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Michigan Supreme Court to hear three important cases this fall

September 6, 2013

The Michigan Supreme Court (MSC) has agreed to hear several cases involving state tax issues this fall. The three cases that will perhaps have the greatest impact on typical business taxpayers include the following:

MBT Apportionment (IBM)
The MSC will consider whether a Michigan Business Tax (MBT) filer may use the elective three-factor tax base apportionment provisions of the Multistate Tax Compact (MTC) or must use the sales factor apportionment provision in the MBT. The Court has granted the appeal by IBM that challenges Court of Claims and Court of Appeals decisions that rejected use of the MTC factors in IBM’s 2008 MBT return. Briefs in the case are due this fall, with oral argument and a written decision to follow in due course.

The California Court of Appeals has ruled just the opposite in Gillette v. Franchise Tax Board. That Court ruled that the MTC was a part of California tax law and was effective in granting Gillette an election to use the three-factor method despite a specific California tax statute that provided for a different formula. The California Court reasoned that the MTC election applied precisely to that type of situation, and that California was bound to allow the MTC election as long as the MTC was a part of California law. Although California has since repealed the statute, the MTC is still a part of Michigan Law.

Sales/Use Tax Liability – Proof of Payment (Andrie, Inc.)
The MSC will determine whether a purchaser of tangible goods in Michigan is liable for use tax if it cannot prove that it paid sales tax on those purchases. In the Andrie, Inc. case, the Michigan Department of Treasury (Treasury) assessed use tax on the taxpayer because the taxpayer could not provide records proving it paid sales tax on certain Michigan purchases. The taxpayer appealed and prevailed at the Court of Claims and Court of Appeals levels.

The Court of Appeals held that “there is no dispute that the transactions in question involved Michigan retailers and the transfers of title occurred within the State of Michigan. Because the retailer has the ultimate responsibility to pay any sales tax, it is erroneous to place a duty on the purchaser to show that the sales tax was indeed paid to the state.” The MSC has agreed to hear Treasury's appeal.

Notice to Taxpayer’s Representative (Fradco Inc./SMK LLC)
The MSC granted Treasury’s application for leave to appeal in Fradco, Inc. (which was submitted with SMK LLC). In these cases, the MSC will address the notice requirements imposed on Treasury in situations where a taxpayer has designated an official representative. In both Fradco, Inc. and SMK, LLC the taxpayers submitted a written notice to Treasury appointing an official representative under the Revenue Act (MCL 205.8 and MCL 205.28). In both cases, Treasury sent a final assessment to the taxpayer but did not send one to the representative until much later. The taxpayers filed appeals to the Michigan Tax Tribunal within 35 days of the notice to the representatives. Treasury claimed that the Tax Tribunal did not have jurisdiction to hear the case because the taxpayer did not file an appeal within 35 days of the date the taxpayer received the final assessment.

The Court of Appeals affirmed the Tribunal’s decision that the Tribunal did have jurisdiction because MCL 211.8 “imposes an affirmative and mandatory duty” on Treasury to send copies of letters and notices regarding the dispute to the taxpayer’s official representative. As a result, the 35-day appeal period did not begin until a copy of the final assessment has been received by the taxpayer’s representative.

Decisions in all three of these cases are expected sometime later this year or early next year. If you have any questions regarding these cases or other state and local tax matters, please contact one of our State and Local Tax attorneys.