Michigan Department of Treasury Sales and Use Tax Audit Protest

The situation

Kevin, 54, owns Precision Metal Fabricators Inc., a Grand Rapids, Michigan job shop with 23 employees that produces precision metal components for the automotive supply chain. Annual revenue: $4.8M. In April 2026 Kevin received a Michigan Treasury Final Bill for Taxes Due: "Michigan Use Tax: $41,600 (penalty of $6,240 + interest of $3,900 = $51,740 total), tax period: 2022-2024."

The Treasury auditor found $41,600 in unremitted use tax on equipment and tooling Kevin purchased from out-of-state vendors during the three-year period. Kevin had been purchasing CNC grinding equipment, precision tool inserts, cutting fluid systems, and industrial air compressors from suppliers in Ohio and Indiana, vendors who were not collecting Michigan tax because they didn't have Michigan nexus.

Kevin has 60 days to request an Informal Conference, OR 35 days to file a Michigan Tax Tribunal petition.

(a) At least 60% of the assessment is probably wrong because of the industrial processing exemption. Kevin's CNC grinding machines, precision tool inserts, and cutting fluid systems are DIRECTLY used in his manufacturing process, they transform raw metal blanks into finished precision components. Under MCL 205.94o (the use tax industrial processing exemption), these items are EXEMPT from use tax even when purchased from out-of-state vendors. The auditor appears to have applied use tax to ALL of Kevin's out-of-state equipment purchases without analyzing which items qualify for the MCL 205.94o exemption. Only the industrial air compressors (which power the factory as a whole, not specifically the machining operations) might be legitimately taxable.

(b) A 2024 amendment may further help. PA 122 of 2024, signed into law in 2024, expanded Michigan's industrial processing exemption to cover additional activities. Kevin should check whether any items on the assessment that were borderline-exempt under the pre-2024 rules are now clearly exempt under the expanded definition.

(c) The dual-track appeal system has strategic implications. Kevin should request an Informal Conference (60-day window) AND simultaneously file a Tax Tribunal petition (35-day window) to preserve both tracks. If the informal conference resolves the dispute favorably, he can withdraw the Tax Tribunal petition. If the conference goes badly, the Tax Tribunal petition is already filed and his appeal rights are preserved. Missing the 35-day Tax Tribunal window while waiting on the informal conference means losing the option for an independent hearing.

(d) An Ayar Law attorney quoted Kevin $7,500 for "audit file review, informal conference representation, and Tax Tribunal petition preparation if needed." The industrial processing exemption analysis + informal conference request + Tax Tribunal petition framework is largely self-executable with the right Michigan-specific structure.

Second portrait: Sandra, 42, owns a food processing business in Lansing, a small commercial salsa and hot sauce manufacturer (SouthWest Kitchen, LLC) with $620,000 in annual revenue. She received a Michigan Treasury Final Bill of $12,400 in use tax on packaging equipment she purchased from an Illinois vendor.

What Sandra doesn't know: Her stand-up pouch packaging machine and lid-sealing equipment are DIRECTLY used in her industrial processing operation, the packaging is part of the finished product (sealed consumer packages of salsa). Under Michigan's industrial processing exemption, packaging machinery that produces the finished product's integral packaging is EXEMPT. The 2024 amendment further clarified that food processing and packaging equipment qualifies for the industrial processing exemption. Sandra's $12,400 assessment is almost certainly entirely exempt under MCL 205.54t and PA 122 of 2024.

Who receives this

Michigan manufacturers and food processors receiving Michigan Department of Treasury use tax assessments for equipment, tooling, and materials purchases. Primary segments: (1) Michigan precision machining, metalworking, and automotive supply chain manufacturers, the primary audience for industrial processing exemption disputes (high concentration in Grand Rapids, Detroit, Warren, Lansing, Ann Arbor corridors); (2) Michigan food processors (Michigan is a major agricultural processing state, salsa, dairy, beverage, confectionery manufacturers); (3) Michigan medical device and plastics manufacturers. Secondary audience: Michigan retailers and service businesses receiving use tax assessments for out-of-state purchases where the exemption claim is disputed.

Why the agency will not advise you

Michigan Treasury cannot advise audit respondents on how to build an industrial processing exemption defense against its own use tax assessment. Michigan Treasury Online (MTO) handles compliance, payment, and account management only, no protest strategy. The dual-track appeal system (informal conference vs. Tax Tribunal) requires immediate strategic legal judgment that no government resource provides guidance on. The 2024 amendment (PA 122 of 2024) expanded the industrial processing exemption after many assessments were already issued under the old, narrower rules, creating a category of businesses with potentially over-assessed use tax bills.

