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Contact Information:
Edward S. Kisscorni, CPA
290 Suncrest Court, SW
Grandville, MI 49418

Office: 616/233-0667
Cell: 616/443-6730
Fax: 616/233-0667




Wednesday, November 30 2011

Taxpayer Did Not Give Up Control Over Aircraft


In Aerogenesis, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 300266, November 10, 2011, a Michigan use tax assessment on an aircraft purchased by a taxpayer was upheld because the taxpayer was not eligible for the exemption as a domestic air carrier and could not take advantage of its subsidiary's exempt status.  


The taxpayer purchased the subject aircraft and leased it to its subsidiary for use in its cargo and passenger transport business.  From the terms of the lease agreement, the taxpayer retained substantial control over the aircraft.  The taxpayer was required to service, maintain, and repair the aircraft, and its subsidiary was barred from making any alterations.  The taxpayer did not cede control of the aircraft to the subsidiary, and therefore did not qualify for exemption due to the subsidiary's exempt status.


Furthermore, the taxpayer could not claim that the Michigan Department of Treasury was estopped from making its assessment due to a letter it initially sent advising of the applicability of the exemption.  There could be no reliance on the part of the taxpayer because the letter was received in 1997 and the taxpayer purchased the aircraft in November of 1996.


Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  0 Comments  |  Email
Tuesday, November 29 2011

Property Owner Failed to File a Petition on or before June 30 for Each Year


In Southgate Lincoln Mercury v. City of Southgate, Michigan Court of Appeals, No. 298337, November 8, 2011, the Court of Appeals ruled a dealership failed to invoke the Michigan Tax Tribunal's jurisdiction to correct incorrectly reported taxable property from tax rolls for property tax years 2004, 2005, and 2006 because it did not file a petition challenging the assessments on or before June 30 of each of those years.  The dealership contended that the taxing authorities' use of statutory procedures to correct incorrectly reported assessments in the State Tax Commission (STC), and their subsequent withdrawal from the STC proceedings, triggered the tribunal's jurisdiction.  However, because the taxing authorities withdrew from the process, leaving unchanged the assessments on the tax roll, the dealership's property was never assessed.  Consequently, there was no determination to appeal.


The dealership also contended that the STC decision permitting the taxing authorities to withdraw their request for an assessment was itself a decision that opened the tribunal appeals process to the dealership.  However, nothing in the applicable law suggested that a local taxing authority reopened all issues concerning assessment, including those subject to the June 30 deadline, by initiating the process to correct inaccurate or omitted information on the tax rolls.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  0 Comments  |  Email
Monday, November 28 2011

Bills Introduced in Both the Michigan Legislature and the US Congress


In October, Click-Through and Affiliate Nexus Bills were introduced in the Michigan Legislature.  The two bills introduced in the Michigan House of Representatives would amend the sales tax act and the use tax act.  See Ed Kisscorni's Blog, October 13, 2011.


House Bill 5004 would amend the sales tax act and House Bill 5005 would amend the use tax act.  Both bills contain both affiliate and click-through nexus provisions relating to the sales and use tax collection responsibilities of remote sellers.  Both bills have been introduced in the Michigan House of Representatives.


Since then, there has been considerable activity in the US Congress as well as the Michigan legislature.



Michigan House Resolution in Support of Federal Main Street Fairness Act Introduced


A joint resolution that memorializes Congress to resolve the Internet taxation issue and enact legislation, such as the Main Street Fairness Act (MSFA), to permit states to collect sales taxes on remote sales transactions has been introduced in the Michigan House of Representatives.  The resolution states that the MSFA would level the playing field for storefront businesses that compete with online retailers and would authorize Michigan and other members of the Streamlined Sales and Use Tax Agreement to collect taxes from out-of-state sellers.



