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Michigan: Costs of Inadequate Record Keeping

Inadequate record keeping was the cause of a negligence penalty and sales tax assessment recently held against a retailer in Michigan. The original judgment by the Michigan Tax Tribunal was upheld by the Michigan Court of Appeals. 

The retailer in question sells groceries, miscellaneous taxable merchandise, beer, wine, liquor, and food prepared for immediate consumption. No records of inventory items made into prepared foods exist. Daily cash register receipts were discarded after the sales were transferred to a worksheet, and monthly sales summaries categorized sales as taxable or nontaxable. A more specific breakdown of sales and use was not available.

The Michigan Court of Appeals quotes the General Sales Tax Act (205.68), which reads,

"A person liable for any tax imposed under this act shall keep accurate and complete beginning and annual inventory and purchase records of additions to inventory, complete daily sales records, receipts, invoices, bills of lading, and all pertinent documents in a form the department requires."

The taxpayer did not keep such records, and the auditor was unable to determine  "if the proper amount of sales tax had been collected" or how much inventory was "used in the production of prepared foods."

It was determined that this was because the taxpayer was negligent. Negligence is defined in this context as "the lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances." (Michigan Administrative Code 1999 AC, R 205.1012(1)).

Therefore, according to the General Sales Tax Act, the department has the right to "assess the amount of the tax due … based on information that is available… ." In this case, the taxpayer is liable for more than $20,000 in sales tax and interest for the audit period, and a negligence penalty of more than $1,700. Ouch.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.