Michigan Supreme Court Holds Use Tax Exemption Not Available To Purchaser That Failed To Prove Sales Tax Paid

The Michigan Supreme Court has held that a purchaser of tangible personal property was not entitled to an exemption from Michigan use tax for sales tax paid because it failed to prove that sales tax was both due and paid.1 In reversing the Michigan Court of Appeals, the Michigan Supreme Court explained that the burden of demonstrating entitlement to this exemption rested on the taxpayer seeking the exemption. Because the purchaser did not submit any evidence that sales tax was paid, the purchaser did not carry its burden and was not entitled to the use tax exemption.

Background

Andrie Inc., a Michigan corporation engaged in marine construction and transportation, purchased fuel and other supplies for its business. Some of these items were purchased from sellers in Michigan. During a use tax audit that covered November 1, 1999 through July 31, 2006, the Michigan Department of Treasury reviewed Andrie's purchases of tangible items. Where the auditor determined an item was subject to use tax, the auditor required that Andrie prove that sales tax was paid. If Andrie produced a receipt showing that it had paid sales tax to the retail seller, the Department applied a statutory use tax exemption for sales tax paid. However, if Andrie could not prove that sales tax had been paid by itself or the retail seller, the Department assessed use tax on the property. Under this approach, the Department imposed use tax on fuel and supply purchases that Andrie made in Michigan from Michigan-based retail sellers where the invoice did not list sales tax as a separate line item.

As a result of the audit, the Department determined that Andrie had understated its use tax by nearly $400,000. Andrie paid the assessments under protest and filed suit in the Michigan Court of Claims. In its complaint, Andrie argued that it could rely on a Michigan statutory requirement that sales tax be included in the price of the goods purchased regardless of whether the sales tax was separately stated.2 The Court of Claims held that Andrie was entitled to a partial refund of use tax for purchases that were subject to sales tax. According to the Court, Andrie did not have an obligation to prove that the retail sellers remitted sales tax because Andrie was entitled to a presumption that sales tax is included in the price of goods purchased. The Court of Appeals affirmed the decision and held that "the mere fact that a transaction is subject to sales tax necessarily means that the...