Monday, December 31 2012
Apportionment Based on US Population Deemed Entirely Speculative
In JRS Distribution Company v. Department of Treasury and Publications International, Ltd. v. Department of Treasury, Michigan Court of Appeals, Nos. 302441 and 307350, December 11, 2012, the Court of Appeals affirmed the lower court. The Michigan Court of Appeals held that the Department of Treasury improperly calculated the single business tax (SBT) sales factor apportionment for two taxpayers.
Located out of state, the taxpayers were involved in a joint venture to sell books in Michigan. During an audit, they provided documentation regarding the sales of books to Michigan customers, but not the requested 50-state sales breakout or the 50-state breakdown of costs of performing sales solicitation services. Therefore, the Department of Treasury assessed the SBT liability using the "best information available," which it decided was a sales factor composed of Michigan population divided by the U.S. population.
The court noted that the Department of Treasury was not statutorily authorized to craft its own calculation method to figure the sales factor. The SBT Act provided that the sales factor was calculated by Michigan sales divided by total U.S. sales. The department's method was "entirely speculative" and had no relationship to the taxpayer's actual Michigan sales. Furthermore, the publisher/taxpayer presented evidence that the greater proportion of the costs of performance were outside Michigan: none of the book production services occurred in Michigan and employees in local offices telephoned potential customers for the sales solicitation activities. As these activities were not properly sourced to Michigan under the applicable statute, there was no SBT liability.
Saturday, December 29 2012
Court of Appeals Ruled the Charge Constituted a Charge by the Seller for any Services Necessary to Complete the Sale
In Midwest Energy Cooperative v. Department of Treasury, Michigan Court of Appeals, No. 307867, December 11, 2012, an energy optimization charge (EO charge) imposed by a regulated electric cooperative was subject to Michigan sales tax because it constituted a "charge by the seller for any services necessary to complete the sale" under MCL 205.51(1)(d). Michigan law requires the taxpayer to create an energy optimization plan (EO plan) in order to reduce the future costs of providing service to customers. The EO plan was a service that the taxpayer was required to provide in order to engage in electricity sales. Consequently, the EO charge was part of the sales price of electricity and was taxable as "gross proceeds."
Friday, December 28 2012
Proceeds From the Disposition of a Business are Not Sales for SBT Apportionment
In Sidney Frank Importing Company, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 306742, December 4, 2012, the Michigan Court of Appeals held that a taxpayer subject to the single business tax (SBT) was required to exclude the proceeds of selling a business from the taxpayer's sales factor denominator for apportionment purposes. An S corporation that imported and distributed wines and spirits, the taxpayer sold all the tangible and intangible assets related to the Grey Goose vodka brand for over $2 billion in 2004. The taxpayer argued that the amount received should be included in the sales factor denominator. To determine if the transaction constituted a "sale," the court looked to the applicable statutory definition.
The SBT law defined "sale" to include, among other things, the rental, lease, licensing, or use of tangible or intangible property which constituted business activity. "Business activity" was defined broadly. The court reasoned that "sale" and "business activity" were not synonymous; otherwise, the Legislature would not have provided separate definitions.
The amount the taxpayer received was not for the use of a brand name; rather, it was for the transfer of title to the entire brand. Thus, the court concluded that the transaction of selling the business was not a "sale" under the law. The taxpayer also argued that the department's calculation of the sales factor led to a grossly distorted result, which was unconstitutional. The court declared that the taxpayer's arguments on this issue were conclusory and without merit. The brand was sold in Michigan; therefore, the state was entitled to tax a portion of the proceeds.
Thursday, December 27 2012
Public Service Improvements Unconstitutionally Increased Taxable Value
In Koetje Builders & Developers, L.L.C. v. Township of Georgetown, Michigan Court of Appeals, No. 303220, December 4, 2012, the Court of Appeals ruled the Michigan Tax Tribunal had jurisdiction to deduct an unconstitutional increase in the taxable values of a company's residential properties that was attributable to public service improvements for the property tax years in which the company filed a timely challenge because the Tax Tribunal had the authority and duty to correct a previous erroneous taxable value for purposes of adjusting a taxable value that was timely challenged in a subsequent year.
