            If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                 revision until final publication in the Michigan Appeals Reports.




                          STATE OF MICHIGAN

                            COURT OF APPEALS



JIM’S BODY SHOP, INC,                                                FOR PUBLICATION
                                                                     May 14, 2019
               Plaintiff-Appellant,                                  9:15 a.m.

v                                                                    No. 343459
                                                                     Court of Claims
DEPARTMENT OF TREASURY,                                              LC No. 16-000135-MT

               Defendant-Appellee.


Before: SWARTZLE, P.J., and M. J. KELLY and TUKEL, JJ.

PER CURIAM.

        In this case involving a use tax deficiency, plaintiff, Jim’s Body Shop, Inc., appeals by
right the Court of Claims’ order granting summary disposition under MCR 2.116(C)(10) in favor
of defendant, Michigan Department of Treasury. Because there are no errors warranting
reversal, we affirm.

                                        I. BASIC FACTS

        Plaintiff is an auto body repair shop located in Clare, Michigan that is primarily engaged
in the business of fixing vehicles that have been involved in collisions for insurance companies.
This collision work may require both body and mechanical work, including part repair or
replacement, as well as exterior painting and refinishing. A smaller component of plaintiff’s
business involves routine non-insurance related mechanical repairs, for example, replacing
batteries, changing oil, or installing tires.

        In July 2015, the Department informed plaintiff that it would be performing a use tax
audit of plaintiff’s returns for the taxable period between August 1, 2011 and December 31,
2014. Upon initial review of plaintiff’s tax records, the Department’s auditors determined that
plaintiff had not maintained adequate tax records. Plaintiff had not remitted any use tax for the
periods at issue and while it had remitted some sales tax, it had not reported that sales tax on its
annual returns. Rather, plaintiff’s annual returns only reported withholding taxes and the portion




                                                -1-
of the returns relating to sales tax, gross sales, and deductions from gross sales, and use tax was
left blank. Consequently, while plaintiff had maintained trial balance sheets,1 the Department
was unable to determine from plaintiff’s purchase invoices whether use or sales tax had been
remitted on these purchases because they could not be related back to plaintiff’s annual return.
The Department requested documents to ascertain which purchases plaintiff personally
consumed (as opposed to purchases it sold and collected sales tax on), but plaintiff could not
provide that information.

        Ultimately, the Department employed an indirect audit methodology to determine the use
tax due on the two types of purchases plaintiff had made during the audit period: capital assets2
and expenses related to mechanical and body shop repair work. With regard to capital assets, the
Department reviewed plaintiff’s federal depreciation schedule for the subject tax years and
assessed tax for those purchases on the schedule for which no tax had been paid. With respect to
plaintiff’s use tax liability for expenses, or property plaintiff purchased to perform its mechanical
and body shop repair work, the Department reviewed plaintiff’s trial balance sheets and
identified 11 accounts as relevant to the use tax audit. Yet, the trial balance sheets did not
identify whether plaintiff’s purchases were for personal consumption or for its retail customers,
although they did show that plaintiff’s purchases were substantially greater than its retail sales,
indicating that certain goods were purchased for plaintiff’s consumption.

        To determine the goods that plaintiff consumed, and that were thus subject to use tax, the
Department, using the information it had available, applied a “one year block” methodology for
the 2014 tax year. Mainly, from the 2014 trial balance sheet and the amount of sales tax remitted
in 2014, the Department was able to compare the purchases plaintiff made, i.e., the total cost of
goods it paid for, to plaintiff’s total retail sales, i.e., the price (cost of the good plus markup)
charged to the consumer. To determine the purchases plaintiff itself used, the Department
subtracted the total amount of retail sales, adjusted to the cost of goods before markup, from the
total purchases. This adjustment to retail sales (hereinafter “retail sales at cost”) was necessary
to insure that plaintiff’s purchases for self-consumption were calculated correctly. Notably,
because plaintiff initially provided only a single invoice from 2014 reflecting a retail sale, for
which the markup was 43 percent, the Department adjusted all of plaintiff’s retail sales for each
tax year using this 43 percent markup. Ultimately, the Department issued a final assessment for
$111,024, including a negligence penalty and interest.

