Saturday, June 30 2012
Public Act 211 of 2012 Defines Tax Return - Applicable to All Open Periods
On Wednesday, June 27th, Governor Snyder signed House Bill 5543 sponsored by Representative Pscholka of Stevensville. The legislation clarifies what constitutes the filing of a tax return for purposes of the four year statute of limitations. It will dramatically reduce overly-aggressive auditing by the Department of Treasury. The bill, which was signed into law as Public Act 211 of 2012 is effective for all open periods.
PA 211 eliminates the current Department of Treasury's practice to conduct a ten year use tax audit on taxpayers registered with the Department of Treasury and filing current returns by clarifying when Michigan's four year statute of limitations begins. The bill amends Section 27a of the Revenue Act to provide that the filing of a return includes the filing of a combined, consolidated, or composite return whether or not any tax was paid and whether or not the taxpayer reported any amount in the Use Tax line, including zero.
The bill expresses legislative intent that the amendment be retroactive and effective for all tax years that are open under the statute of limitations provided in Section 27a of the Revenue Act and for all matters regarding the filing of a return under Section 27a. The bill also expresses legislative intent that the amendment not affects a refund required by a final court order for which all rights of appeal were exhausted or had expired before May 1, 2012.
I had the opportunity to write the amendatory language which was reviewed and edited by Curtis Ruppel, CPA and the Tax Policy Committee of the Michigan State Chamber of Commerce. I was asked to testify at the House Tax Policy Committee. But I was third in line. The first witness told a long heartbreaking story about his struggles to keep his construction company afloat. Then the use tax audit came. He could not afford to hire a CPA or attorney. He fought it on his own. The preliminary audit adjustment was about $150,000. He had worked it down to about $30,000 with the auditor, a manageable amount. Then, he said, the auditor came back after a meeting with the supervisor and said the audit period was extended to ten years and $150,000 with interest; an amount that would put the company out of business.
The second witness was Stacy Berndt, CPA from Stevensville, Michigan. She told a long and disgusting story of her experiences with a use tax audit on her client that also covered ten years. I had to follow these two witnesses. I felt like walking out the door. I did testify about the need to make the amendment retroactive. After my testimony, the Department of Treasury representative testified that the Department of Treasury supports the legislation and has changed their policy accordingly.
Any Michigan taxpayer currently undergoing a ten year use tax audit, appealing at informal conference, the Tax Tribunal or the courts should be aware of the new law and their cases should be settled accordingly.
Friday, June 29 2012
Taxpayer Who Has the Legal Liability to Remit the Sales Tax on the Retail Sales is Entitled to the Bad Debt Deduction
In Home Depot USA, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 301341, May 24, 2012 a retailer that entered into private label credit card (PLCC) agreements with certain finance companies was entitled to a bad-debt deduction for Michigan sales taxes remitted on purchases made by PLCC holders who later failed to pay their credit-card bills because the taxpayer met the requirements set forth in the applicable statute, MCL 204.54i(1)(e).
The taxpayer sought a refund of taxes paid between September 1, 1999, and January 31, 2007, despite having received compensation for the purchases and the tax pursuant to its contracts with the finance companies. In Daimler Chrysler Service of North America, LLC v. Department of Treasury, Michigan Court of Appeals, No. 264323, July 25, 2006, the court held that parties acting in concert could be viewed as a unit for purposes of the bad-debt statute. In amending the statute in 2007, the Legislature did not expressly override this conclusion but merely stated that only the retailer was entitled to the bad-debt deduction for periods on or before September 30, 2009. The taxpayer in the present case did have the legal liability to remit the sales tax on the retail sales for which the bad-debt deduction is recognized for federal income tax purposes. The fact that the finance companies wrote off the bad debts did not diminish the taxpayer's qualification under the statute. According to the principles of Daimler Chrysler, the finance companies' actions in writing off the debts satisfied the requirements of MCL 204.54i(2).
