In a split decision, the Michigan Supreme Court held that retail purchasers are liable for the Michigan use tax unless they can prove that they paid sales tax, or that sales tax was remitted by the seller. Michigan’s sales tax and use tax are complementary. The sales tax is imposed on a retail seller for the privilege of making retail sales in Michigan, while the use tax is imposed on a purchaser if it uses, consumes or stores the property in Michigan—if Michigan sales tax was not paid on the purchase.
In Andrie v. Department of Treasury, case number 145557 (decided June 23, 2014), the Michigan Supreme Court ruled that, because the sellers’ invoices paid by Andrie did not specifically designate a charge for sales tax, Andrie could not prove that it was entitled to an exemption from use tax payments under an exclusion that is available when “…sales tax was due and paid on the retail sale to a consumer.” MCL 205.94(1)(a). The Court held that the burden of proving entitlement to the use tax exemption rests on the party asserting the exemption. If the retail seller does not admit that sales tax was collected or paid on a sale, the purchaser must show that it paid sales tax on the purchase before it can claim an exemption from the use tax.
Andrie purchased from Michigan retailers, and used or consumed in Michigan, fuel and other tangible items. Andrie was audited by the Michigan Department of Treasury and asserted that it did not owe use tax because it was entitled to rely on a requirement in the Sales Tax Act that the sales tax be included in the price of the goods purchased, regardless of whether the sales tax was separately stated in the invoice. The Department disagreed and assessed use tax on Andrie.
Andrie initially sought relief in the Michigan Court of Claims, which held that Andrie was entitled to rely upon a presumption that sales tax was included in the price of the goods it purchased, and it had no obligation to prove that the retail sellers remitted sales tax to the state. Upon the Department’s appeal, the Michigan Court of Appeals affirmed, holding that “the mere fact that a transaction is subject to the sales tax necessarily means that the transaction is not subject to use tax.” It further held that “…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 Department further appealed and the Supreme Court reversed. Significantly, the Court reasoned that while the use tax and sales tax are complementary and supplementary, contrary to the Court of Appeals’ conclusion their potential applications are not mutually exclusive. It held that absent an exception, a sale of tangible personal property in Michigan is subject to both use and sales tax.
Following this decision, purchasers will not be entitled to a presumption that sales tax was included in the prices they paid to retailers when their invoices do not list sales tax as a separate line item. Many Michigan retailers offer to “pay the sales tax on your purchase” and some simply do not separately state sales tax even though they impute and remit sales tax. In such instances, the purchasers may, upon audit, have difficulty proving that they are not subject to use tax. A purchaser may be dependent upon the seller producing records or an affidavit that it paid sales tax on the purchase. Armed with the Andrie decision, expect that the Department will be more aggressively asserting use tax upon audits of purchasers who either do not retain their invoices with separately stated sales tax or whose invoices do not separately state inclusion of sales tax.