        Shortly after the Department issued its final audit determination, plaintiff filed a
complaint in the Court of Claims, asserting that it was entitled to cancelation of the assessment
due to the Department’s “errors.” Plaintiff asserted that it was not subject to use tax and that the


1
  A “trial balance sheet” is “a bookkeeping or accounting report that lists the balances in each of
an organization’s general ledger accounts.” See < https://www.accountingcoach.com/blog/what-
is-a-trial-balance > (accessed April 26, 2019).
2
 “Capital assets” are “long-term asset[s] used in the operation of a business or used to produce
goods or services, such as equipment, land, or an industrial plant.” Black’s Law Dictionary (10th
ed), p 140.


                                                -2-
Department ignored “various” tax exemptions for which plaintiff is eligible. Plaintiff clarified its
position in its discovery responses, alleging that the Department erred in calculating a 43 percent
markup to determine plaintiff’s purchases for personal use because the Department relied on a
single purchase invoice, the sample size of which was too small and not representative of
plaintiff’s sales so as to be extrapolated over the four-year period. Plaintiff further claimed that
certain expenses and capital assets were improperly included because they were exempt under
the industrial processing exemption, including, as to expenses, paint supplies, sandblaster sand
and supplies, and paintless dents equipment and supplies; and, as to capital assets, the Cooltech
R143A, Saylor Beal, pressure washer, and carpet extractor. Plaintiff also asserted that the
remaining capital assets were not subject to taxation for various reasons, including tools and a
foam sprayer that were allegedly part of the realty; a 2008 Gran Prix that plaintiff allegedly never
purchased; and a 2003 International 4300 that was purchased for resale.

         In support of its position, plaintiff provided additional documentation that it had not
provided during the audit and, consequently, the Department reduced plaintiff’s tax liability.
Plaintiff, for example, provided documents showing that sales tax had been paid on some tire
sales and some inventory vehicles and, thus, the Department removed those items from the
taxable balance. Plaintiff also produced invoices from three of the 11 expense accounts of
interest, including 63 tire invoices, 36 parts invoices, and 2 mechanical invoices. Given this
additional information, the Department recalculated the markup by averaging the invoices
separately in each of the three accounts and then averaging the average. As a result, the
Department adjusted the markup downward to 35 percent, thereby reducing plaintiff’s tax
liability for expenses.

       Eventually the parties filed cross-motions for summary disposition under MCR
2.116(C)(10). The Court of Claims ruled in the Department’s favor.

       This appeal follows.

                                 II. SUMMARY DISPOSITION

                                 A. STANDARD OF REVIEW

        Plaintiff argues the trial court erred by granting summary disposition in favor of
defendant. This Court reviews de novo a decision of the Court of Claims granting summary
disposition. GMAC LLC v Dep’t of Treasury, 286 Mich App 365, 372; 781 NW2d 310 (2009).
“A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint.” Maiden v
Rozwood, 461 Mich 109, 119; 597 NW2d 817 (1999). The Court must view all the evidence
submitted by the parties in a light most favorable to the nonmoving party. Id. at 120. If no
genuine issue of material fact exists and judgment is proper as a matter of law, then the motion
was properly granted. Id. Questions of statutory interpretation are questions of law that are also
reviewed de novo. GMAC LLC, 286 Mich App at 372.




                                                -3-
                                          B. ANALYSIS

                            1. PRESUMPTION OF CORRECTNESS

        Under MCL 205.104a(1) of the Use Tax Act (UTA), MCL 205.91 et seq., a taxpayer in
the business of selling tangible personal property has a duty to maintain, for a period of four
years, “an 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.” In the event the taxpayer fails to
comply with this requirement, MCL 205.104a(4) authorizes the Department to determine the
taxpayer’s tax liability using sources beyond the taxpayer’s formal declarations. MCL
205.104a(4) creates a presumption that the resulting assessment is correct and mandates that the
audit shall be conducted in accordance with certain standards.

        Here, plaintiff failed to remit any use tax, failed to report sales or use taxes on its annual
returns, and failed to maintain the required documentation to establish its use tax liability.
Consequently, the Department acted within its authority to apply an indirect audit methodology
under MCL 205.104a(4) to determine plaintiff’s use tax liability for the tax years at issue.

        On appeal, plaintiff does not dispute that an indirect methodology was permissible, but
instead claims that the resultant assessment was not reasonable under the statute and that the
Department, therefore, was not entitled to the presumption that the assessment was correct.
Plaintiff’s contends that under MCL 205.104a(4) the Department is not entitled to the
presumption of correctness absent a showing of reasonableness. In support, plaintiff points to
subparagraphs (a) through (d), claiming that because these are mandatory requirements, the
Department’s failure to comply with them either makes the Department ineligible for the
presumption or rebuts the presumption. Plaintiff, however, misconstrues the statute.