Thursday, June 28 2012
Property Owner Failed to Meet Burden of Proof
In Landon v. Township of Mt. Morris, Michigan Court of Appeals, No. 301986, May 24, 2012, the Michigan Court of Appeals affirmed in part the lower court's determination of the true cash value of a taxpayer's residential property (used as a rental unit) for property tax purposes. The assessment for the 2007 tax year was vacated as the township conceded that the valuation was too high. However, the assessments for the 2008 and 2009 tax years were affirmed because the taxpayer failed to meet his burden of proof.
Under the applicable standard of review, the appellate court had to determine if the lower court misapplied the law or adopted a wrong principle. The taxpayer used the sales-comparison approach to calculate true cash value, but the township and the lower court used the cost-less-depreciation method. Using a different way to figure true cash value was not a misapplication of the law or the adoption of a wrong principle. In addition, it was not an invalid method because the property did not assess at the taxpayer's purchase price.
Wednesday, June 27 2012
County Sold Property to Recover Delinquent Property Tax
In Bush v. Slagh, U.S. Supreme Court, Docket 11-1205, Petition for Certiorari Denied May 29, 2012, the U.S. Supreme Court has denied a request by Michigan taxpayers for review of the sale of their properties by the local county to recover delinquent property tax. In their pro se petition, the taxpayers alleged violations of several federal and state constitutional provisions. The taxpayers specifically challenged dismissal of their actions on comity and Tax Injunction Act grounds by the U.S. Court of Appeals for the Sixth Circuit in an unpublished decision.
Tuesday, June 26 2012
Apportionment of a Unitary Tax Base Ruled Proper for a Unitary Business
In The Estate of Thomas M. Wheeler, et al., v. Department of Treasury, Michigan Court of Appeals, No. 302251, May 15, 2012, the Michigan Court of Appeals has held that an S corporation and a lower-tier general partnership were unitary, so that the shareholders/taxpayers properly apportioned their income to Michigan under the personal income tax laws. The S corporation made automotive electrical systems and acquired all the business assets of a German business, which was also a manufacturer and assembler of electrical distribution systems. The German business's operating assets were moved into a partnership as part of the acquisition. The taxpayers received flow-through income from the S corporation and the partnership, which they apportioned.
Under the unitary business principle, for a taxpayer to use apportionment, there must be some sharing or exchange of value not capable of precise identification or measurement (beyond the mere flow of funds arising out of a passive investment or a distinct business operation) that makes apportionment reasonable. Reviewing applicable case law, the court observed that Michigan law does not allow separate entities to be treated as a unitary business in the absence of some common ownership at the entity level and that being owned by the same individual taxpayer is insufficient to trigger this relationship requirement. In this case, the court determined that the taxpayer could use the unitary business principle to apportion income. Furthermore, the unitary business principle does not exclude foreign entities. The personal income tax definition of "state" specifically includes foreign countries.
Finally, the two businesses met the test to be considered unitary: (1) under the economic realities, the regularly conducted activities of the businesses were related as they were both engaged in manufacturing and assembling electrical distribution systems; (2) under functional integration, the business functions were blended to promote a unitary relationship as component engineering, manufacturing and industrial engineering, cost estimating, business development, finance, and executive administration were shared; (3) management was centralized; (4) economies of scale were achieved with an expanded customer base, sharing of unique and proprietary processes, and improved financing terms; and (5) under substantial mutual interdependence, acquisition of the German business was essential for the S corporation to remain a Ford supplier. Accordingly, the lower court properly found that the taxpayers apportioned their income under the unitary business principle.
Monday, June 25 2012
Technical Amendments Pushed by the MACPA is Intended to Clarify Current Law
Legislation that will clarify several issues with the Michigan Business Tax (MBT) is sitting on the Senate floor. There is a difference of opinion on what the cost will be to the state Treasury.
Senate Bill 1037 was introduced in response to various MBT issues that the Michigan Association of Certified Public Accountants (MACPA) and Certified Public Accountants couldn't get cleared up with the Department of Treasury after implementation of the MBT in 2008.
