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Inc. v. Department of Treasury

Court of Appeals of Michigan

May 14, 2019

JIM'S BODY SHOP, INC, Plaintiff-Appellant,

          Court of Claims LC No. 16-000135-MT

          Before: Swartzle, P.J., and M. J. Kelly and Tukel, JJ.

          Per Curiam.

         In this case involving a use tax deficiency, plaintiff, Jim's Body Shop, Inc., appeals by right the Court of Claims' order granting summary disposition under MCR 2.116(C)(10) in favor of defendant, Michigan Department of Treasury. Because there are no errors warranting reversal, we affirm.

         I. BASIC FACTS

         Plaintiff is an auto body repair shop located in Clare, Michigan that is primarily engaged in the business of fixing vehicles that have been involved in collisions for insurance companies. This collision work may require both body and mechanical work, including part repair or replacement, as well as exterior painting and refinishing. A smaller component of plaintiff's business involves routine non-insurance related mechanical repairs, for example, replacing batteries, changing oil, or installing tires.

         In July 2015, the Department informed plaintiff that it would be performing a use tax audit of plaintiff's returns for the taxable period between August 1, 2011 and December 31, 2014. Upon initial review of plaintiff's tax records, the Department's auditors determined that plaintiff had not maintained adequate tax records. Plaintiff had not remitted any use tax for the periods at issue and while it had remitted some sales tax, it had not reported that sales tax on its annual returns. Rather, plaintiff's annual returns only reported withholding taxes and the portion of the returns relating to sales tax, gross sales, and deductions from gross sales, and use tax was left blank. Consequently, while plaintiff had maintained trial balance sheets, [1] the Department was unable to determine from plaintiff's purchase invoices whether use or sales tax had been remitted on these purchases because they could not be related back to plaintiff's annual return. The Department requested documents to ascertain which purchases plaintiff personally consumed (as opposed to purchases it sold and collected sales tax on), but plaintiff could not provide that information.

         Ultimately, the Department employed an indirect audit methodology to determine the use tax due on the two types of purchases plaintiff had made during the audit period: capital assets[2]and expenses related to mechanical and body shop repair work. With regard to capital assets, the Department reviewed plaintiff's federal depreciation schedule for the subject tax years and assessed tax for those purchases on the schedule for which no tax had been paid. With respect to plaintiff's use tax liability for expenses, or property plaintiff purchased to perform its mechanical and body shop repair work, the Department reviewed plaintiff's trial balance sheets and identified 11 accounts as relevant to the use tax audit. Yet, the trial balance sheets did not identify whether plaintiff's purchases were for personal consumption or for its retail customers, although they did show that plaintiff's purchases were substantially greater than its retail sales, indicating that certain goods were purchased for plaintiff's consumption.

         To determine the goods that plaintiff consumed, and that were thus subject to use tax, the Department, using the information it had available, applied a "one year block" methodology for the 2014 tax year. Mainly, from the 2014 trial balance sheet and the amount of sales tax remitted in 2014, the Department was able to compare the purchases plaintiff made, i.e., the total cost of goods it paid for, to plaintiff's total retail sales, i.e., the price (cost of the good plus markup) charged to the consumer. To determine the purchases plaintiff itself used, the Department subtracted the total amount of retail sales, adjusted to the cost of goods before markup, from the total purchases. This adjustment to retail sales (hereinafter "retail sales at cost") was necessary to insure that plaintiff's purchases for self-consumption were calculated correctly. Notably, because plaintiff initially provided only a single invoice from 2014 reflecting a retail sale, for which the markup was 43 percent, the Department adjusted all of plaintiff's retail sales for each tax year using this 43 percent markup. Ultimately, the Department issued a final assessment for $111, 024, including a negligence penalty and interest.

         Shortly after the Department issued its final audit determination, plaintiff filed a complaint in the Court of Claims, asserting that it was entitled to cancelation of the assessment due to the Department's "errors." Plaintiff asserted that it was not subject to use tax and that the Department ignored "various" tax exemptions for which plaintiff is eligible. Plaintiff clarified its position in its discovery responses, alleging that the Department erred in calculating a 43 percent markup to determine plaintiff's purchases for personal use because the Department relied on a single purchase invoice, the sample size of which was too small and not representative of plaintiff's sales so as to be extrapolated over the four-year period. Plaintiff further claimed that certain expenses and capital assets were improperly included because they were exempt under the industrial processing exemption, including, as to expenses, paint supplies, sandblaster sand and supplies, and paintless dents equipment and supplies; and, as to capital assets, the Cooltech R143A, Saylor Beal, pressure washer, and carpet extractor. Plaintiff also asserted that the remaining capital assets were not subject to taxation for various reasons, including tools and a foam sprayer that were allegedly part of the realty; a 2008 Gran Prix that plaintiff allegedly never purchased; and a 2003 International 4300 that was purchased for resale.

         In support of its position, plaintiff provided additional documentation that it had not provided during the audit and, consequently, the Department reduced plaintiff's tax liability. Plaintiff, for example, provided documents showing that sales tax had been paid on some tire sales and some inventory vehicles and, thus, the Department removed those items from the taxable balance. Plaintiff also produced invoices from three of the 11 expense accounts of interest, including 63 tire invoices, 36 parts invoices, and 2 mechanical invoices. Given this additional information, the Department recalculated the markup by averaging the invoices separately in each of the three accounts and then averaging the average. As a result, the Department adjusted the markup downward to 35 percent, thereby reducing plaintiff's tax liability for expenses.

         Eventually the parties filed cross-motions for summary disposition under MCR 2.116(C)(10). The Court of Claims ruled in the Department's favor.

         This appeal follows.



         Plaintiff argues the trial court erred by granting summary disposition in favor of defendant. This Court reviews de novo a decision of the Court of Claims granting summary disposition. GMAC LLC v Dep't of Treasury, 286 Mich.App. 365, 372; 781 N.W.2d 310 (2009). "A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint." Maiden v Rozwood, 461 Mich. 109, 119; 597 N.W.2d 817 (1999). The Court must view all the evidence submitted by the parties in a light most favorable to the nonmoving party. Id. at 120. If no genuine issue of material fact exists and judgment is proper as a matter of law, then the motion was properly granted. Id. Questions of statutory interpretation are questions of law that are also reviewed de novo. GMAC LLC, 286 Mich.App. at 372.

          B. ANALYSIS

         1. ...

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