The Michigan Court of Appeals noted that in Mich Props, LLC v. Meridian Twp, 817 N.W. 2d 548 (2012), the Michigan Supreme Court held that the Tax Tribunal had jurisdiction over challenges to taxable values such as the one raised by the company in this case in order to bring the taxable value of property back into compliance with the general property tax provisions. In particular, the Michigan Supreme Court held that the taxpayer could seek a recalculation of the taxable value of its properties in the years that it did timely appeal, and that the basis for seeking this recalculation could be an error made in the year prior to the challenge.The appellate court noted that the general rule was that judicial decisions were to be given complete retroactive effect. It was apparent that the decision from Mich Props, LLC was not intended to have prospective-only effect because the Michigan Supreme Court applied the holding from the case to the parties involved in that case. Therefore, the appellate court concluded that when courts announce a rule and apply the rule in that case, it was clear that the rule did not apply only prospectively.
Wednesday, December 26 2012
Assessments Not Timely Appealed and Neither a Clerical Error Nor Mutual Mistake of Fact Occurred
In Pirate Logistics, Inc. v. City of Romulus, Michigan Court of Appeals, No. 307262, November 29, 2012, the Michigan Tax Tribunal properly determined that it had no jurisdiction over a taxpayer's local property tax assessment appeal because the assessments were not timely appealed and neither a clerical error nor a mutual mistake of fact had occurred. In this case, the parties agreed that the assessment of the taxpayer's leased equipment was incorrect and that the assessment notices named the wrong taxpayer and were mailed to the wrong address, but the parties' stipulation did not indicate a mistake of fact on the part of the taxpayer, much less a mutual mistake of fact.
The facts regarding the confusion about the ownership of the parcel containing the assessment notices and the address of the owner may have suggested that there was a clerical error in linking the parcel number, the taxpayer, the property, and the address. However, the mistake may also have arisen for other reasons, such as the taxpayer's failure to provide notice of a transfer. Even when the parties were given the opportunity to present documentation, they failed to present an explanation of the circumstances that led to the assessment. Even on appeal, the parties did not explain how the assessments were the product of a clerical error.
Saturday, December 22 2012
Single Mixed Transaction Rule Proposed; Other Administrative Amendments Proposed
The Michigan Department of Treasury has proposed a new sales and use tax rule regarding single mixed transactions. A "single mixed transaction" would be defined as a transaction in which a combination of taxable and nontaxable services, taxable and nontaxable personal property, or taxable and nontaxable services and personal property is sold for a single price. If the transaction was principally a transfer of taxable services or taxable tangible personal property, the entire transaction would be deemed taxable. However, if the transaction was principally the transfer of nontaxable services or nontaxable personal property, the entire transaction would be exempt.
The following factors would be used to determine whether a single mixed transaction was principally the sale of a service or of personal property:
· what the buyer sought as the object of the transaction;
· what the seller or service provider is in the business of doing;
· whether the taxable item was provided as a retail enterprise with a profit-making motive;
· whether the taxable item was available for sale without the exempt item;
· the extent to which the nontaxable item has contributed to the value of the taxable item; and
· any other factors relevant to the particular transaction.
The Department of Treasury has also proposed to rescind the following sales and use tax rules: R205.5 ("Tangible Personal Property"),
R205.9 ("Sales for purposes of resale"), and
The Department of Treasury has proposed to amend the following rules:
R205.1 ("Sales tax licenses"),
R205.8 ("Consumer; use; conversion"),
R205.15 ("Trade-in deduction"),
R205.16 ("Returned goods"),
R205.20 ("General application"),
R205.22 ("Discounts generally; discounts on certain motor vehicle sales"),
R205.26 ("Use tax registration"),
R205.28 ("Use tax included in gross proceeds"), and
R205.136 ("Food for human consumption").
Friday, December 21 2012
Court of Appeals Rules the Master Manuscripts are Tangible Property
In Random House, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 307035, November 27, 2012, a taxpayer was allowed to claim the capital acquisition deduction (CAD) under the Michigan single business tax (SBT) for amounts spent purchasing original or "master manuscripts" from authors. The taxpayer was a publisher and sold books in interstate commerce.
The taxpayer argued that the costs were of the same type that were capitalized and depreciated for federal income tax purposes as required by the IRS; in essence, the taxpayer claimed that it was buying physical manuscripts. The Department of Treasury argued that the taxpayer purchased the rights to publish books, which was an intangible asset.