With various businesses threatening to sue or take the state to court over the discrepancies, Senate Bill 1037 was introduced to prevent lawsuits. Senators were concerned that the litigation resulting from current law would cost the state more than $125 million. If action isn't taken soon, the lawsuits will be coming. Although the MBT is a dead tax, repealed last year, businesses are facing audits of their 2008 returns. Audits being completed in 2012 could cover four years of MBT returns. Businesses fear the potential issues and how they they affect their reporting of their MBT tax base.
The legislation, which deals mostly with "purchases from other firms" should not cost the state additional revenue because the technical amendments merely clarify the original legislative intent. However, the Department of Treasury isn't so sure. The Department of Treasury is opposed to the bill and has fought several other attempts to clarify the law. They point to a Senate Fiscal Agency (SFA) analysis, that says Senate Bill 1037 would reduce General Fund revenue by an "unknown and likely significant amount." One might ask, how can they say revenue will be reduced by a significant amount when it is unknown.
The bill excludes certain items from the tax base, increases the value of some deductions and alters the calculation on certain credits. Added all together, the change dealing with a change in the definition of materials and supplies could cost the state as much as $440 million because it would be retroactive, according to Treasury numbers.
Business owners who prepared, filed and paid the MBT based on the literal reading of the law may be underpaid and consequently may be facing large audit tax deficiencies. On the other hand, business owners who prepared, filed and paid the MBT based on the department of treasury interpretation of the law may be overpaid and entitled to refunds. The department of treasury fears the refunds which could go back to 2008. The retroactive aspects of the bill will hit the state's budget in fiscal year 2012. The Treasury Public Information Officer Terry Stanton said: "It carries a substantial potential cost."
Tuesday, June 19 2012
Michigan Poverty Property Tax Exemption on Personal Residence
Public Act 135 of 2012, effective May 16, 2012, permits a person to file an affidavit instead of a federal or state income tax return in order to claim a local Michigan poverty property tax exemption on his or her principal residence if the person was not required to file a return in the tax year in which the exemption is claimed or in the immediately preceding tax year.
Monday, June 18 2012
Exempt Purpose Tied to Religious Activity
In Camp Retreats Foundation, Inc. v. Township of Marathon, Michigan Court of Appeals, No. 304179, May 15, 2012, a Michigan nonprofit organization's camp retreats facility was entitled to a local charitable institution property tax exemption because the property's primary use focused on bringing people's minds or hearts under the influence of religion, and it offered this charity on a nondiscriminatory basis. The organization bought the property specifically intending to create a camp for use by people of the Muslim faith and created a facility particularly suitable for that use. Despite the organization's articles of incorporation, which placed emphasis on athletic activities for youth, the camp facility's central focus was on providing the Islamic community with religious experience in a camp environment. Participants either had a personal connection to the two directors who were both Muslim or were tied to Muslim groups or activities.
The camp facility's recreational opportunities also furthered religious purposes by inextricably interweaving Islamic worship and observance into the camp's daily programs. In addition, no evidence supported the Tax Tribunal's finding that the general public was prevented from attending programs at the camp facility. To the contrary, the testimony established that the organization welcomed participants of every faith, as well as atheists. The presence of fences on the property and signs warning against trespassing bore no relationship to whether the camp facility offered its charity generally and without restriction.
Friday, June 15 2012
Parties Mistakenly Believed the Personal Property Statement was Accurate
In Cherryland Electric Cooperative v. Blair Township, Michigan Court of Appeals, Nos. 296829, 296830, and 296856, May 15, 2012 an electric cooperative was entitled to a local Michigan personal property tax refund because of a mutual mistake of fact. The electric cooperative and the townships' assessors shared and relied on the erroneous belief that a 1984 rural electric cooperatives (REA) personal property reporting form (1984 form) was accurate. That belief was erroneous because contributions in aid of construction (CIAC) should not have been included in the personal property assessments for REA, such as the electric cooperative in this case, based on a 1984 State Tax Commission (STC) bulletin. The erroneous belief of the parties resulted in the electric cooperative's personal property being inaccurately assessed, thereby affecting the substance of the transaction.
