A Michigan company specializing in heavy industrial demolition, Bierlein Companies, Inc. (Bierlein or Appellant), appealed an audit assessment of just over $1.3 million in tax, penalties and interest. The Michigan Department of Treasury (Department) issued a final assessment against Bierlein earlier this year, citing a failure to pay Michigan use tax during the tax years 2015-2018.
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During the audit period, Bierlein engaged in business involving the processing, removal and recycling of “highly technical” and “potentially hazardous machinery and equipment” for itself and on behalf of its customers. In order to conduct such business, Bierlein leased equipment such as forklifts, shears and grapples from an equipment leasing company and provided the company with a Michigan Sales and Use Tax Exemption Certificate.
Bierlein continued to provide the equipment leasing company with exemption certificates and timely filed Michigan Sales, Use and Withholding tax returns during the entirety of the tax years covered by the audit. So, what’s the catch?
THE Catch
On the exemption certificates, Bierlein claimed an exemption from use tax under the “industrial processing exemption”. However, the Department determined that Bierlein is not an industrial processor, does not engage in industrial processing, and was therefore subject to use tax in the full amount of the rental payments made to the equipment leasing company, approximately $350,000 per month for each year during the audit period.
The Counter Argument
After receiving the audit notice, Bierlein filed a notice of appeal to the Michigan Court of Claims. In its complaint, Bierlein argued that that it is an industrial processor and, thus, the industrial processing exemption under the Michigan Use Tax Act (UTA) does apply.
During the audit period, the industrial processing exemption applied to “[a] person, whether or not the person is an industrial processor, if the tangible personal property is intended for ultimate use in and is used in industrial processing by an industrial processor.”
An “industrial processor” is defined as “a person who performs the activity of converting or conditioning tangible personal property for the ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail.”
Bierlein maintains that it qualified as an industrial processor because it converted industrial processing machinery and equipment to be ultimately sold at retail by changing the character of the machinery and equipment as set forth in the state’s definition of “industrial processing.”
Moreover, Appellant asserts that all exemption claims it made involved industrial processing activity for or on behalf of its customers, including construction, maintenance, repair, monitoring and more. Because Bierlein’s customers were industrial processors, Bierlein asserts it was performing these activities “for ultimate use … by an industrial processor”, thus qualifying it for the industrial processing exemption.
The conclusion
Bierlein’s appeal requests that the Michigan Court of Claims determine that Bierlein was a qualifying industrial processor engaged in exempt industrial processing activities during the applicable tax years, as well as a full abatement of assessed penalties and interest in the amount of $1.3 million.
Receiving an audit notice can be an unnerving experience, however it does not have to be. Involving your tax consultant at the initial stages of an audit is the best approach to defend the audit and to develop a strategy for appeal.