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State and Local Tax Update

July 22, 2014

The Michigan Supreme Court (MSC) has issued a number of significant state tax decisions in the past few months. The following is a summary of the most important ones.

Multi-state apportionment of Michigan Business Tax

The MSC has decided that a multistate business subject to tax in more than one state can elect to use an apportionment process that compares sales, payroll and property in calculating its Michigan Business Tax (MBT) Liability, rather than only sales as the MBT dictates. The reason is an interstate arrangement Michigan entered into with other states in 1970, when it enacted the "Multistate Tax Compact.” IBM v Department of Treasury involved the 2008 MBT liability of IBM. The MBT was repealed at the end of 2011 and the Compact was amended that year by the Legislature to remove the election. Many questions remain to be resolved, which may occur through further law changes, court decisions (including a possible appeal by the State to the U.S. Supreme Court) and written guidance from the Michigan Department of Treasury. The questions include when and how to seek refunds, the effect of the 2011 amendment, and whether the State can unilaterally amend the Compact or must withdraw altogether.

Use tax may be imposed on transactions subject to Michigan sales tax

In Andrie, Inc v Dep't of Treasury, the MSC held that while sales and use tax are complementary and supplementary, they are not mutually exclusive and both taxes may be imposed upon the same transaction. A consumer must prove that sales tax was paid in order to avoid assessment of use tax. Justice Zahra authored a dissent pointing out that the majority opinion results in the potential for double taxation.

The company had challenged the Department's imposition of use tax on sales which occurred in Michigan and were subject to the retail privilege sales tax imposed upon Michigan sellers. The company argued that because the sales tax is imposed upon a seller, that the burden of the tax on sales subject to the sales tax is on the seller, not the consumer. Both the Court of Claims and the Court of Appeals held that Andrie was entitled to rely on the presumption that sales tax was included in purchases from Michigan retailers; thus, Andrie is not liable for use tax on those purchases. However, the MSC held that while the seller is responsible to remit sales tax on sales in Michigan, the legal responsibility for the use tax is on the consumer. To be entitled to an exemption from use tax the consumer has the burden of showing that sales tax was both due and paid. The consumer is not entitled to a presumption that the sales tax is included in the price, even though the Sales Tax Act allows a seller to sell items without imposing tax as a separate line item.

Michigan taxpayers who are purchasing items in Michigan must now be diligent in making sure the receipt explicitly shows a line item for sales tax, or need to ask the seller for appropriate proof that sales tax was remitted by the seller to the state of Michigan.

Proper form for claiming a refund

In Ford Motor Company v Department of Treasury, the MSC addressed when interest begins to accumulate on a claim for refund. Pursuant to statute (MCL 205.30(3)), interest begins to accrue in the taxpayer’s favor 45 days after a claim for refund is filed with Treasury. The issue before the Court was the proper form for claiming a refund. The Court determined that although a claim or petition for refund need not take any specific form, it must clearly assert a right to a refund, and provide Treasury with adequate notice of a claim for refund. An expression of disagreement with an audit determination is not sufficient. In this particular case, the Court found that a letter to Treasury expressing the taxpayer’s decision to institute formal legal proceedings was sufficient to invoke such claim. Treasury had asserted that the claim had not been timely made until the suit had actually been filed in court.  

Notice to Taxpayer Representatives Required

In the combined cases of Fradco, Inc. v Department of Treasury, and SMK, LLC v Department of Treasury, the MSC held that the Department of Treasury is required to issue notices to both the taxpayer and the taxpayer’s official representative before the taxpayer’s 35-day Tax Tribunal appeal period under MCL 205.22 begins to run. Both of these cases involved situations where the Department sent final assessment notices to the taxpayer, but the taxpayer’s designated representative did not receive notice until more than 35 days after notice to the taxpayer. The Department argued that it was only required to provide notice to the taxpayer’s last address and that the Tax Tribunal lacks jurisdiction to hear appeals in these cases because they were filed more than 35 days after notice to the taxpayer. The Court held that the appeal period was not tolled until both the taxpayer and its representative received notice of the final assessment.

For more information regarding these topics or any another related issue, please contact any of our State and Local Tax attorneys or professionals.