The 1984 STC bulletin was issued to assessing officers and county equalization directors and directed the REA to prepare their personal property tax statements using the same procedures as the investor owned utilities (IOU). The 1984 bulletin also indicated that a system economic factor would be based on the cooperatives kilowatt hour sales per mile of line and did not mention CIAC. Following the issuance of the 1984 bulletin, the STC issued the 1984 form, which included CIAC when CIAC was not being reported by IOUs. The mutual mistake of fact was the parties' shared erroneous belief that CIAC was required to be reported and included pursuant to the STC's personal property statements and directives.
Thursday, June 14 2012
Failed Six-Factor Test for Exemption
In Boyne Area Gymnastics, Inc. v. City of Boyne City, Michigan Court of Appeals, No. 303590, May 15, 2012, a nonprofit Michigan corporation did not qualify for a local charitable institution property tax exemption because it did not meet the six-factor test in Wexford Med Group v. City of Cadillac, 713 N.W. 2d 734 (2006). The corporation existed for the purpose of educating children in all aspects of gymnastics, dance, and fitness. The corporation provided scholarship funds to families unable to pay tuition fees. The corporation determined eligibility for these scholarships based on the individual's participation in the public school lunch program. The corporation also existed to provide classes for adults and students for additional activities such as ballroom dancing, karate, yoga, and step aerobics.
The Michigan Court of Appeals noted that although the corporation's articles of incorporation stated that it was organized exclusively for charitable, religious, educational, and scientific purposes, the articles also stated that one of its purposes was to provide the opportunity for self-expression and recreation through gymnastics and dance. The corporation's articles did not state that the corporation was organized chiefly for a charitable purpose. The corporation provided classes to anyone who wished to participate in gymnastics, dance, and physical fitness and provided the use of its facilities either at a discount or no charge to some members of the public and was not organized primarily to provide charitable services. At most, the waiving of fees to some members of the public was incidental to the primary purpose for organizing.
Although the corporation claimed that its classes lessened the burdens of government by providing training outside of Michigan's strained public school system, the corporation failed to cite any evidence that it was the government's burden to provide physical fitness and gymnastics classes to children and young adults. Furthermore, the corporation's charitable endeavors appeared to be incidental to its recreational purposes, so that the corporation's overall nature was not charitable.
Wednesday, June 13 2012
Failed to Establish Home as the One True, Fixed, and Permanent Residence
In Roberts v. Township of West Bloomfield, Michigan Court of Appeals, No. 303098, May 10, 2012, a taxpayer was not entitled to a local Michigan principal residence property tax exemption because he failed to establish that he owned and occupied the home as his one true, fixed, and permanent residence. The township established that the taxpayer did not utilize water or sewage services from September 2007 through May 2009. Whether a home was occupied must be judged as of May 1 in the year for which the principal residence exemption is claimed. As of May 1, 2009, the township's water department had last inspected the water meter at the residence on March 2, 2009. At that time, no water or sewage services had been used at the property since September 2007. In addition to the lack of water usage, the township presented photographs of the taxpayer's residence taken in March 2008. The photographs showed that the yard had not been tended to for at least two seasons. There were no curtains or blinds in the windows, and a visual inspection revealed little furniture inside the home. The township also provided evidence that the taxpayer had marketed the property for rent during his alleged occupancy.
Tuesday, June 12 2012
Organization Failed Exempt Purpose
In Miss Dig System, Inc. v. City of Auburn Hills, Michigan Court of Appeals, No. 303059, May 10, 2012, a nonprofit organization that operated a one call center that received calls from anyone who planned to commence underground excavation within Michigan was not entitled to a charitable institution property tax exemption because the organization's activities did not qualify as charitable. The organization's basic purpose did not reflect an institution that was organized solely or chiefly for charity because the organization did not relay the excavation information it received through its one call center to the underground facilities owners free of charge. Although the organization provided service to any person who wished to excavate in Michigan, it did not provide a benefit to an indefinite number of people. Instead, it was only paying utility members and participants who received the excavation information given to the organization through its one call center and, therefore, the benefit of the one call center was limited to a definite number of people. Additionally, the organization's financial records revealed that it usually had a surplus at the end of each fiscal year, which suggested that it charged more than what was needed for its successful maintenance.