        When construing statutory language, this Court’s goal is to ascertain the Legislature’s
intent. Cook v Dep’t of Treasury, 229 Mich App 653, 658-659; 583 NW2d 696 (1998). The best
indicator of that intent is the plain language used. Ferguson v City of Lincoln Park, 264 Mich
App 93, 95-96; 694 NW2d 61 (2004). If the language is clear and unambiguous, it must be
applied as written. Id. “Further, tax statutes are not to be extended by implication and are to be
construed against the taxing authority if an ambiguity exists.” Garfield Mart, Inc v Dep’t of
Treasury, 320 Mich App 628, 643; 907 NW2d 880 (2017).

       MCL 205.104a(4) provides:

                (4) If a taxpayer fails to file a return or to maintain or preserve sufficient
       records as prescribed in this section, or the department has reason to believe that
       any records maintained or returns filed are inaccurate or incomplete and that
       additional taxes are due, the department may assess the amount of the tax due
       from the taxpayer based on an indirect audit procedure or any other information
       that is available or that may become available to the department. That assessment
       is considered prima facie correct for the purpose of this act and the burden of
       proof of refuting the assessment is upon the taxpayer. An indirect audit of a
       taxpayer under this subsection shall be conducted in accordance with 1941 PA

                                                 -4-
       122, MCL 205.1 to 205.31, and the standards published by the department under
       section 21 of 1941 PA 122, MCL 205.21, and shall include all of the following
       elements:

               (a) A review of the taxpayer's books and records. The department may
       use an indirect method to test the accuracy of the taxpayer's books and records.

              (b) Both the credibility of the evidence and the reasonableness of the
       conclusion shall be evaluated before any determination of tax liability is made.

              (c) The department may use any method to reconstruct income,
       deductions, or expenses that is reasonable under the circumstances. The
       department may use third-party records in the reconstruction.

               (d) The department shall investigate all reasonable evidence presented by
       the taxpayer refuting the computation. [Emphasis added.]

        Subsection (4) requires that an assessment derived from an indirect method “is
considered prima facie correct” and specifically allocates the “burden of proof of refuting the
assessment . . . upon the taxpayer.” MCL 205.104a(4). Because the burden of proof refers back
to the presumption of correctness, MCL 205.104a(4), by its plain terms, means that the taxpayer
has the burden of rebutting the presumption of correctness by showing that the assessment was
incorrect. See By Lo Oil Co v Dep’t of Treasury, 267 Mich App 19, 43; 703 NW2d 822 (2005).3
The last sentence of subsection (4) requires that an “indirect audit” contain the elements listed in
subparagraphs (a) through (d). See MCL 205.104a(4)(a) through (d).

        Contrary to plaintiff’s interpretation, subparagraphs (a) through (d) do not inform, or
otherwise act as a prerequisite to, the Department’s entitlement to the presumption of correctness
under subsection (4). Subparagraphs (a) through (d) are mandatory procedural requirements in
the performance of an indirect audit, but the statutory language never indicates that the failure to
follow these procedural requirements renders the assessment invalid or otherwise prohibits
application of the presumption. Had the Legislature intended the procedural requirements of




3
  In By Lo Oil Co, 267 Mich App at 43, this Court explained, “[a]lthough plaintiff proffered
opinion testimony that the audit method used by the department was not the most reliable and
should have been verified with test samples chosen from throughout the period audited, plaintiff
failed to offer any evidence that the error rate determined by the ‘block sampling method’ was
actually inaccurate.” In other words, challenging the audit method without also proffering
evidence showing that the audit is actually incorrect is insufficient to establish, “as a factual
matter that any unfairness or injustice occurred.” Id.


                                                -5-
subparagraphs (a) through (d) to be requisites to the presumption of correctness, it would have
stated so plainly.4

        When the statute is read as a whole, it is plain that the burden rests on taxpayers to show
that an assessment derived from an indirect method is actually incorrect. Subparagraphs (a)
through (d) are only relevant to a taxpayer’s burden if the taxpayer can show that as a result of
the Department’s failure to abide by those procedural requirements, the assessment was not
correct: for example, by showing that the Department made a mathematical error or failed to
include pertinent information. In this case, plaintiff does not assert that the assessment is
incorrect; rather, based on its flawed interpretation of the statute, it claims that the assessment
methodology was unreasonable because the Department did not abide by its manual and because
a more reasonable method would have resulted in a more accurate assessment. As explained
above, under the plain terms of the statute, assertions that an audit procedure was unreasonable,
absent a showing that the assessment is incorrect, do not support a conclusion that the assessment
is actually incorrect. On this basis alone, plaintiff has failed to meet its burden.