Under the SBT law, the tax base was adjusted by deducting the cost paid or accrued in a tax year of tangible assets of a type that were eligible for depreciation for federal income tax purposes. Under federal guidelines, to determine if a taxpayer producing intellectual or creative property is producing tangible personal property or intangible property, the term "tangible personal property" includes books. Furthermore, according to the IRS, the costs of producing such property, including prepublication expenditures incurred by publishers, are required to be capitalized.
Under a previous federal income tax audit, the IRS required the taxpayer to capitalize the amounts spent purchasing the manuscripts. The department argued that the manuscripts were not subject to wear and tear or decay. The court noted that this argument was without merit because the "useful life" was a period over which the asset may reasonably be expected to be useful to the taxpayer in trade or business or in the production of income. Accordingly, the taxpayer was entitled to the CAD under the SBT for manuscript purchases.
Thursday, December 20 2012
The Multistate Tax Compact Three Factor Apportionment Not Applicable
In International Business Machines Corp. v. Department of Treasury, Michigan Court of Appeals, No. 306618, November 20, 2012, affirming the lower court, the Michigan Court of Appeals held that a Michigan taxpayer was required to use the Michigan Business Tax (MBT) apportionment formula (100% sales) and that the taxpayer was not permitted to elect to use the Multistate Tax Compact's apportionment formula (equally-weighted property, payroll, and sales).
The taxpayer argued that the MBT apportionment formula was optional, and the Department of Treasury argued that the MBT apportionment formula was mandatory. The court noted that the MBT statute allowed taxpayers to request permission to use an alternate apportionment method so that unusual situations where the default formula caused distortion would not occur. However, the Compact allowed an election of right, presumably exercised in order to obtain a lower tax liability. Examining the statutory language, the court noted that the applicable provision (M.C.L. 208.1301) absolutely precluded any other apportionment formula except by petition.
The taxpayer next argued that the Compact was a contract. However, the court noted that statutes were not deemed to be contracts in the absence of an exceedingly clearly-expressed intent by the Legislature. Essentially, for the Legislature to express such an intent, it would have had to use the word "contract" or "covenant," or otherwise explicitly "surrender its power to make changes." In addition, the Compact language did not specify that it was a contract. As such, the court reasoned that enacting a conflicting statute might be an improper way to repeal the Compact, but not necessarily impermissible. Accordingly, the MBT law repealed by implication the apportionment election provision in the Compact.
Wednesday, December 19 2012
Power of Attorney and the Right of a Taxpayer to be Represented by a Representative Authorized to Receive Correspondence including Assessments
SMK, LLC v Michigan Department of Treasury
SMK, LLC (SMK) operated a convenience store located in Midland, Michigan across the street from the Dow Chemical world headquarters. The Department of Treasury (Treasury) audited SMK for sales tax. SMK executed a Power of Attorney form directing the Department of Treasury to send all correspondence and bills to their CPA. The CPA represented SMK during a sales tax audit. SMK wanted to appeal the sales tax audit determination. The Department of Treasury failed to send a copy of the Bill for taxes Due (Final Assessment) to the CPA. Consequently, the Tax Tribunal Petition was filed late.
The Department of Treasury prepared a Bill for Tax Due (Final Assessment) sending it out blind to the taxpayer, but did not send it to the CPA. The Tax Tribunal Petition was filed after 35 days from the date on the Bill for Tax Due (Final Assessment). The Tax Tribunal accepted the Petition.
The Tax Tribunal appeal was successful with the Tax Tribunal ordering the Bill for Tax Due (Final Assessment) be cancelled.
The Department of Treasury appealed to the Court of Appeals, not on the sales tax issues, but on the issue of Subject Matter Jurisdiction because the Petition was filed after 35 days from the date of the Bill for Tax Due (Final Assessment).
The Court of Appeals ruled in a Published decision that the 35-day appeal period does not start until both the taxpayer and the taxpayer's representative have received the Bill for Tax Due (Final Assessment). The Department of Treasury filed a Motion for Reconsideration which was rejected by the Court of Appeals. Last week Treasury filed an Application for Leave to Appeal to the Michigan Supreme Court. The Supreme Court will be asked to opine on the right of a taxpayer to be represented by professional counsel and the right of a CPA or other professional to represent a taxpayer.
