Saturday, February 26 2011
A Direct Pay Authorization Did Not Apply to the Purchase of Cleaning Supplies
In Knight Facilities Management Inc. v. Department of Treasury, Michigan Tax Tribunal, No. 319568, October 21, 2010, released February 17, 2011 the sale of cleaning supplies by the taxpayer to General Motors (GM) was subject to Michigan sales tax because GM's direct payment authorization did not apply to tangible personal property consumed by a person performing any service activity for the company.
The taxpayer provided facility maintenance services and supplies to GM, but GM's own janitors consumed the cleaning supplies. As GM's direct payment authorization did not apply, GM could also be found liable for use tax on the cleaning supplies. However, the Tax Tribunal concluded that only the taxpayer should be held liable for sales tax in regards to the cleaning supplies as sales tax is generally imposed first whereas use tax is imposed on transactions not covered by sales tax. Though the taxpayer asserted that it relied on the language in GM's direct pay permit, this language did not negate its sales tax liability.
Friday, February 25 2011
Use Tax Base Includes Evaluation Reports Included in Price of Motor Vehicle Subleases
In Ford Motor Company v. Department of Treasury, Michigan Court of Appeals, No. 294411, February 17, 2011, the price upon which Michigan use tax was based in motor vehicle subleases between Ford Motor Company (Ford) and its employees included the value of testing and evaluation reports provided by these employees because Michigan law does not allow a deduction of any service promised by the consumer in the complete performance of a transaction from the definition of "price." The value of the testing and evaluation services, however, was a matter of fact, and, therefore, the Court of Appeals reversed the lower court's order granting summary disposition to the Department of Treasury.
During the relevant time period, Ford sold vehicles to Ford Credit Company (Ford Credit) and Ford Credit leased the vehicles back to Ford at a yearly lease rate of 28.8% of the wholesale price. Ford subleased the vehicles to its employees and retirees at a yearly rate of 20.8% of the wholesale price. As a condition of the sublease agreements, the sub leasees were required to provide testing and evaluation reports on the motor vehicles. As the failure to provide the reports served as a default under the agreements, the reports qualified as part of the consideration for the subleases.
However, the conclusion that provision of the testing and evaluation reports constituted part of the "price" of the sublease agreements did not necessitate a finding that Ford was liable for use tax based on the 28.8% rate. The department asserted that the value of the reports was equivalent to the difference between the sublease rate (20.8%) and the lease rate (28.8%). However, the sublease and lease rates are based on a percentage of the wholesale vehicle prices. Accepting this argument, the court concluded, would lead to the illogical result that the value of providing testing and evaluation reports for a luxury vehicle would be greater than the value of a sub leasee's reports on an economy vehicle.
Thursday, February 24 2011
Court of Appeals Supports the Tax Tribunal Acceptance of Assessed Valuation on the Tax Rolls In Determination of True Cash Value
In President Inn Properties LLC v. City of Grand Rapids, Michigan Court of Appeals, No. 294452, February 17, 2011, the Tax Tribunal did not abdicate its responsibility to independently determine the true cash value of two parcels of property on which a taxpayer operated a hotel when it adopted the properties' assessed valuation on the local Michigan property tax rolls. There was competent and substantial evidence in the record supporting the tribunal's determination. In this case, the taxpayer's expert and his appraisals concluded that the properties' true cash value was less than that on the assessment rolls. The city's expert and her appraisals concluded that the properties' true cash value was more than that on the assessment rolls. The Tax Tribunal, however, was under no obligation to accept the valuation figures or the approach to valuation advanced by either the taxpayer or the city.
Further, the tribunal did not commit an error of law or adopt a wrong principle by finding that the properties' assessed valuation on the tax roll was also the properties' true cash value. Although a property's assessed valuation on the tax rolls carries no presumption of validity, the tribunal may adopt the assessed valuation on the tax rolls as its independent finding of true cash value when competent and substantial evidence supports doing so.
Wednesday, February 23 2011
No Mutual Mistake of Fact Concerning Transfer of Property by Land Contract
In Allesee v. Township of Bloomfield, Michigan Court of Appeals, No. 295188, February 15, 2011, a case involving a local real property tax dispute relative to a taxpayer's home, the Michigan Court of Appeals held that the Tax Tribunal did not err in dismissing the taxpayer's petition based on a finding that there was no clerical error or mutual mistake of fact, given that the taxpayer believed there was no transfer of ownership in 2002. The taxpayer alleged that a proper transfer did not take place until a warranty deed was executed in 2007 and that there was a mutual mistake of fact as to whether there had been a transfer of ownership in 2002. Under the taxpayer's theory, the alleged erroneous belief shared and relied on by the parties concerned the accuracy of the warranty deed and the underlying fact referenced in the warranty deed that the property was transferred in 2002 by way of a land contract.
