SALT Report 1728 – The Michigan Tax Tribunal ruled that a Taxpayer was not liable for use tax on cement and other raw materials that were used for oil well production. The Taxpayer is an oil well contractor who offers “turnkey” operations to its customers. A turnkey operation is a contractual relationship in which the Taxpayer agrees to provide all of the expertise, labor and materials necessary to drill a well to a certain depth or stage of completion for a sum of money. Once finished, the oil well is turned over to the customer, usually the oil well operator.
In 2008, the Taxpayer was audited for the periods of May 1, 2004 through June 30, 2007. Upon completion of the audit the Taxpayer was assessed $401,074.00 in unpaid use tax, plus a penalty of $976.00. The auditor assessed the use tax because they determined that the Taxpayer was the consumer of the cement and raw materials used in its turnkey not the subcontractor.
During the Taxpayer’s appeal the Tax Tribunal determined that the party that provided the raw materials and cement to the Taxpayer was a subcontractor, not an employee, because the subcontractor retained control over all aspects of the cement operations at the job site. Furthermore, the fact that the Taxpayer was present at the job site and monitored the progress of the cement work did not mean that the Taxpayer exercised control over the work.
Based on the above facts, the Michigan Tax Tribunal ruled in favor of the Taxpayer and dismissed the use tax assessment because use tax liability is not imposed on the prime or general contractor for materials that are consumed by a subcontractor. Furthermore, the Taxpayer was not liable for use tax on equipment rented from Michigan vendors because there is a presumption that the Michigan seller paid the sales tax.
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