937 N.W.2d 123
Mich. Ct. App.2019Background
- Jim’s Body Shop, an auto body repair business, was audited by Michigan Department of Treasury for Aug 1, 2011–Dec 31, 2014 after failing to maintain required tax records and not reporting use tax on returns.
- Department used an indirect audit (block methodology) comparing trial balance purchases to retail sales (adjusted to cost using a markup) to determine purchases consumed by the business and assessed $111,024 (including penalty and interest).
- Plaintiff provided additional invoices after assessment; Treasury recalculated the markup (from 43% to 35%) and reduced the assessment, but plaintiff still sued in Court of Claims seeking cancellation and claiming exemptions.
- Key disputes: (1) whether Treasury was entitled to a presumption of correctness for its indirect audit and whether its methods were reasonable; (2) applicability of the industrial-processing exemption to Jim’s paint/repair operations; (3) taxability of certain capital assets listed on plaintiff’s depreciation schedule; and (4) imposition of a negligence penalty.
- Court of Claims granted summary disposition for Treasury; the Court of Appeals affirmed, holding plaintiff failed to rebut the presumption and was not entitled to the industrial-processing exemption.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Presumption of correctness for indirect audit | The Department must show its method was reasonable before presumption applies; failure to follow manual or use representative sampling rebuts presumption | MCL 205.104a(4) makes an indirect-audit assessment prima facie correct; taxpayer bears burden to show assessment incorrect; procedural manual is guidance only | Treasury entitled to presumption; plaintiff failed to rebut it or show assessment actually incorrect |
| Audit methodology (markup/sample) | Using a single invoice and averaging account averages produced unreliable markup; sampling/method was unreasonable | Department used block method and the only records plaintiff provided; method within wide discretion for indirect audits | Method was not shown to produce an incorrect assessment; alternative methods alone insufficient to rebut presumption |
| Industrial-processing exemption | Jim’s contends its paint/conditioning qualifies as industrial processing | Treasury: exemption requires an "ultimate sale at retail"; Jim’s transactions are primarily repair services with incidental tangible transfers, not retail sales | Exemption inapplicable: transactions are services (tangible goods incidental); Jim’s not an industrial processor |
| Capital-asset assessments | Assets listed on depreciation schedule are nontaxable or exempt; owner’s testimony shows assets were realty, purchased for resale, or otherwise exempt | Department included assets where no sales-tax-paid invoices existed; plaintiff must produce documentary evidence to create factual dispute | Plaintiff failed to produce invoices/documentary evidence; summary disposition proper and assets taxable as assessed |
| Negligence penalty | Penalty should be waived because plaintiff reasonably thought exemption applied | Plaintiff failed to file or report taxes, left return sections blank, and raised exemption only in litigation; ordinary care would require filing returns | Penalty upheld: plaintiff’s conduct lacked ordinary care; waiver not warranted |
Key Cases Cited
- GMAC LLC v. Dep’t of Treasury, 286 Mich. App. 365 (audit and summary disposition standards)
- Maiden v. Rozwood, 461 Mich. 109 (MCR 2.116(C)(10) standard)
- Cook v. Dep’t of Treasury, 229 Mich. App. 653 (statutory interpretation principles)
- Ferguson v. City of Lincoln Park, 264 Mich. App. 93 (plain-language statutory construction)
- Garfield Mart, Inc. v. Dep’t of Treasury, 320 Mich. App. 628 (tax statutes construed against taxing authority when ambiguous)
- By Lo Oil Co. v. Dep’t of Treasury, 267 Mich. App. 19 (indirect audit discretion; must show assessment actually incorrect)
- Danse Corp. v. City of Madison Heights, 466 Mich. 175 (agency manuals as nonbinding guidance)
- Vomvolakis v. Dep’t of Treasury, 145 Mich. App. 238 (state’s taxing power and record failures)
- MidAmerican Energy Co. v. Dep’t of Treasury, 308 Mich. App. 362 (industrial-processing exemption and sale/service distinction)
- Catalina Marketing Sales Corp. v. Dep’t of Treasury, 470 Mich. 13 (incidental-to-service test for mixed transactions)
- Auto-Owners Ins Co. v. Dep’t of Treasury, 313 Mich. App. 56 (application of incidental-to-service test in UTA context)