Monday, June 11 2012
Sales to Prison Inmates are Taxable
Public Act 126 of 2012, effective May 8, 2012, eliminates the exemption from Michigan sales tax for purchases of tangible personal property by prison inmates. Such sales are taxable effective October 1, 2012.
Friday, June 08 2012
Aircraft Owner Not Engaged in Leasing Business, leases Not At Arms Length
In Devonair Enterprises LLC v. Department of Treasury, Michigan Court of Appeals, No. 303785, May 8, 2012 an assessment of Michigan use tax based on the purchase price of an aircraft was upheld because the aircraft's owner, a single member LLC, did not qualify as a "lessor" for purposes of a Rule 82 election. The taxpayer was not allowed to make use tax payments on the rental receipts received, as it was not engaged in the business of renting or leasing tangible personal property to others. The only leasing agreements into which the taxpayer entered were with the LLC's sole member, and with an individual that created and operated that sole member. The leases were not arm's-length transactions, as the rate charged per flight hour to the individual was far lower than the costs incurred by the taxpayer per flight hour. Also, the lease terms with the LLC's sole member were unreasonably disadvantageous, for the lessee was liable for all operational costs even though the lease was terminable at will by the taxpayer. Furthermore, the taxpayer failed to seek out other leasing opportunities by advertising its aircraft leasing business.
Thursday, June 07 2012
Large Taxpayer Payment Schedule Changed
Public Act 117 of 2012, effective May 2, 2012; Public Act 118 of 2012, effective May 2, 2012 change large taxpay payment schedule. Beginning January 1, 2014, a Michigan taxpayer with sales and use tax liabilities of $720,000 or more in the prior calendar year must remit, by the 20th of the month, an amount equal to 75% of its liability in the immediately preceding month. Also due will be a reconciliation payment equal to the difference between the tax liability determined for the previous month and the amount of tax previously paid for that month. Furthermore, a single payment by electronic funds transfer is permitted for amounts due pursuant to the sales tax and use tax.
Wednesday, June 06 2012
Lending Institutions Allowed to Claim Exemption on Certain Foreclosed Property
Public Act 114 of 2012, effective May 1, 2012, changes the deadline for a property owner to file an affidavit claiming the local Michigan property tax principal residence exemption has been changed. A property owner may claim the exemption by filing an affidavit with the local tax collecting unit in which the property is located on or before May 1 for taxes levied before January 1, 2012. For taxes levied after December 31, 2011, the affidavit must be filed on or before June 1 for the immediately succeeding summer tax levy and all subsequent tax levies or on or before November 1 for the immediately succeeding winter tax levy and all subsequent tax levies.
In addition, a land contract vendor, bank, credit union, or other lending institution is allowed to retain the principal residence exemption on foreclosed property if the property is not occupied, is for sale, is not leased to any person other than the person who claimed the exemption immediately preceding the foreclosure, and is not used for any business or commercial purpose. A lending institution that retained the exemption is required to pay what it otherwise would have paid in school operating taxes and to pay an administration fee. The administration fee is retained by the local tax collecting unit.
Tuesday, June 05 2012
Purchases From Michigan Vendors Exempt as the Seller Is Liable for the Sales Tax
In Andrie, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 301615, April 26, 2012, a marine transportation business was not able to claim an exemption from Michigan use tax for fuel and supplies used by its tugs, as the tugs were not vessels of 500 tons or more used in interstate commerce. The taxpayer argued that each tug was connected and in "dedicated service" to a barge that was registered at over 500 tons and that these tug-barge units constituted a single vessel for purposes of the Use Tax Act. However, the Court of Appeals held that the plain language of the relevant statute did not permit multiple vessels serving as a single vessel to qualify for exemption. The exemption applied only to single watercraft of 500 or more tons, and, in this instance, each tug and barge was registered individually as a separate vessel, with each tug having a tonnage of less than 500 tons.
