Tuesday, November 27 2012
Court of Appeals Confirm Strict Interpretation of Law - Amended Return Refund Claims
In P&M Holding Group, LLP v. Department of Treasury, Michigan Court of Appeals, No. 307037, November 15, 2012, the Michigan Court of Appeals allowed a fiscal-year taxpayer to file its final Single Business Tax return using the "actual method" and its initial Michigan Business Tax return using the "annual method." The Department of Treasury did not approve of the taxpayer using two different methods. The department argued that the lower court incorrectly interpreted the applicable statute (M.C.L. 208.1503). The appellate court disagreed: the statute gave taxpayers a choice to use the actual method or the annual method. Furthermore, the statute did not require taxpayers to use the same method for the final short year SBT return. Even though Revenue Administrative Bulletin 2007-5 directed taxpayers to use the same accounting method for both the final SBT return and the initial MBT return, it was not adopted under the Administrative Procedures Act and thus was merely explanatory. The department next argued that because the statute did not require consistency in methods of filing the final SBT return and the initial MBT return, the statute violated the state constitution's uniformity guarantee. Again, the appellate court disagreed. The statute met a rational basis of review: the purpose behind providing alternative methods of tax computation was to create ease of administration. Accordingly, use of the different accounting methods was permitted for the final SBT return and the initial MBT return.
Taxpayers who followed RAB 2007-5 in preparing and filing their first MBT return, may file an amended return to secure a refund of overpaid taxes.
Monday, November 26 2012
Wireless Service Provided With Equipment Located in Indiana
In Michiana Metronet, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 306219, November 8, 2012, a taxpayer's sales other than sales of tangible personal property were properly excluded from the Michigan sales factor numerator under the Single Business Tax (SBT). A regional wireless services provider with operations in three states, the taxpayer maintained its administrative and business operations in Indiana. Under audit, the taxpayer contested the proper apportionment of its sales other than sales of tangible personal property. The SBT statute provided that such sales were in Michigan if the business activity was performed both inside and outside Michigan and, based on the costs of performance, the greater proportion of the business activity was performed in Michigan.
"Business activity" was defined to include the performance of services. The Department of Treasury issued guidance (Internal Policy Directive 2006-8) discussing "costs of performance." In the directive, the department stated that (1) the cost of performance analysis was not to be applied to the total business activities of the taxpayer, but to each sale separately and (2) the determination of direct costs depended on the nature of the services provided.
The trial court reasoned that, as the taxpayer's engineering, billing, and customer service departments were in Indiana, all Michigan services were provided through the network and other equipment located in Indiana. The taxpayer's service was performed through the completion of wireless calls and the provision of network to subscribers. Accordingly, the taxpayer properly excluded from the sales factor numerator receipts for long-distance calls, international long distance, enhanced features, and incollect roamer charges.
Monday, November 12 2012
Customers Were Given Cash Refunds Which Including Sales Tax
In Discount Tire Co. v. Department of Treasury, Michigan Court of Appeals, No. 307038, November 6, 2012, the Michigan Court of Appeals has held that a tire retailer was entitled to a returned goods sales tax credit on previously remitted sales tax because it conveyed cash refunds, including sales tax, to customers who returned damaged tires. The taxpayer's customers had the option of purchasing a certificate that entitled them to a full cash refund on irreparably damaged tires within three years of purchase. Also, at the customer's request, the taxpayer was required to offer the customer the opportunity to purchase a replacement tire at a price equal to the price of the original tire. When a replacement tire was sold pursuant to a certificate, the taxpayer remitted sales tax and also use tax to the Department of Treasury. Though the department claimed that goods must be returned within a certain time frame and in the same condition as they were sold, in order to qualify for a returned goods tax credit, the applicable statute, MCL 205.56b, contains no such requirements. Moreover, Rule 16, issued by the department to clarify the meaning of "returned goods" is invalid, as it contains more restrictive language than MCL 205.56b and narrows the returned goods credit.