Bipartisan U.S. Senate Bill Would Give Both SST and Non-SST States USE Tax Collection Authority


On November 9, 2011, a bipartisan group of 10 U.S. senators announced the introduction of legislation that would give states implementing simplification requirements the authority to require remote sellers to collect sales and use tax, unless a seller qualifies for a small seller exception. Unlike most previous legislation on this topic introduced during this and former Congresses, the Marketplace Fairness Act (S. 1832) would not limit the authorization to member states of the Streamlined Sales and Use Tax (SST) Agreement. It joins other legislation on the same topic introduced this year in both houses of Congress: The Main Street Fairness Act (S. 1452 and H.R. 2701), the Marketplace Equity Act (H.R. 3179), and proposed resolutions in opposition to collection authority (S. Res. 309 and H. Res. 95.


The new legislation was introduced by Sens. Mike Enzi, R-Wyo.; Richard Durbin, D-Ill.; and Lamar Alexander, R-Tenn. Other cosponsors are Sens. Tim Johnson, D-S.D.; John Boozman, R-Ark.; Jack Reed, D-R.I.; Roy Blunt, R-Mo.; Sheldon Whitehouse, D-R.I.; Bob Corker, R-Tenn.; and Mark Pryor, D-Ark. The legislation has been referred to the Senate Finance Committee.


A full member state of the SST Agreement would receive collection authority for remote sales sourced to that state under the Agreement. This authority would begin no earlier than the first day of the calendar quarter that is at least 90 days after the date of enactment of this legislation.


Alternative collection authority would be granted to any non-SST member state that implements the minimum simplification requirements specified below. This alternative authority would begin no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to implement each of the requirements.


A state could certify a "provider" that would have the responsibility for tax administration, collection, remittance, and audits for transactions serviced or processed for sales by remote sellers.


Minimum Requirements for Alternative Collection Authority


A state that wants to receive collection authority, but is not a member of the SST Agreement, would have to implement the following minimum requirements:

  • a single, state-level agency to administer the collection and administration of all state and local sales and use taxes on remote sales;
  • a single audit for all state and local tax jurisdictions;
  • a single tax return for remote sellers and providers;
  • a uniform tax base for the state and any local tax jurisdictions;
  • a requirement that remote sellers and providers collect tax at the destination rate, which would be the sum of the state rate and any local rate for the jurisdiction into which the sale is made;
  • adequate software and services for remote sellers and providers that identifies the applicable destination rate;
  • certification procedures for providers to make software and services available to remote sellers and hold the providers harmless for any errors or omissions as a result of relying on information provided by the state;
  • a provision to hold remote sellers using a provider harmless for any errors and omissions by that provider;
  • a provision to relieve remote sellers from liability, including any penalties and interest, for collecting the incorrect amount of tax if the error was the result of relying on information provided by the state; and
  • 30-days' notice to remote sellers and providers of a local rate change, which may only be effective on the first day of a calendar quarter.

         Remote sales would be sourced to the location where the item sold is received by the purchaser, based on the delivery instructions. If no delivery location is specified, the sale would be sourced to the customer's address known or obtained by the seller. If an address is unknown and cannot be obtained, the sale would be sourced to the address of the seller from which the sale was made.


Small Seller Exception and Other Provisions


The following provisions would apply whether a state receives collection authority as a member of the SST Agreement or by implementing the alternative collection requirements:

         A small seller exception would relieve a remote seller of the collection mandate if the seller, and related entities, had $500,000 or less in gross annual receipts in total remote sales in the United States in the preceding calendar year.

         Collection authority would end on the date the highest court of competent jurisdiction makes a final determination that the state no longer meets the requirements of this legislation, and the determination is no longer subject to appeal.

         The provisions of this legislation would only apply to remote sales and not to intrastate sales or intrastate sourcing rules. However, states granted authority as members of the SST Agreement would have to comply with the intrastate provisions of the Agreement.


