Looking for a Michigan Tax Refund?
Michigan’s Department of Treasury (“Department”) recently issued updated guidance on the process of claiming sales and use tax refunds from the state. The proper path is first determined by whether it was tax charged by and paid to your vendor versus consumer’s use tax remitted directly to the Department. Generally speaking, the refund claim process – at least initially – follows the path for which the tax was originally paid.
Tax Erroneously Paid to the Department
This one is the easiest to understand so let’s look at it first. In the situation where a purchaser over remits consumer’s use tax directly to the Department, purchasers are allowed to seek a refund directly from the Department. For example, let’s assume that a manufacturer in Michigan bought a piece of equipment from an out-of-state vendor that didn’t have nexus with Michigan. The equipment will be used directly in the manufacturing process (shameless plug – see our recent blog on the two taxability theories generally applied by the states for manufacturers), but didn’t realize it would be exempt based on its usage. As a result, the purchaser remitted use tax directly to the Department. Upon later hiring Clarus Partners to do a refund review of its Michigan manufacturing operations, Clarus would have discovered that that purchase should have been exempted and no use tax remitted. In this situation, the buyer (or its advisor on behalf of the buyer) can seek a refund of that use tax directly from the Department.
Tax Erroneously Paid to Vendors
Understandably, both sellers and purchasers sometimes make mistakes and charge or pay, respectively, tax that is really not owed. For example, a seller might not realize that a sales tax holiday is in effect and inadvertently charge tax on an item that is exempt during the holiday. Alternatively, a buyer might not realize that what it is buying is exempt based on how the purchaser is using it. The purchaser should have provided the seller with a properly completed exemption certificate but didn’t realize it at the time and paid the tax charged to the seller.
Michigan law contains an unjust enrichment provision, essentially providing that sales tax collected by a vendor in error must either be refunded to the purchaser or remitted to the Department. Furthermore, sellers are not required to refund a purchaser as long as the tax that was collected was remitted to the Department.
If a purchaser buys an otherwise exempt item from a seller but fails to provide the proper exemption certificate, the purchaser can request the seller’s participation to refund the overpaid tax, which it would then properly request back from the Department. However, as we noted above, the seller is not required to refund the buyer, even if presented with a properly completed exemption certificate. It’s worth noting here that the nature of the relationship and the volume of business between the buyer and seller can definitely have an impact on whether a seller would be inclined to help its buyer with respect to these types of refund requests.
So what other avenues are available to buyers who fail to claim an exemption at the time of purchase? Prior to 2019, the only avenue was to try and work with the seller as noted above. Now, the Department allows buyers that overpaid tax to its vendor based solely on its failure to claim an exemption at the time of purchase to pursue a claim for refund directly from the Department. The Department has mandated the requirements shown below that buyers must adhere to in filing its claim. Of note here is the seller’s acknowledgment (3rd bullet below). This is essentially a seller’s assignment of the refund, which several other states have.
- The purchaser must make the claim within four years of the date of purchase;
- The purchaser must submit an accurate record of the purchase including, but not limited to, a paper, electronic or digital receipt, invoice or purchase order reflecting the terms of the purchase, and specifically reflecting the date of the purchase and the tax the purchaser paid that it seeks to recover;
- The purchaser must obtain the signed acknowledgment of the seller that the seller charged the purchaser sales or use tax, paid the tax and has not and will not claim a refund of the tax;
- The purchaser must submit a proper exemption claim to Treasury. This requirement may be met in several different ways as long as all of the required data elements are present (i.e., the identifying information of the purchaser, the reason for claiming the exemption, and any other information that a specific exemption may require); and
- The purchaser must submit any other information Treasury requires relative to the refund claim.
The procedures above are only in those circumstances where a buyer fails to properly claim an exemption at the time of purchase. In contrast, there are situations where the item being sold is statutorily exempt and a claim for exemption is not needed. For example, food for home consumption is exempt in Michigan and its sale is not subject to sales tax. In these situations, if a vendor improperly charges and collects sales tax on its sales of items with a statutory product-based exemption (i.e., where a buyer doesn’t need to present/claim an exemption), only the seller can request a refund directly from the Department. This means that in the example we gave earlier of a seller charging tax on an item that is exempt pursuant to a sales tax holiday, it is not the buyer’s responsibility to claim that exemption. Therefore, in these types of situations, the only recourse a buyer has to recover sales tax erroneously charged by a seller on that item during the sales tax holiday is to pursue the seller for the refund.
Let Clarus Partners Help
State refund provisions can be complicated – how long is the statute of limitations and is it different for refunds versus assessments, is there a seller assignment provision, are sellers required to help its customers, etc. Let Clarus Partners help you navigate the refund landscape to ensure you maximize your refund potential.