As the replacement tires were purchased with the cash refunds, these tires were retail goods subject to sales tax only. The taxpayer was therefore entitled to a refund of use taxes as the two taxes cannot be imposed on the same transaction.
Friday, November 09 2012
Nonresident Presumed Exempt If brought Into Michigan More Than 90 Days After Purchase
In Free Enterprises LLC v. Department of Treasury, Michigan Court of Appeals, No. 306195, November 6, 2012, Michigan use tax was not due on a recreational vehicle (RV) purchased in Florida, registered in Montana, and subsequently used in Michigan because there is a presumption of exemption for property brought into Michigan by a nonresident more than 90 days after its purchase. The owner of record was a Montana-based limited liability company (LLC) whose sole member was a Michigan resident at the time of the RV's purchase.
No sales or use taxes were paid on the RV, as it was titled in Montana, which does not impose such taxes, and Florida defers taxation to the state of registration. The Department of Treasury failed to rebut the presumption of exemption, as there was no evidence that the formation of the LLC and the subsequent RV purchase were undertaken illegally for purposes of tax evasion. Though the transaction may have been structured to minimize the LLC member's tax liability, there was no evidence that the Petitioner failed to pay any legally required taxes or fees in Florida or Montana or engaged in other illegal conduct. As the RV was not brought into Michigan until 389 days after purchase, was stored in Michigan only in the summer months, and the Petitioner's sole member resided in Florida, the Tax Tribunal correctly held that the presumption of exemption was not overcome.
Thursday, November 08 2012
Michigan Business Tax Credit Available for Production of a Video Game Based on a Television seriesIn MVW Game, LLC v. Michigan Film Office and Department of Treasury, Michigan Court of Appeals, No. 304999, October 23, 2012, the Michigan Court of Appeals held that a taxpayer met the statutory requirements to earn the film production expenditures credit available against the Michigan Business Tax. The taxpayer produced a video game based on a television series. The Michigan Film Office denied the credit application because the taxpayer was not an "eligible production company," as required by law. According to the Film Office, as the taxpayer had entered into a contract with another company to manufacture and distribute the video game, it was not in charge of making the overall project and had less than overall control. The lower court reasoned that the applicable statute only required an eligible production company to produce a product for distribution and did not require the company to have ownership or control over all the rights necessary to produce the product. The appellate court agreed. The statute did not require that the taxpayer both produce and distribute the qualified production. Thus, because the taxpayer was engaged in the commerce of bringing qualified productions into existence by intellectual or creative ability, it was not required to distribute the video game and could qualify for the credit.
Wednesday, November 07 2012
Tax Tribunal Has Authority to Reach Back and Correct Prior Year Unconstitutional Increases
In Summit Development Group, Inc. v. City of Battle Creek, Michigan Court of Appeals, No. 307773, October 23, 2012, the Michigan Court of Appeals held that the Tax Tribunal should not have affirmed the 2008 and 2009 taxable values of a parcel of property because the Tax Tribunal had the authority to reduce an unconstitutional previous increase in the taxable value of the property for the 2007 property tax year for purposes of adjusting the taxable values that were timely challenged in 2008 and 2009.
In this case, the 2007 taxable values were used as a starting point for the 2008 and 2009 taxable values, and the taxpayer wanted the Tax Tribunal to reach back to 2007, a year not under review, and remove the unconstitutional public-infrastructure improvements made by the taxpayer from the assessments for 2007 and onwards. The Michigan Court of Appeals noted that, at the time of the Tax Tribunal's decision, it did not have the benefit of the Michigan Supreme Court's decision in Michigan Properties, LLC v. Meridian Twp, 817 N.W. 2d 548 (2012), in which the court held that the Tax Tribunal did have the authority to reduce an unconstitutional previous increase in taxable values.
The taxpayer also contended that it should be entitled to challenge the taxable values for 2007, despite its untimely challenge of them, because the 2007 notices of assessment were not timely delivered to the taxpayer and a due process violation occurred. The appellate court held that if the taxpayer could prove that the 2007 notices were not received and the city had knowledge of that fact, then the failure of the city to take further action may have given rise to a due process violation. However, there was a dearth of evidence that the 2007 notices were sent to the wrong address or that the notices as sent were undeliverable.