There was a two-fold problem with the taxpayer's argument. First, the taxpayer's petition never clearly alleged that he mistakenly believed that the warranty deed was accurate, that a land contract had been entered into in 2002, or that there had been a transfer of property in 2002 that he erroneously believed occurred and relied on in paying additional tax amounts. More importantly, the taxpayer failed to submit an affidavit or any documentary evidence indicating that when he paid the additional taxes, he mistakenly believed that the warranty deed was accurate, that a land contract had been entered into in 2002, or that there had been a transfer of property in 2002 that he erroneously believed occurred and relied on in paying the reassessed tax amounts.
In this case, the taxpayer only submitted the property transfer affidavit of the previous owner of the house indicating that the warranty deed was prepared and given to the taxpayer, but this had no bearing on whether the taxpayer himself had an erroneous belief regarding whether a land contract had existed. An erroneous belief on the part of the taxpayer, not the previous owner, was a necessary component of establishing a mutual mistake of fact. Although the appellate court acknowledged that there appeared to be some merit to the taxpayer's argument that no transfer of ownership occurred in 2002, the statutory scheme and the failure by the taxpayer to submit the most basic of supporting proofs left the court with no other choice but to affirm the Tax Tribunal.
Tuesday, February 22 2011
SBT Deduction and Credit Available for Assets Used in an Exempt Activities
In Sparrow Hospital Association v. Department of Treasury, Michigan Court of Appeals, No. 294833, February 15, 2011 the Michigan Court of Appeals has held that a taxpayer that was a nonprofit entity could claim the capital acquisition deduction (CAD) for tax years 1993 to 1999 and the investment tax credit for tax years 2000 and 2001 against the former single business tax for capital assets that were used in the entity's tax-exempt activities. Examining the statutory language of the applicable Michigan laws, the court determined that the reference to federal law was made to determine the type of assets that were subject to the CAD or the credit. The statutory language did not require the tax-exempt entity to calculate the credit solely on its nonexempt activities. As such, the taxpayer was not required to allocate the assets between its exempt and nonexempt activities. The court acknowledged that this result allowed the taxpayer to potentially "double dip;" i.e., the taxpayer was granted tax-exempt status on its nonprofit activities and, in addition, it also was permitted to reduce the taxes it owed on its unrelated taxable income with capital assets used in its tax-exempt activities. Nonetheless, the statutory language dictated this result.
Monday, February 21 2011
Michigan Individual Income Tax E-File Mandate Expanded
On February 18, 2011 the Michigan Department of Treasury issued a statement noting that the tax preparers of personal income tax returns are currently required to e-file if they prepare 200 or more returns. The Michigan Department of Treasury said that it expects any tax preparer e-filing a federal income tax return to e-file the Michigan return. Beginning January 1, 2011, the IRS is mandating tax preparers filing 100 or more personal income tax returns to e-file. The federal threshold is reduced to 11 or more returns beginning January 1, 2012.
Michigan Business Tax E-File Mandate Expanded
Michigan will strengthen the Michigan Business Tax (MBT) e-file mandate as part of budgetary savings measures. Below are some of the details related to the changes for tax year 2010.
Beginning with the 2010 tax year, Michigan will have an enforced MBT e-file mandate. Developers producing MBT tax preparation software and computer-generated forms must support e-file for all eligible Michigan forms that are included in their software package. All eligible MBT returns prepared using tax preparation software or computer-generated forms must be e-filed.
Treasury will not process computer-generated paper returns that are eligible to be e-filed. A notice will be mailed to the taxpayer indicating the return was not filed in the proper form and content and must be e-filed. Payment received with a paper return will be processed and credited to the taxpayer's account even when the return is not processed.
Treasury recognizes that there are conditions which make a return ineligible for e-file. When the computer-generated MBT return meets one or more of the Treasury-recognized e-file exceptions, the taxpayer may have to complete and attach Form 4833, Michigan Business Tax E-File Exceptions to the front of their return or the paper filing will not be processed.
Attach Form 4833 to a computer-generated paper return that meets one or more of the Treasury recognized e-file mandate exceptions.