        Even assuming that an unreasonable audit method by itself could function to rebut the
presumption of correctness, plaintiff has failed to show that the method the Department
employed was unreasonable or otherwise demonstrate in any way that the assessment was not
correct. Regarding the Department’s alleged failure to follow the manual’s guidance when using
a sampling method, plaintiff points out that small sample sizes are disfavored as are those that
are not representative of the entire population. Yet, the Department did not rely on a sampling
methodology whereby a “sample” of invoices would be used to determine the markup
theoretically applied to all goods sold. Instead, the Department used a block sampling
methodology and used the only information plaintiff had made available to it, which renders the
manual’s guidance on sampling methodology immaterial. Moreover, even assuming the
sampling methodology had some relevance, plaintiff cites no authority for the proposition that
the Department’s alleged failure to follow its own guidance renders the assessment incorrect or
constitutes error requiring reversal. In any event, the manual is not binding law, but merely
guidance. See Danse Corp v City of Madison Heights, 466 Mich 175, 181; 644 NW2d 721
(2002) (indicating that agency manuals not promulgated through formal rulemaking are merely
guidance). Further, to hold that a taxpayer may rebut the presumption of correctness by merely
showing that the Department did not follow its manual would prohibit, or constrain, the
Department from making assessments on available information in situations where taxpayers do
not maintain proper records and would greatly erode the state’s power to tax. See Vomvolakis v
Dep’t of Treasury, 145 Mich App 238, 245; 377 NW2d 309 (1985).

       Relatedly, plaintiff claims that it was unreasonable for the Department to project the cost
of goods plaintiff sold at retail by determining an overall markup based on the average of three
separately averaged accounts. When it is necessary for the Department to use an indirect



4
   We note that plaintiff’s understanding of the statute, which requires a showing of
reasonableness before the presumption attaches, effectively eviscerates the presumption of
validity by shifting the burden onto the Department to show that the assessment is reasonable.


                                                -6-
methodology, it has wide discretion in the selection of the method and the taxpayer has no right
to choose the method ultimately applied. By Lo Oil Co, 267 Mich App at 42. Nevertheless,
plaintiff asserts that giving equal weight to the Parts-Mechanical account (average markup of 66
percent based on two invoices) disproportionately affects the markup averages of the other two
accounts, both of which had much larger sample sizes. According to plaintiff, the Department
should have averaged all the invoices together for a total markup of 13 percent, as opposed to
averaging the averages of the accounts. Plaintiff ignores, however, that each of the 11 accounts
make up different percentages of plaintiff’s business; the significance of this is that by simply
averaging all the invoices together, undue weight would be given to the tire account (because
plaintiff submitted the most invoices for that account), which only makes up 4 percent of
plaintiff’s business. By averaging the averages, defendant gave equal weight to each of the
accounts for which invoices were submitted. While defendant’s method does not account for the
proportion of business activity in each account (primarily because plaintiff did not produce
invoices for each account), plaintiff’s proposed method is not any more reliable than the method
applied, given that a taxpayer could manipulate the markup by producing a greater number of
invoices favorable to it. In any case, that an audit method other than the one employed may have
been more reasonable or reliable than the one actually used is insufficient to rebut the
presumption of correctness without a showing that the assessment is actually incorrect. Id. at 42-
43.

        In sum, plaintiff failed to rebut the presumption that the assessment is prima facie correct,
so the Court of Claims did not err by granting summary disposition on this basis.

                        2. INDUSTRIAL-PROCESSING EXEMPTION

       Plaintiff argues that the industrial-processing exemption should be applied in this case.
Property sold to an “industrial processor” that is used or consumed in “industrial processing” is
exempt from taxation under the UTA. MCL 205.94o(1)(a). The Act defines “industrial
processor” as:

       a person who performs the activity of converting or conditioning tangible
       personal property for ultimate sale at retail or use in the manufacturing of a
       product to be ultimately sold at retail or affixed to and made a structural part of
       real estate located in another state. [MCL 205.94o(7)(b).]

