Michigan – Sales and Use Tax Notice: Emagine Entertainment, Inc., et. al. v Dep’t of Treasury


On November 19, 2020, the Court of Appeals issued its published decision in Emagine Entertainment, Inc., et. al. v Dep’t of Treasury, Mich App (2020).[1]  Emagine operated movie theaters.  At issue was whether Emagine’s sales of prepackaged candy constituted the taxable sale of prepared food and whether Emagine had collected the sales tax from its customers on those sales for purposes of its refund claim.  As explained further below, the Court of Appeals upheld the Michigan Tax Tribunal, which invalidated part of the Department’s administrative rule that established a standard used to determine when otherwise exempt food is taxed as prepared food based on the seller providing eating utensils to their customers in specific ways. However, the court also upheld the Tribunal’s finding that Emagine had collected the tax from its customers and had not refunded them, therefore, it was not entitled to the refund because it would be unjustly enriched under MCL 205.73(4).   In other words, while the court concluded that the prepackaged candy at issue was not taxable prepared food, the taxpayer was not eligible for a refund since the taxpayer had collected sales tax from its customers but not refunded that tax back to them.

Food and food ingredients are generally exempt from sales and use taxes, but sales of “prepared food” are taxable. [2]  In general, prepared food is food sold in a heated state or food that contains two or more food ingredients combined by the seller for sale as a single item, but also  includes “food sold with eating utensils provided by the seller.…”[3]  Because the General Sales Tax Act[4] and the Use Tax Act[5] do not define the phrase “eating utensils provided by the seller;” the Department defined that phrase – consistent with the Streamlined Sales and Use Tax Agreement – in Rule 86, Mich Admin Code, R 205.136(5)(b).  Under Rule 86(5)(b), whether “eating utensils are provided by the seller” depends on the seller’s percentage of prepared food sales.  If a seller’s percentage of prepared food sales over the prior tax year was greater than 75%, the eating utensils are considered provided by the seller if they are merely made available to purchasers.   If the seller’s percentage of prepared food sales was 75% or less, eating utensils are considered provided by the seller only if it is the seller’s practice to physically give or hand eating utensils to purchasers.  

Emagine’s percentage of prepared food sales exceeded 75% during all periods of the refund request and it made eating utensils available to its customers.  Thus, the Department denied Emagine’s refund request related to prepackaged candy pursuant to Rule 86’s 75% standard. Emagine appealed the denial to the Tribunal.  The Tribunal invalidated Rule 86’s 75% standard, but also found that Emagine had collected sales tax from its customers.  Since the General Sales Tax Act prohibits a taxpayer from enriching itself from collection of sales tax, and because Emagine had not refunded its customers nor could it do so, it would be unjustly enriched if it were issued a refund for the sales tax remitted on those sales.  Therefore, the Tribunal held the refund was properly denied.  Emagine appealed the Tribunal’s decision to the Court of Appeals.

The Court of Appeals upheld the Tribunal on both issues.  Specifically, the court held that Rule 86’s 75% standard was invalid because it conflicted with the language in the statute that prescribed no such standard or threshold.  Using dictionary definitions, the court held that for food to be considered “sold with eating utensils provided by the seller” the “eating utensils must specifically accompany the food or be added to it.” 

However, the court held in favor of the Department on the issue of tax collected from Emagine’s customers.  The court noted that while the sales tax is imposed on the seller, the seller may reimburse itself the incidence of the tax.[6]  The court held that under MCL 205.73(4), a seller must be able to adequately demonstrate that it did not collect sales tax from its customers or that it has refunded the tax to its customer as a prerequisite to obtaining a refund of the tax from the Department.  Emagine conceded that it had not refunded its customers, and the court found that the financial records and testimony of Emagine’s witnesses supported the Tribunal’s conclusion that the Emagine collected the sales tax from its customers.  Therefore, while the prepackaged candy was not taxable since the court invalidated Rule 86(5), the taxpayer was nonetheless not eligible for a refund. 

Emagine is a published decision, and therefore binding on the Department and taxpayers.  Consequently, Rule 86’s 75% standard no longer applies.  Accordingly, for purposes of sales and use taxes as applied to food, eating utensils are “provided by the seller” only when they “specifically accompany the food or [are] added to it.”  If a seller merely makes eating utensils available to its customers, such activity is not considered “providing” eating utensils for purposes of the sales and use tax definitions of “prepared food,” For example, using the facts in this case, prepackaged candy is not taxable unless eating utensils accompany the candy.  However, if that seller erroneously collects tax from its customers and remits the tax to the Department, it must refund those taxes to its customers before it is eligible for a refund. 


[1] Court of Appeals Docket Nos. 350376 and 350881.

[2] MCL 205.54g(1)(a) and MCL 205.

[3] MCL 205.54g(4)(c) and MCL 205.94d(4)(c).  See also RAB 2009-8. 

[4] MCL 205.51 et seq.

[5] MCL 205.91 et seq.

[6] See MCL 205.73(1).


For more information please visit: michigan.gov/taxes

michigan department of treasury
January 20, 2021