Treasury-recognized exceptions at the time of this printing include, but are not limited to:
? Taxpayer is filing one or more of the following forms:
o Qualified Affordable Housing Seller's Deduction (Form 4579)
o Tribal Agreement Ownership Schedule (Form 4597)
o Tribal Agreement Apportionment (Form 4598)
? Return was prepared by a preparer who has been suspended or denied acceptance to participate in the IRS or does not have an EFIN.
? Return was rejected by Michigan or IRS and there is no way to correct and resubmit the return electronically and software does not support State Stand Alone.
? Taxpayer's federal return contains a form that is not eligible for e-file and the software does not support State Stand Alone e-file.
The following are also Treasury-recognized exceptions. However, do not attach Form 4833 to a MBT paper return that meets one or more of the following conditions.
? UBG returns. However, whenever possible the preferred method is e-file.
? Taxpayer is an individual or fiduciary.
? Taxpayer does not have a Federal Employer Identification Number (FEIN).
? Completed by hand (with pen or pencil).
? Completed using forms from Treasury's Web site.
? Completed using forms from Michigan tax instruction books.
Additional information will be published on Treasury's Web sites www.michigan.gov/taxes and www.MIfastfile.org as it becomes available.
Contact Information for Michigan Electronic Filing Programs.
This contact information is for tax preparers and software developers only and enables Treasury to provide better service to authorized e-file providers. The Electronic Filing staff is unable to provide return status information or address specific taxpayer account issues. Should an error occur on the Michigan return during mainframe processing, Treasury will communicate directly with the taxpayer through the regular error resolution process.
Telephone: (517) 636-4450
Fax: (517) 636-437
Thursday, February 17 2011
Property Tax True Cash Value Determination Supported by the Evidence
In New Michigan, L.P. v. City of Roosevelt Park, Michigan Court of Appeals, No. 294174, February 10, 2011 the Michigan Tax Tribunal's determination of the true cash value, state equalized value, and taxable value of a taxpayer's apartment complex for the local property tax years at issue was supported by competent, material, and substantial evidence on the whole record. The tribunal's opinion indicated that it considered evidence affecting the weight and reliability of the city's valuation evidence, while at the same time giving effect to the taxpayer's burden of proof. Contrary to what the taxpayer asserted in this appeal, the tribunal did not simply adopt the city's proposed valuation. It was only after the tribunal found the taxpayer's evidence too unreliable for it to apply the income-capitalization approach or the sales-comparison approach, and after the tribunal evaluated the accuracy of the city's proposed cost approach, that the tribunal accepted the true cash value contained in the property tax records. This was a common and acceptable practice of the tribunal. Accordingly, the tribunal satisfied its duty to make an independent determination of true cash value.
Wednesday, February 16 2011
Governor Rich Snyder to Formally Roll Out His Tax Reform Plan on Thursday
Many Alternative Proposal to Replace the MBT Surface in the Legislature
Tomorrow, February 17th, the administration is expected to present to the Michigan Legislature their proposed budget for the next two fiscal years. The Michigan fiscal year starts on October 1 and ends on September 30. A major element in the proposal is expected to be repeal of the Michigan Business Tax and replacement with a Michigan Corporate Income Tax imposed only on C Corporations at a 6% rate.
Version 4 of the administration's proposal was released about two three weeks ago for vetting. From that proposal we can glean that not many taxpayers will be paying the new Michigan Corporate Income Tax, as compared to the Michigan Business Tax. The proposed tax would apply to only C Corporations, effectively eliminating from the tax rolls all small businesses, proprietorships, partnerships and Corporations with 100 or fewer shareholders. Because it is an income tax, many out of Michigan taxpayers, currently paying the Michigan Business Tax, would no longer have to pay the new tax if their activities in Michigan are protected by Public Law 86-272.
All of this is great if you are a small business in Michigan or an out of Michigan taxpayer soliciting sales of property in Michigan. You would not pay the new tax. However, the Governor must submit a balanced budget and the legislature must pass a balanced budget.
Don't be surprised if the administration pairs the Michigan Corporate Income Tax with a new Michigan Corporate Franchise Tax. The Michigan Corporate Franchise Fee, because it's not an income tax, could reach those out of Michigan taxpayers. However, if that happens, then were back to four taxes as with the Michigan Business Tax. Also, if it does happen, then we could be back to the tax structure in existence prior to 1976 when the Single Business Tax became effective.
