Michigan taxpayers should insist on invoices with sales tax included
As most of us know, if a Michigan-based business buys something from out of state and does not pay a sales tax, it’s required to pay a 6% use tax on that purchase (if the purchase would have been subject to Michigan sales tax had it been purchased from a Michigan vendor). So in the past, Michigan audits for use tax liability have focused on Michigan businesses who bought products outside of Michigan and did not pay sales tax to the state they bought it from. This happens a lot with online purchases.
But after a recent decision by the Michigan Supreme Court, the purchaser is now liable as well. The court ruled that a taxpayer is subject to Michigan use tax on property purchased from a Michigan vendor (and used in Michigan) if the taxpayer cannot show that sales tax was paid on the purchase even though the seller is responsible for the sales tax (and may have even paid it!).
So now, audits are starting to focus on purchases from Michigan vendors where the invoice does not show that sales tax was paid or included in the purchase price. Normally, when you buy from a Michigan vendor, the vendor is supposed to charge sales tax and it’s either shown separately on the invoice or included in the total price. The vendor is then responsible for remitting the sales tax over to the state of Michigan. And thus the onus has been on the vendor to report and remit the sales tax to Michigan.
With the court’s recent ruling, however, the state is now holding the purchaser liable for the sales tax as well, if it cannot show that sales tax was due and paid to the vendor. If an invoice shows the sales tax as a separately stated line item (and the invoice was paid), then this should suffice. However, a taxpayer will run into problems if the invoice does not show the sales tax as a separate item, even if it was known and agreed by both parties to be included in the total price. In this case, the Michigan taxpayer can go back to the vendor and request proof that their purchase was included in the vendor’s sales tax calculations and paid to the state. But, given the extra paperwork burden, this method of proof isn’t practical. Consequently, there will be inequitable situations where the seller and vendor will have both remitted the 6% sales/use tax—basically a windfall double-dip to the state!
As such, we recommend that taxpayers insist on invoices that detail the sales tax portion and/or obtain other documentation from the vendor that states: 1.) the transaction is subject to sales tax; 2.) it is their liability to remit it; 3.) it will be paid by the vendor; and 4.) they accept full responsibility for doing so.
The talented team at ShindelRock can assist you in drafting this type of documentation and minimizing your tax liability.