The Michigan Court of Appeals held that the Michigan Department of Treasury was permitted to engage in an indirect audit of a taxpayer because of its insufficient recordkeeping. The taxpayer operated oil change and automotive maintenance facilities in Michigan.  It claimed sales tax exemptions for labor charges associated with its services. On audit, the Department disallowed exemptions on the basis that the retailer had not itemized its non-taxable labor charges on its invoices. Michigan provides for a sales tax exemption for “labor or service charges involved in maintenance and repair work on tangible personal property of others if separately itemized.” MCL 205.51(1)(d)(iii)(B) (emphasis added). See also Mich. Admin. Code r. 205.117(3).

The court held that, during the audit, the invoices available to the Department of the Treasury did not clearly itemize the cost of the tangible personal property. Rather, each contained a line called the “Taxable Amount,” but did not identify whether this was intended to itemize tangible personal property in accordance with Michigan law. While the taxpayer submitted invoices after the audit was complete with separate lines for “Taxable Parts” and “Non-Taxable Labor,” the court concluded that the Department was not obligated to review these post-audit invoices. 

Further, the court also concluded that it was appropriate for the Department to assess the taxpayer on the basis of an indirect audit. Per MCL 205.68(4), the Department may do so if there exists “a belief by the Department that records or returns are inaccurate or incomplete and that additional taxes are due.” The court found the indirect audit to be appropriate because the first round of duplicate invoices submitted to the Department during the audit period “revealed problems with accuracy and completeness” and that “the record is replete with evidence of inaccuracies and inconsistencies in Sav-Time’s financial documents.” 

Sav-Time, Inc. v. Michigan Department of Treasury, No. 370459 (Mich. Ct. App. Mar. 10, 2026).