SALT Report 1752 -The Michigan Court of Appeals ruled that a Taxpayer who provides a major automotive manufacturer with janitorial supplies for use by the Manufacturer’s janitorial staff was not liable for Michigan use tax.
According to court records, the Taxpayer purchased the janitorial supplies from a supply company who shipped the items directly to the Manufacturer’s facilities. The Taxpayer provided the supply company with a resale certificate and the manufacturer provided the Taxpayer with a direct pay permit.
Under the terms of the Manufacturer’s purchase agreement it stated that the Taxpayer should, “not bill sales or use tax on items delivered to [or] shipped to locations within the states listed. [Manufacturer] holds direct pay authority with these states. As a result, in all of the identified states [manufacturer] will remit directly to taxing authorities, all sales or use tax liability related to its purchase and use of tangible personal property and services.”
In 2005, the Taxpayer was audited. The auditor determined that the Taxpayer was “a service provider and not a seller of tangible property.” Consequently, the Department found that the Taxpayer was liable for use tax on purchases from November 1, 2000 to April 30, 2004. The Taxpayer was assessed $983,812.00 in tax and $156,203.04 in interest.
The Taxpayer challenged the assessment with the Michigan Tax Tribunal. The Taxpayer asserted that under MCL 205.54a(1)(n) “A sale of tangible personal property to a person holding a direct pay permit under section 8 of the use tax act, 1937 PA 94, MCL 205.98 is exempt from sales tax.” The Taxpayer also noted that the statute does not require the seller to review or certify that the tangible personal property it is selling is within the scope of the buyer’s direct pay permit.
The Tribunal ruled in favor of the Taxpayer and overturned the Department’s use tax assessment. The Tribunal found that the Taxpayer was correct in its argument that the burden is not placed on the seller to interpret the language of direct pay permits. Furthermore, property purchased for resale is statutorily exempt from tax.
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