Tax News Highlights

Michigan Supreme Court Overturns Court of Appeals Decision in Significant Use Tax Case

July 1, 2014

In Andrie, Inc. v. Department of Treasury, the Michigan Supreme Court overturned a Michigan Court of Appeals decision and held that a taxpayer purchasing tangible personal property in Michigan, rather than the retailer who sold the property, bears the burden of proof to claim a use tax exemption. To qualify for the exemption from use tax, a taxpayer must show that sales tax was both due and paid on the sale of the tangible personal property.

Michigan’s Use Tax Act (UTA) imposes a 6 percent tax on a consumer’s use, storage, and consumption of all tangible personal property in Michigan. Under the UTA, taxpayers can claim an exemption from the use tax when the sales tax was due and paid on the retail sale to a consumer. Concurrently, Michigan’s General Sales Tax Act (GSTA) imposes a 6 percent tax on a retailer’s gross proceeds. At issue in the Andrie case was whether a purchaser and user of tangible personal property may avail itself of the exemption when it cannot prove payment of sales tax, either by itself to the retail seller at the point of sale or by the retail seller to the Michigan Department of Treasury (DOT).

The Michigan Court of Appeals held that if a transaction is a sales-taxable transaction, the purchaser does not have the burden of proving that the sales tax was paid in defending against a Michigan DOT assessment of use tax. The court reasoned the retailer has the ultimate responsibility to pay any sales tax.

In its reversal, the Michigan Supreme Court held that the UTA and GSTA are complementary and supplementary and that the two taxing statutes relate to entirely separate taxable events: the use and sale of tangible personal property. Absent an exception, tangible personal property sold and used in Michigan is subject to both the use and sales tax. As each tax is triggered by a separate taxable event, the legal responsibility for each tax falls upon a separate taxpayer. The UTA liability falls solely on the consumer, while the GSTA liability falls on the retail seller.

Under the Andrie decision, a purchaser is not entitled to a presumption that it paid the sales tax at the point of sale. The purchaser must obtain the necessary documentation to claim the UTA exemption, such as a receipt that shows the inclusion of sales tax in the purchase price or an affidavit from the retail seller affirming that sales tax was included in the sale price or remitted to the Michigan DOT. In both examples, the consumer can show that the sales tax was paid.

The Andrie decision affects every taxpayer in Michigan subject to the UTA. Taxpayers need to understand their responsibilities as they will need to provide proof of paid sales tax to the Michigan DOT upon audit.

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Daniel E. Megathlin