Speaking of the Single Business Tax, I prefer we go back to a value added tax, but not like the Single Business Tax. The new tax should be a subtractive method value added tax. That's my proposal. Following are several proposals that have surfaced in the Legislature. I am sure there will be more.
Senator Dave Hildenbrand introduced Senate Bill 1 to repeal the MBT. He doesn't have a replacement plan yet, but he said the replacement must be simple, low rate and treat all businesses fairly.
Representative Kenneth Horn introduced a bill that would change the MBT without repealing it. It would remove many credits, eliminate the gross receipts tax and increase the base business income tax to 6%.
Representative Kurt Heise introduced a bill to repeal the surcharge retroactive to 2008 and refund the $1.5 billion collected.
Representative Mark Meadows proposes to tweak the existing MBT by removing the surcharge, cutting the gross receipts tax in half, reduce exemptions and expand the sales tax to service at a 5% rate.
I am sure the list will grow. The key persons are the chairs of the tax committees and the Speaker of the House and Majority leader of the Senate. They will decide which bills get consideration in their respective committees.
I have one more observation; I have not heard of anyone, outside of the administration, in favor of the Governor's proposal.
The debate should start as early as next week.
Tuesday, February 15 2011
The Federal Income Tax "Tax Benefit Rule" Is Incorporated into the Michigan Income Tax Act But Not Applicable
In Sturrus v. Department of Treasury, Michigan Court of Appeals, No. 295403, February 8, 2011 the Michigan Court of Appeals has held that the federal tax benefit rule is incorporated into personal income tax law, but that it was not applicable to the taxpayers' case. According to the federal tax benefit rule, gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent that such amount did not reduce the amount of tax imposed.
The taxpayers' case arose from making investments in a company that was later found to be a Ponzi scheme. In 2002, the taxpayers claimed a theft loss deduction on the federal tax return. This deduction was "below the line," i.e., after the calculation of adjusted gross income (AGI), so it did not reduce the Michigan tax liability. The company entered bankruptcy and the taxpayers offset the repayment of interest received from the investment against the lost investments in the company to the bankruptcy trustee. In 2004, the taxpayers reported a theft loss recovery on the federal tax return. This item was "above the line," i.e., before the calculation of AGI, so it was essentially included on the Michigan tax return. As a result, the taxpayers deducted the theft loss recovery from the 2004 Michigan return. The tax benefit rule did not permit this as the lost investment was not previously deducted on any Michigan return. The court noted that while Michigan does not have a theft loss deduction, the proper place to seek a remedy was in the Legislature.
Monday, February 14 2011
Transportation Company Based in Muskegon, Michigan was Determined to be subject to the Single Business Tax
In Andrie, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 291758, February 1, 2011 the Michigan Court of Appeals held that a transportation company was properly subject to the Single Business Tax (SBT). The taxpayer was a shipping company that plied the Great Lakes waters. The parties agreed that the proper apportionment formula was revenue miles in Michigan to revenue miles everywhere.
The court determined that the department did not violate the taxpayer's right to equal protection by applying different apportionment schemes. Under equal protection, persons under similar circumstances must be treated alike, but persons under different circumstances are not required to be treated the same. The rational basis test was used to examine if the challenged statute created a classification scheme that was rationally related to a legitimate governmental purpose. The statute was presumed valid, and the taxpayer did not prove that similarly situated taxpayers were treated differently.
In addition, the court determined that the taxpayer's due process and Commerce Clause rights were not violated. The tax had a rational relationship with the income attributed to the state. The state's power to tax was justified by the protection, opportunities, and benefits the state conferred on the activities. The taxpayer argued that the tax was not fairly apportioned, but the court noted the benefits the state provided to the taxpayer, including the use of its ports and the convenience of inland and port infrastructure. Even though the statute did not define "in Michigan," the court reasoned that the plain, ordinary meaning included anything that occurred within the state boundaries. Because the taxpayer regularly earned business income from the Great Lakes and had its primary location in Muskegon, the taxpayer was subject to the former SBT.
Wednesday, February 02 2011
Corporate Officer Liable for Tax When Appeal Not Timely Filed
In Eberhart v. Department of Treasury, Michigan Tax Tribunal, No. 357863, July 30, 2010, released January 26, 2011 the president of an Indiana corporation that received an assessment for Michigan use tax could not challenge the original assessment because the taxpayer failed to pursue his appeal rights. Therefore, the assessment became final and was not subject to review by any method of direct or collateral attack. As the president admitted that he was a responsible corporate officer, he remains liable for the assessed use tax and interest.