Tuesday, November 06 2012
Use of Indirect Audit Procedures and Sampling Limited, Generally Accepted Governmental Auditing Standards (GAO Yellow Book) Mandated
HB 5988 Amends the Use Tax Act: It adds language that would limit the use of indirect audit procedures and requires taxpayer approval for sampling and sample projections.
HB 5989 Amends the General Sales Tax Act: It adds language that would limit the use of indirect audit procedures and requires taxpayer approval for sampling and sample projections.
HB 5990 Amends the Revenue Act: Requires that audits completed by the Department of Treasury be done in accordance with Generally Accepted Governmental Auditing Standards and sampling be done in accordance with the AICPA Sampling Guide.
HB 5991 Amends the Uniform Unclaimed Property Act: Requires that audits for unclaimed property, including sample projections be done in accordance with Generally Accepted Governmental Auditing Standards. It adds language that would limit the use of indirect audit procedures and requires taxpayer approval for sampling and sample projections.
Monday, November 05 2012
Notice of Final Assessment Must Be Served to Both Taxpayer and Representative
The 35-day Period for Filing an Appeal Does Not Start Until Both the Taxpayer and the Taxpayer's Representative Are Served with the Final Assessment
In two cases decided at the Tax Tribunal involving sales tax audits of convenience stores based on upside down audit techniques and a two month sample, the Court of Appeals rendered a decision on the "subject matter jurisdiction" of the Tax Tribunal. In both cases the Tax Tribunal ruled that the audit techniques were invalid. However, the Department of Treasury appealed because the Petitions in both cases were filed late. The taxpayer in both cases executed a Power of Attorney asking the Department of Treasury to send notices to their CPA. Treasury did not, as is their policy. The failure of the CPA to receive the Final Assessment caused the Petition to be filed late.
In SMK LLC v. Department of Treasury, Michigan Court of Appeals, No. 306639, October 30, 2012, the Court of Appeals has held that the Michigan Tax Tribunal had proper jurisdiction to determine a taxpayer's appeal of a sales tax assessment because the applicable 35-day period for filing an appeal did not commence until both the taxpayer and the taxpayer's representative were served with the final assessment. The taxpayer had filed a request with the Department of Treasury to send copies of all letters and notices to its official representative. However, a copy of the assessment was not sent to the representative until 10 months after it was submitted to the taxpayer. Though MCL 205.28 requires that notice be given to the taxpayer, the court found that MCL 205.8 imposes a parallel notice requirement when the taxpayer has a valid written request on file for the department to send copies to a representative. Therefore, the 35-day filing period did not begin to accrue until both the taxpayer and its representative were served.
In Fradco, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 306617, October 30, 2012, a case decided concurrently with SMK LLC v. Department of Treasury, No. 306639, the Court of Appeals held that the Michigan Tax Tribunal had proper jurisdiction to determine a taxpayer's appeal of a sales tax assessment because the applicable 35-day period for filing an appeal did not commence until both the taxpayer and the taxpayer's representative were served with the final assessment. The taxpayer had filed a request with the Department of Treasury to send copies of all letters and notices to its official representative. Though MCL 205.28 requires that notice be given to the taxpayer, the court found that MCL 205.8 imposes a parallel notice requirement when the taxpayer has a valid written request on file for the Department of Treasury to send copies to a representative. Though the Department of Treasury claimed that it issued a notice of the issuance of a Final Assessment to the representative, this letter was not a final assessment within the meaning of MCL 205.8.
Ed Kisscorni handled both cases at the Tax Tribunal and succeeded in obtaining a favorable decision for the taxpayer in both cases. Upside down auditing using indirect audit procedures based on an inadequate sample are invalid. Joe Tomczyk testified as an expert on audit procedures. Jim Novis handled the jurisdictional despite, based on "late" appeals, which was caused by the Final Assessments not having been provided to the Powers of Attorney, the CPAs handling the sales tax audits that generated the assessments. The Tax Tribunal applied MCL 205.8 and tried both cases based on the merits.