SST Requirements Not Applicable to Alternative Collection Authority

The minimum simplification requirements that a non-SST member state would have to implement in return for collection authority are less extensive than the current requirements for SST member states. The requirements in the SST Agreement that this legislation would not require states seeking alternative collection authority to implement include the following:

  • uniform definitions of products and product-based exemptions;
  • uniform rules for bad debts, rounding, and sales tax holidays;
  • various uniform sourcing rules;
  • uniform exemption administration rules, including a relaxation of the good-faith requirement for acceptance of exemption certificates;
  • the elimination of most caps and thresholds;
  • consistent electronic filing and remittance methods;
  • a taxability matrix with information on defined terms and exemptions;
  • mandated vendor compensation; and
  • for all sellers (rather than just remote sellers), state-level administration of local taxes, relief from liability for relying on state-provided data, and a single-audit option.


Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Friday, November 25 2011

Legislative Solution Pending to Disregarded Entity Issue 


On November 15, 2011, the Michigan Department of Treasury issued its Third Revised Notice to Taxpayers Regarding Federally Disregarded Entities and the Michigan Business Tax, extending the date for affected persons to file a return or amend a return to July 1, 2012.   In response to the decision in Kmart Michigan Property Services LLC v Dep't of Treasury, 283 Mich App 647 (2009), lv den 772 NW2d 421 (2009), the Department issued a notice mandating that taxpayers file amended returns under the MBT to reflect U.S. disregarded entities as separate persons. 

The due date for filing, now July 1, 2012, has been extended three times by the Department.  Amended returns are required even if the return results in no change in tax liability.  

While the deadline for filing amended returns still exists, it appears the legislature will enact a legislative fix so that disregarded entity returns and amended returns ultimately will not be required.


Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  0 Comments  |  Email
Tuesday, November 22 2011

Court Upholds Tax on Pension Income; Strikes Down Phaseout of Exemptions

Late last week, the Michigan Supreme Court upheld the constitutionality of the vast majority of the tax reform plan to implement a new business Corporate Income Tax and modify Michigan's Individual Income Tax.  The tax reform plan included replacing the Michigan Business Tax with a simple Corporate Income Tax as well as attempting to treat all retirement income, regardless of whether it is from public resources or private, the same.


In Re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38, Michigan Supreme Court, Docket No. 143157, November 18, 2011, the Michigan Supreme Court has held that:

(1) reducing or eliminating the personal income tax statutory exemption for public pension income does not impair accrued financial benefits of a pension plan or retirement system of Michigan or its political subdivisions under the state constitution;

(2) reducing or eliminating the statutory exemption for pension income does not impair a contract obligation in violation of the federal or state constitutions;

(3) determining eligibility for exemptions on the basis of date of birth does not violate equal protection under the federal or state constitutions; and

(4) determining eligibility for exemptions on the basis of total household resources does create a graduated income tax in violation of the state constitution. Even though the portion of the statute that determined eligibility for exemptions was unconstitutional because it created a graduated income tax, the court determined that it could be severed from the remainder of the Act.

The opinions were issued in response to a request from Governor Rick Snyder.  The governor requested the opinion so that the constitutionality of several of the personal income tax changes enacted earlier in the year could be determined before the law took effect on January 1, 2012.

Accrued Financial Benefits

Under the Michigan state constitution, the accrued financial benefits of each pension plan and retirement system of the state is a contracted obligation that cannot be diminished or impaired.  This means that public pensions are treated as contractual obligations that, once earned, cannot be diminished.  The court noted that this section of the constitution does not contain any limitations on the Legislature's authority to tax pensions.  In fact, if the ratifiers of the constitution had intended to limit the Legislature's authority to tax pensions, specific limiting language would have been included.

A tax exemption is not an "accrued financial benefit" of the pension plan.  "Accrue" means to increase or grow over time; an exemption does not grow.  An exemption does not even vest until the employee begins to collect pension benefits.  The exemption is a post-distribution effect of the benefits otherwise paid in full.  The constitution protects deferred compensation and not tax exemptions.

Contract Obligation

Under the federal and state constitutions, no law impairing the obligation of contract can be enacted.  Here, the obligation of contract consists of pension income, not the tax exemption of that income.  Thus, the reduction or elimination of the exemption does not affect or impair the obligation of contract.