Fradco, Inc. v Michigan Department of Treasury
Fradco, Inc. (Fradco) operated a convenience store located near Grand Rapids across the street from the Amway world headquarters. Fradco was audited for sales tax for the third time by the Department of Treasury. Fradco was represented by a CPA. Fradco executed a Power of Attorney form directing the Department of Treasury to send all correspondence and bills to the CPA. The CPA had represented Fradco during several sales tax audits including the last one and also represented Fradco at an informal conference.
At the completion of the Informal Conference, the Department of Treasury prepared a Bill for Tax Due (Final Assessment) sending it out blind to the taxpayer, but did not send it to the CPA.
Fradco filed a Tax Tribunal Petition so as to appeal the Sales Tax Assessment. The Tax Tribunal Petition was filed after 35 days from the date on the Bill for Tax Due (Final Assessment. The Tax Tribunal accepted the Petition.
The Tax Tribunal appeal was successful with the Tax Tribunal ordering the Bill for Tax Due (Final Assessment be cancelled.
The Department of Treasury appealed to the Court of Appeals, not on the sales tax issues, but on the issue of Subject Matter Jurisdiction because the Petition was filed after 35 days from the date of the Bill for Tax Due (Final Assessment.
The Court of Appeals ruled in a Published decision that the 35-day appeal period does not start until both the taxpayer and the taxpayer's representative have received the Bill for Tax Due (Final Assessment. The Department of Treasury filed a Motion for Reconsideration which was rejected. Last week the Department of Treasury filed an Application for Leave to Appeal to the Michigan Supreme Court. The Supreme Court will be asked to opine on the right of a taxpayer to be represented by professional counsel and the right of a CPA or other professional to represent a taxpayer.
Tuesday, December 18 2012
Supreme Court to Decide Whether Fuel for Tug-Barge Units is Exempt and Whether Use Tax Can be Applied on Purchases Subject to Sales Tax
The Michigan Supreme Court has granted motions for immediate consideration and to stay the precedential effect of Andrie, Inc. v. Department of Treasury, Michigan Court of Appeals, 296 Mich. App. 355.
The Court of Appeals held that a Michigan company engaged in marine transportation and marine construction was not entitled to a use tax exemption for fuel and supplies for vessels engaged in interstate commerce for its tugs, as the tugs were not vessels of 500 tons or more used in interstate commerce. Each tug-barge unit did not qualify as a single vessel for purposes of the exemption, and each tug had a registered tonnage of under 500 tons. The Supreme will be asked to determine whether the exemption in MCL 205.94(1) applies in this case.
The second issue, which has broad application, is: (1) whether the Court of Appeals correctly determined that a retail transaction in Michigan subject to the sales tax is not subject to the use tax; and (2) whether a retail purchaser is entitled to a presumption that sales tax is paid on retail transactions in Michigan.
Andrie, Inc. v. Department of Treasury,, Michigan Court of Appeals, 296 Mich. App. 355 (2012); leave to appeal granted, Mich. S. Ct., Dkt. No. 145557, December 5, 2012
Monday, December 17 2012
Amended Michigan Business Tax Returns Possible
The Michigan legislature is sending to the governor amendments to four provisions in the Michigan Business Tax Act. The bill is curative and given immediate effect. It would open the way for amended returns.
Following are the affected sections:
1. Definition of "officer" [111(5)(c)]
2. Reasonable Return on Capital [201(2)(h)]
3. Income base NOL Successorship [201(5)]
4. Clarify "ultimate destination" [305(1)(a)]
Changes to the above sections were part of a package of changes included in the MACPA technical corrections proposals. There are seven issues remaining from the original report on needed MBT technical corrections and ambiguity clarifications.
1. COD Income [111(1)(ff)]
2. ITC Recapture [403(3)(d)-(f)]
3. Renaissance Zone Credit [433 (1)]
4. Self-constructed Assets
5. Materials and supplies
6. Credit Ordering
7. Intercompany eliminations for UBG
The Administration has agreed to address #2 and #3 above in the first quarter of 2013. At the moment, opposition to the other 5 issues remains; however, the MACPA will continue to develop a strategy in pursuit of these needed reforms.