Failure to Presume that the Michigan Seller Paid the Sales Tax Adds a Significant Burden to the Purchaser
In Andrie, Inc. v Department of Treasury, Docket No. 145557, June 23, 2014; the Michigan Supreme Court turned upside down the decades long presumption that a purchaser could presume sales tax was included in the purchase price of taxable tangible personal property if purchased from a Michigan vendor. The ruling may necessitate that Michigan taxpayers make major changes to their use tax compliance systems.
The Michigan Supreme Court said the taxpayer must prove exemptions to which it is entitled; including the exemption from the use tax on transactions subject to the sales tax. The opinion barred the taxpayer from a presumption that the sales tax was paid if purchased from a Michigan vendor. Significant recordkeeping and documentation is required for the taxpayer to prove that sales tax was due and paid. Taxpayer may want to significantly alter their compliance systems.
Direct Pay Authorization
The traditional use tax compliance system includes a very labor intensive and paper intensive system of exemption claims and documentation. A Direct Pay Authorization opens the door to an alternative use tax compliance system.
Revenue Administrative Bulletin 2000-3 provides for a statutorily authorized direct pay permit. It is called a “direct pay authorization”. Under the more common compliance system, the seller will charge sales tax on all purchases unless an exemption certificate is issued. This system has the potential for human error and it is very costly in the form of labor and paperwork.
Act 117 of 1999 added in Section 8 of the Use Tax Act a Direct Pay Authorization and reads as follows.
(1) The commissioner…may authorize…a direct pay authorization, if the following conditions are met:
- The authorization is to be used for the purchase or lease of tangible personal property or services.
- The authorization is necessary because it is either impractical at the time of acquisition to determine the manner in which the tangible personal property or services will be used or it will facilitate improved compliance with the tax laws of the state.
- The person requesting authorization for direct payment maintains accurate and complete records of all purchases or leases and uses of tangible personal property or services purchased pursuant to the direct payment authorization in a form acceptable to the department.
(2) The commissioner has the authority to identify items that are not eligible for a direct payment authorization.
The taxpayer must apply for direct pay authorization. The request must be in writing and submitted to the Michigan Department of Treasury at the Treasury Building in Lansing, Michigan 48922. In addition to the applicant’s name, address and account number, the request must contain a statement of how the applicant meets each of the three conditions described above. The request must be signed by the business owner, a responsible corporate officer or a person with similar authority. A request signed by a person who lacks proper authority will be rejected.
If the request is granted, a direct pay authorization will be provided to the applicant in the form of a letter. In the authorization letter, the Department of Treasury will assign an authorization number to each authorization. The letter will also state that direct payment authorization is granted to the taxpayer named in the letter and will list items, if any, that are excluded from the direct payment authorization. It will also describe how a claim under direct pay is to be made to a person who sells or leases tangible personal property or services at the time of purchase or lease, including the requirement that a copy of the authorization letter must be provided to the person.
When granted, the taxpayer may purchase all items of tangible personal property tax free under the direct pay authorization. The authorization to purchase tax-free is limited to tangible personal property. Any affixation to realty would not come under the direct pay authorization. The taxpayer would then be required to self assess for use tax on the property purchased tax-free which was ultimately used in a taxable manner.
The beauty of the Direct Pay Authorization is that it completely removes from the purchaser the Andrie Supreme Court requirement that the purchaser is liable for use tax on taxable purchases unless the purchaser can prove that tax was paid by the seller. A Direct Pay Authorization, like the Andrie decision, places the burden for paying the tax on the purchaser. With a Direct Pay Authorization, the purchaser controls the payment of the use tax. The purchaser would no longer need to rely on proving that the seller paid the tax.
The MICPA Sales and Use Tax seminars scheduled for October 2014 will include expanded coverage of the Andrie Supreme Court decision addressing the impact on Michigan business.
Register on line at the MACPA website:
Michigan Sales and Use Tax (30696 - MSUTEM)
Wednesday, October 22, 2014
Best Western PLUS Sterling Inn - Sterling Heights, MI
Michigan Sales and Use Tax (30681 - MSUTTC)
Monday, October 27, 2014
Prince Conference Center Calvin College - Grand Rapids, MI