In general, statutes do not create contractual rights, but, rather, represent policies to be pursued.  Policies, unlike contracts, are inherently subject to revision and repeal.  Before a statute, especially a tax one, is held to be irrepealable or not subject to amendment, an intent not to repeal or amend must be clearly stated within the statute so that there is no doubt. Here, there are no terms used that are typically associated with contractual relationships.  The tax exemption laws at issue do not create contractual rights that cannot be altered by the Legislature.  Taxpayers do not have a vested right in tax statutes.

Equal Protection

Under the federal and state constitutions, no person can be denied the equal protection of the law.  However, classifications are not forbidden.  Under the rational basis test, the classification must rationally further a legitimate state interest.  As age is at issue here, a suspect class is not involved.  The person challenging the constitutionality of the law has the burden of proof to show that the legislation is arbitrary.  Perfection is not possible nor necessary.

The court reasoned that it is a rational distinction to provide an exemption for older persons as they are less able to earn additional income to offset the loss of the exemption.  Also, recognizing that older individuals may have decreased earning capacity is a legitimate reason to base the eligibility for the pension exemption on age.

Graduated Income Tax

Under the state constitution, no income tax graduation as to rate or base can be imposed by the state.  A graduated income tax generally is a tax on income that imposes a proportionately greater tax burden on higher-income taxpayers than on lower-income taxpayers.  Here, it is uncontested that the base consists of net taxable income and that exemptions and deductions decrease the base by decreasing the amount of the taxpayer's income subject to tax.  If the taxpayer is entitled to the exemption or deduction, the base is decreased; on the other hand, if the taxpayer is not entitled to the exemption or deduction, then the base is not decreased.  The income-based exemption or deduction can result in an income tax that is graduated as to base, even if a flat rate is applied.  Here, an income tax graduated as to base is created because entitlement to the exemption (and the extent of such entitlement, which reduces the taxpayer's base) is entirely dependent on the taxpayer's income level.  This violates the state constitution.

The unconstitutional portions of the statute can be severed from the remainder of the Act. Thus, the rest of the Act can be given effect without the invalid portions.


Posted by: Ed Kisscorni AT 03:52 pm   |  Permalink   |  0 Comments  |  Email
Tuesday, November 08 2011

New Tax Must Be Paid by Electronic Funds Transfer


Senate Bill 347 (PA 141 of 2011) amends the Use Tax Act by ending the collection of the Michigan Use Tax of 6% on Medicaid contracted health plans and specialty prepaid health plans, also referred to as Medicaid managed care organizations, 90 days after the effective date of the Health Insurance Claims Assessment (HICA) Act.  Senate Bill 348  (PA 142 of 2011) creates the HICA Act which would establish a 1% tax on certain paid health care claims beginning January 1, 2012, with the act being repealed January 1, 2014.  Both bills are tie-barred to one another.


These bills are the result of an anticipated action by the federal Centers for Medicare and Medicaid offices to disallow the Use Tax as a means to generate State revenue to be used as a match for federal Medicaid funds.  The health insurance paid claims tax is a broad-based tax which should satisfy the federal government as a replacement for the current Use Tax model.

All payments under the HICA Act are required to be remitted to the Michigan Department of Treasury by electronic funds transfer (EFT). Quarterly payments are due April 30, July, 30, October 30, and January 30.


In order to be registered to make payments by EFT, a taxpayer must complete and submit Form 4926, Electronic Funds Transfer Application − Health Insurance Claims Assessment, to the Department of Treasury.  An EFT application could take at least four weeks to process.


An annual return must be filed using an online interface to e-file directly to the treasury. The first annual return for tax year 2012 is due February 28, 2013. The annual return will be available at a later date and will be posted on the treasury's website.


A taxpayer who receives a notification letter from the Department of Treasury, but does not believe the he or she is subject to the HICA, should submit to the Department of Treasury a written letter of explanation detailing why the taxpayer believes he or she is not subject to the HICA.  Treasury will acknowledge receipt of the letter.  A self-determination that a taxpayer is not subject to HICA is not binding on the Department of Treasury and is subject to potential review or audit at a later date.