In regard to the apportionment of the taxpayer's foreign commerce, the court ruled that all of the fuel and supplies used for foreign commerce that were used, consumed, or stored in Michigan were subject to use tax. The ruling modifies the trial court's decision that only tangible personal property used in Michigan by the taxpayer while engaged in foreign commerce was taxable.
The barges' intrastate trips between Michigan ports qualified as interstate commerce, as a vessel is still considered to be used in interstate commerce when it never leaves the state "if it carries goods moving in a continuous stream from an origin in one state to a destination in another." Fuel and supplies used by the taxpayer's barges while making trips in Michigan therefore qualified for exemption. Use tax was also not due on certain purchases the taxpayer made in Michigan, as these sales were properly subject to the sales tax. It was not permissible to place the duty on the purchaser because retailers have the ultimately responsibility for the payment of sales tax.
Monday, June 04 2012
Real Estate Transfer Tax Applicable to Sales of new Homes to Predetermined Buyers
In Eastbrook Homes, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 299612, April 24, 2012, the real estate transfers of a residential building company that constructed and sold new homes to predetermined buyers were not exempt from the Michigan real estate transfer tax because the buyers' quitclaim deeds could not be construed as only equitable mortgages and the company's quitclaim deeds as only their discharge. Although all the buyers' quitclaim deeds provided strong security to the building company regarding its construction contracts, they also transferred all of the buyers' property rights in a lot or condominium unit that were received through a prior warranty deed to the company.
In this case, a buyer would purchase property from a developer who conveyed a warranty deed of an unimproved lot or condominium unit to the buyer. The buyer in turn would contract with the building company to construct a house or condominium unit. As security for the contract between the building company and the buyer, the building company would require the buyer to quitclaim the property to the company. Once construction was complete and the company was paid the contract price, the company would quitclaim the property back to the buyer. Because the quitclaim deeds were made for the purpose of creating a security interest in the property or discharging a security interest, the company contended that the quitclaim deeds were exempt from the real estate transfer tax. The Department of Treasury contended that the building company acted in a coordinated manner with the developer to sell improved property to its buyers without paying the transfer tax on the improved value of the property.
The Michigan Court of Appeals held that the building company's quitclaim deeds were taxable because they conveyed an interest in the property for consideration beyond just a discharge of a security interest. According to the court, the quitclaim deeds would be taxable even if the building company and the developer were separate entities and the parties intended to create security interests. They would also be taxable even if there were legitimate business reasons to structure the transactions the way they were and if the building company believed the transactions were exempt.
Friday, June 01 2012
Bidding Process Statutorily Mandated Property Going to the Highest Bidder
In Arenac Property I, LLC v. Stawowy, Michigan Court of Appeals, No. 303766, April 24, 2012, a limited liability companie should be permitted to amend their complaint in a case where the companies alleged that the county treasurer's conduct wrongfully or fraudulently deprived the companies of their ability to participate in a public auction to sell off various properties for unpaid local Michigan property taxes. The companies had a legitimate expectancy that they would be able to bid at the auction and that their bid would be evaluated fairly and openly.
In this case, the companies timely submitted a bid on a bundle of foreclosed properties. Although the properties went to auction, they were not sold because the county treasurer determined that there were no qualified bidders. Moreover, the properties were not pulled from the auction. Thereafter, several of the parcels were unbundled and individually transferred to the respective local municipalities in which the parcels were located. The remaining parcels ultimately remained with the county and under the county treasurer's control.
The Michigan Court of Appeals noted that a bidding process was statutorily mandated, with the property going to the highest bidder. By declaring that there were no qualified bidders, the county treasurer ensured that a competitive bid process could not take place and effectively subverted the tax foreclosure statutory requirements. The court held that the companies' complaint alleged facts that the county treasurer conspired to prevent them from engaging and participating in a public auction. Therefore, the companies should be permitted to amend their complaint especially when there may be evidence of a violation of the public trust by the county treasurer's intentional interference with the auction process.