Key facts, with sources

• The Michigan Department of Treasury issues a Final Bill for Taxes Due (Intent to Assess) when a sales/use tax audit concludes. The taxpayer has two appeal tracks: (1) Informal Conference: within 60 days of the Final Bill, request an informal conference with Treasury's Hearings Division. The conference is scheduled within approximately 6 months; a referee (a Treasury hearing officer, not independent) conducts the conference. If the taxpayer disagrees with the informal conference decision, they can then appeal to the Michigan Tax Tribunal within 35 days of that decision. (2) Michigan Tax Tribunal: within 35 days of the Final Bill, file a direct petition with the Michigan Tax Tribunal, an independent administrative court created under the Michigan Tax Tribunal Act. The Tax Tribunal is NOT part of Treasury; its decisions are judicially reviewable by the Court of Appeals. For amounts under $100,000, the case is assigned to the Small Claims Division, which has a simplified procedure and allows self-representation. Taxpayers can pursue BOTH tracks simultaneously: filing a Tax Tribunal petition preserves rights while the informal conference proceeds. If the informal conference resolves the dispute, the Tax Tribunal petition can be withdrawn. The dual-track option is a strategically important choice, informal conference is faster and less formal but decided by a Treasury employee; Tax Tribunal is independent but takes 12-18 months to reach hearing. Most assessments under $50,000 are resolved at informal conference. Source: Collections, Audits, and Appeals — Michigan Department of Treasury · Michigan Sales and Use Tax Audits — Foster Swift Collins & Smith (Michigan Tax Blog) · Michigan Sales and Use Tax Audit Defense Attorney — Ayar Law
• Michigan's Industrial Processing Exemption (MCL 205.54t, Sales Tax Act; MCL 205.94o, Use Tax Act) exempts tangible personal property used by an 'industrial processor' in 'industrial processing' activities from Michigan sales and use tax. Michigan's definition of industrial processing is among the broadest in the US: it encompasses activities from the point when 'tangible personal property begins movement from raw materials storage to begin industrial processing' through when 'finished goods first come to rest in finished goods inventory storage.' Under this definition, material handling equipment within the factory floor (forklifts moving work-in-process, conveyor systems), quality control equipment testing products during production, packaging machinery that seals the finished product, and energy (electricity, natural gas, propane) directly consumed in the manufacturing process all potentially qualify for the exemption. Michigan Revenue Administrative Bulletin 2000-4 provides the key interpretive guidance. Michigan Treasury auditors frequently contest the exemption for: (a) packaging machinery and materials where the packaging does not become an integral part of the finished product; (b) material handling equipment that also moves finished goods (dual-use); (c) maintenance and repair supplies for manufacturing equipment (consumable vs. capital, and whether the repaired equipment 'directly' uses the supplies in industrial processing); (d) quality control equipment that tests goods after they leave the production line (no longer 'in' industrial processing). A 2024 amendment (PA 122 of 2024, signed into law by Governor Whitmer) further expanded the industrial processing exemption to include certain activities previously treated as taxable, particularly for food processors and certain packaging operations. Assessments issued before 2024 may over-collect tax on activities that are now exempt under the expanded definition. Source: Michigan Sales Tax Exemption for Industrial Processing — Agile Consulting · Michigan Sales Tax Exemption for Manufacturing — Agile Consulting · Michigan Sales and Use Tax Acts Amendment Expands Tax Exemption for Industrial Processing — ArentFox Schiff · New Law Ensures Industrial Processing Machinery is Tax Exempt — Michigan Chamber of Commerce
• Michigan's use tax is the counterpart to its sales tax: when a business purchases taxable goods or services from an out-of-state supplier who did not collect Michigan sales tax, the business owes Michigan use tax (6%) on the purchase price, which must be self-accrued and remitted directly to Treasury. The manufacturing exemption applies to use tax as well as sales tax, so a manufacturer who purchases equipment from an out-of-state supplier without paying Michigan tax owes use tax UNLESS the equipment qualifies for the industrial processing exemption. The use tax audit commonly identifies: (a) industrial machinery that the manufacturer failed to accrue use tax on (correctly taxable, general admin equipment not used in manufacturing), and (b) industrial machinery that Treasury incorrectly asserts is taxable (the manufacturer argues it's exempt under MCL 205.94o). Michigan has 92,000+ manufacturing companies, the largest manufacturing base among Great Lakes states, making use tax compliance on equipment purchases the most common Michigan Treasury audit finding for businesses. Source: So, You've Been Selected for a Michigan Tax Audit — Agile Consulting · Michigan Sales and Use Tax Guide — Sales Tax Helper

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. Collections, Audits, and Appeals — Michigan Department of Treasury
2. Michigan Sales and Use Tax Audits — Foster Swift Collins & Smith (Michigan Tax Blog)
3. Michigan Sales and Use Tax Audit Defense Attorney — Ayar Law
4. Michigan Sales Tax Exemption for Industrial Processing — Agile Consulting
5. Michigan Sales Tax Exemption for Manufacturing — Agile Consulting
6. Michigan Sales and Use Tax Acts Amendment Expands Tax Exemption for Industrial Processing — ArentFox Schiff
7. New Law Ensures Industrial Processing Machinery is Tax Exempt — Michigan Chamber of Commerce
8. So, You've Been Selected for a Michigan Tax Audit — Agile Consulting
9. Michigan Sales and Use Tax Guide — Sales Tax Helper