Posted by: Ed Kisscorni AT 01:40 pm   |  Permalink   |  0 Comments  |  Email
Friday, November 04 2011

SST Compliance Review and Interpretations Committee (CRIC) Finds Fault

During a conference call held on November 3, 2011, the Streamlined Sales Tax (SST) Compliance Review and Interpretations Committee (CRIC) voted 4-0, three absent, in favor of finding Michigan out of compliance with the Agreement.  The call was the fifth in a series of weekly calls during which the CRIC performs its annual review of the compliance status of each SST member state. The CRIC will complete its 2011 review of the remaining states during weekly conference calls continuing in November until all states have been reviewed.

With respect to telecommunications (generally taxable under Michigan's use tax act), Michael Eschelbach, representing the Michigan Depart of Treasury, responded that Michigan's certificate of compliance should be revised to indicate that prepaid calling service (other than wireless prepaid service) is exempt and that a comment should be added indicating that prepaid calling cards and prepaid authorization numbers are taxable under the state's sales tax act.

Eschelbach indicated that citations will be added, changed, or deleted throughout the state's certificate of compliance as indicated in the CRIC's preliminary recertification report for Michigan.  Eschelbach further indicated that the answer in the state's taxability matrix as to whether tax is imposed on products transferred electronically other than specified digital products will be changed from "Yes" to "No."  In Section 333 of the certificate of compliance (Use of Specified Digital Products), on the question of whether the state includes any product transferred electronically in its definition of tangible personal property, Eschelbach agreed that the response will be changed to "No" and the comment that tangible personal property includes prewritten computer software will be deleted.  However, Eschelbach pointed out that the certificate of compliance language does not state that prewritten computer software is not included in the definition of specified digital products.  He explained that as a result, the state attempted to remedy the situation by responding "No" in Section 333 and entering a comment that the state does not tax specified digital products.

The CRIC's preliminary recertification report for Michigan indicates that the state's statute for taxing telecommunications service excludes one-way paging service, but that the Agreement defines "paging service" as including both one-way and two-way service. The report further indicates that Michigan has had this issue since its 2009 recertification review. Eschelbach indicated on the call that though draft legislation has been submitted, the Michigan Legislature has not yet addressed this issue.  As a result, committee members voted 4-0 in favor of finding Michigan out of compliance with the Agreement.  Discussion of a Michigan issue related to remote use of prewritten computer software was deferred until a later date.


Posted by: Ed kisscorni AT 09:05 am   |  Permalink   |  0 Comments  |  Email
Thursday, November 03 2011

Retroactive Amendment Makes Temporary Business Use of Inventory Taxable

An automobile manufacturer (General Motors Corp. v. Michigan Department of Treasury, U.S. Supreme Court, Dkt. 11-532, petition for certiorari filed October 20, 2011)  has asked the U.S. Supreme Court whether an eleven-year retroactive application of a Michigan use tax amendment unconstitutionally impairs the manufacturer's rights in violation of the Takings and Due Process Clauses of the U.S. Constitution.

The manufacturer sought a refund of use tax it had paid on the interim business use of vehicles held for resale after the Michigan Supreme Court held that the vehicles were exempt from use tax under the resale exemption. However, while the refund request was pending, the Michigan Legislature amended the use tax statute to make the temporary business use of inventory taxable on a retroactive basis for any open tax year. Subsequently, the Michigan Court of Appeals denied the refund request.

It held that the period of retroactivity of the amendment did not violate the manufacturer's constitutional rights because the amendment was rationally related to a legitimate legislative purpose: limiting an interpretation of the use tax statutes that might have caused significant and unanticipated loss of tax revenue that had been collected in good faith. The Michigan Supreme Court denied review.

Posted by: Ed kisscorni AT 10:51 am   |  Permalink   |  0 Comments  |  Email


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