Both of the taxpayers involved, small convenience store businesses, employed very capable outside accountants who maintained complete and accurate books and records. The Department ignored these records and commenced an audit on the presumption that as cash businesses, the records were inaccurate. The Department reviewed only purchases and extrapolated grossly overstated sales amounts that ignored shrinkage and inventories. The Tax Tribunal found this "audit" method to be erroneous ruling the Department had not carried its burden of proof and cancelled the assessments. The Department appealed to the Court of Appeals solely on the jurisdiction issue asking the Court of Appeals to allow it to collect assessments that the Tax Tribunal found to be without substantive merit.
These two decisions of the Court of Appeals are PUBLISHED decisions granting a complete taxpayer victory on the MCL 205.8 Power of Attorney issue.
Michigan Department of Treasury Revises their Power of Attorney Form
This past summer, the Department of Treasury issued on their website a revised Power of Attorney Form 151. [POA Form 151 (ver. 7-2012)] The new Form 151 has boilerplate language at Part 4 which attempts to disclaim away the Department's obligation under MCL 205.8. The Department apparently anticipated the Court of Appeals decision. The change to the Form 151 was done with no notice to CPAs, the state Bar or other impacted groups despite regular Business Tax Advisory Group (BTAG) meetings. However, at last week's meeting, the Department informally advised that CPAs, attorneys and others representing taxpayers before the Department of Treasury can do so by having the taxpayer send a letter to the Department asking the representative to represent them and to receive all notices, bills, assessments and other communications.
Friday, November 02 2012
Intention Disregard 25% Penalty Assessed for Failure to Follow Instructions
In a Decision and Order of Determination received this month from the Hearings Division, the Department of Treasury upheld the imposition of the 25% penalty for intentional disregard. The taxpayer, a retailer, paid sales tax on a monthly basis from the sales tax collected figures from cash register tapes. After the end of the year the amount paid was compared to the amount calculated to be due from the annual return, any balance due was paid at that time. The taxpayer did not prepare and retain monthly sales tax worksheets.
From the Decision and Order of Determination:
The audit papers indicate that this is the Petitioner's first audit; however, the auditors found Petitioner showed intentional disregard of the law or rules promulgated by the department specifically noting that Petitioner failed to correctly file their sales tax returns by reporting the 2008 tax return for a different amount than was remitted during the year, failed to provide daily sales records or prepare monthly sales tax worksheets as instructed in the SUW booklet they receive annually, and clearly disregarded the requirement to maintain proper records as required under MCL 205.68(1). Petitioner's argument that intentional disregard does not apply where the business is being run by an insufficiently trained employee manager with an absentee owner, fails. The fact that the owner was absent and not attempting to implement controls or properly train the manager on proper sales reporting and inventory check-in tends to show an intentional disregard for the instructions provided by Michigan Law and the Department for proper reporting and documentation retention. October 19, 2012 - Michigan Department of Treasury
Thursday, November 01 2012
Taxpayer Sought Sales Tax Refunds for Tax Paid on Bad Credit Card debts
In Home Depot USA, Inc. v. State of Michigan, et al., Michigan Court of Appeals, No. 301341, May 24, 2012; leave to appeal denied, Michigan Supreme Court, Dkt. No. 145412, October 22, 2012, the Michigan Supreme Court has denied a request to review a Court of Appeals decision which held that a retailer that entered into private label credit card (PLCC) agreements with certain finance companies was entitled to a bad-debt deduction for sales taxes remitted on purchases made by PLCC holders who later failed to pay their credit card bills.
The taxpayer had sought a refund of taxes despite having received compensation for the purchases and the tax pursuant to its contracts with the finance companies. The Supreme Court did not believe that the questions presented should be reviewed by the court.