Michigan has some of the most complicated sales tax and use tax laws.  We can assist a business in complying with the laws in a way to assure reasonable that all taxes due have been paid.  Following is a description of the procedures to determine if there is compliance with the sales tax and use tax laws. 

Michigan Sales Tax Review - The sales tax review involves the complete review of all sales transactions.  All such transactions are subject to tax unless specifically exempt from tax by statute.  The taxpayer has the responsibility to prove all exemptions.

The first step in the sales tax review is a review of the sales tax compliance system.  The taxpayer, the seller, is responsible for compliance with the Sales Tax Act.  Based on the degree of reliability the reviewer can place on the compliance system, an review plan is developed.  The review plan includes a review of sales transactions and the underlying documentation, usually sales invoices.

Sales invoices are reviewed to determine if the proper tax has been applied and paid to the state.   When invoices do not list the tax and the reviewer cannot determine if the tax was paid, the reviewer will list the invoice.

After the initial review of the sales invoices and other documentation, the reviewer will give the taxpayer the exception schedule.  At this point the taxpayer will have an opportunity to obtain documentation that either the tax was paid or that the sale is exempt.  The burden of proof is on the taxpayer to prove with internal documents that the tax was paid or the sale is exempt from tax.

The above described process is very similar to the review procedures used by the Department of Treasury.  The only difference is that the goal is an evaluation of the reliability of the sales tax compliance system.  If there are significant exceptions, we might suggest changes to the compliance system.

Michigan Use Tax Review - The use tax review is usually a review of purchase transactions.  There are exceptions.  A review of use tax paid on rental receipts, sellers use tax and use tax due on other taxable services are reviewed in much the same way as with the sales tax.

The use tax review starts with a review of the taxpayers use tax compliance system.  Based on the reviewers evaluation of the taxpayer's compliance system, an review plan will be determined.  The review plan will include the examination of purchase transactions and include purchase invoices, purchase orders, contracts, agreements and other relevant documentation.

The examination of purchase transactions usually is done on a sample basis.  The reviewer reviews the purchase transactions to determine if sales tax or the complimentary use tax was paid.  If neither tax was paid, the reviewer determines if the purchase is exempt from tax.  The taxpayer is responsible to determine if an exemption is applicable and to retain documentation to prove the exemption. 

The reviewer will list all purchase transactions where the taxpayer cannot prove that the tax was paid or an exemption applies.  These purchases are listed on an exception schedule.

After the completion of the detail review of purchases, the reviewer will give the taxpayer a list of exceptions, purchases on which the reviewer could not determine that tax was paid or than an exemption is applicable.  The taxpayer will have an opportunity obtain proof that the tax paid or that an exemption applies.

The above described process is very similar to the review procedures used by the Department of Treasury.  The only difference is that the goal is an evaluation of the reliability of the sales tax compliance system.  If there are significant exceptions, we might suggest changes to the compliance system.

This process is sometimes called a reverse audit when the objective is to find overpayment of tax.  A reverse audit can result in significant tax refunds.