The Act further defines “industrial processing” as:

       the activity of converting or conditioning tangible personal property by changing
       the form, composition, quality, combination, or character of the property for
       ultimate sale at retail or for use in the manufacturing of a product to be ultimately
       sold at retail or affixed to and made a structural part of real estate located in
       another state. Industrial processing begins when tangible personal property
       begins movement from raw materials storage to begin industrial processing and
       ends when finished goods first come to rest in finished goods inventory storage.
       [MCL 205.94o(7)(a).]




                                                -7-
       Plaintiff prepares damaged or new auto body parts by sandblasting and fixing dents as
necessary, and preparing and applying a primer. After the primer is baked, plaintiff mixes a
combination of powdered tints and other liquid chemicals, and applies the resultant paint color to
the auto body part using an air gun. After the paint has baked, plaintiff finishes the process by
mixing more chemicals to create a clear coat, which is again applied to the auto part using an air
gun. Plainly, plaintiff’s auto body collision repair work is an activity that alters tangible personal
property (the paint tints and other chemicals) by changing its form and character. See MCL
205.94o(7)(a).

        Notwithstanding plaintiff’s activities, plaintiff is not an industrial processor engaged in
industrial processing. This is because, by definition, an industrial processor and industrial
processing require an “ultimate sale at retail.” The General Sales Tax Act, MCL 205.51 et seq.,
defines “sale at retail” as “a sale, lease, or rental of tangible personal property for any purpose
other than for resale, sublease, or subrent.” MCL 205.51(1)(b). It is significant that the
Legislature qualified the necessary activity with the phrase “for ultimate sale at retail” because it
excludes from the industrial processing exemption persons involved in the sale of services. See
MidAmerican Energy Co v Dep’t of Treasury, 308 Mich App 362, 364-365; 863 NW2d 387
(2014) (recognizing that under Michigan’s General Sales Tax Act’s analogous industrial
processing exemption, the exemption is not available to persons selling something other than
tangible personal property).5

        Plaintiff’s auto-body work involves both the sale of tangible personal property, i.e., new
paint on a new or pre-existing auto body part, and the sale of a service, i.e., the repair of auto
body parts. For purposes of the exemption, whether a “sale at retail” has occurred when a mixed
transaction is at issue depends on whether the transfer of tangible personal property is merely
incidental to the service provided, in which case the transaction is for services and not a “sale at
retail.” To determine whether a “sale at retail” has occurred, courts applying the General Sales
Tax Act have used the “incidental to service test” and have objectively examined the totality of
the transaction, considering:

       what the buyer sought as the object of the transaction, what the seller or service
       provider is in the business of doing, whether the goods were provided as a retail
       enterprise with a profit-making motive, whether the tangible goods were available
       for sale without the service, the extent to which intangible services have
       contributed to the value of the physical item that is transferred, and any other




5
  Notably, prior to the amendment that added MCL 205.94(o) in 1999, the Legislature had
recognized that the exemption could apply to those involved in the sale of services, so long as
those services changed or altered the character of tangible personal property to place it in a
different form. See Beckman Prod Servs v Dep’t of Treasury, 202 Mich App 342, 344-345; 508
NW2d 178 (1993). The 1999 amendment, which added the language requiring that industrial
processors effect a change in tangible personal property for ultimate sale at retail, reflects a
conscious decision to narrow the applicability of the exemption.


                                                 -8-
          factors relevant to the particular transaction. [Catalina Marketing Sales Corp v
          Dep’t of Treasury, 470 Mich 13, 26; 678 NW2d 619 (2004).6]

         Plaintiff is primarily engaged in the business of providing auto body repairs to vehicles
that have been in a collision. With respect to this aspect of plaintiff’s business, customers sought
the auto body repairs of their damaged vehicles as the object of the transaction. The paint and
supplies that plaintiff used to make these repairs were not made available for sale without the
service. And, this tangible personal property, the unmixed paint, other chemicals, and supplies
used to prepare and finish the repair paint job, would have virtually no value to the customer
without the service of applying those components to the vehicle so that the auto body parts look
like new. Consequently, the sale of tangible personal property, i.e., new paint on a new or pre-
existing auto body part, is incidental to the sale of a service, i.e., the repair of auto body parts.
Because plaintiff makes no sales at retail, given that its transactions are for the sale of a service,
it is not an “industrial processor” engaged in “industrial processing” and it is not eligible for the
industrial processing exemption.

        Plaintiff disagrees with this conclusion, claiming that the Court of Claims erred by
focusing its analysis solely on the fact that the paints were not sold separately at retail, but in
doing so, plaintiff takes the Court of Claims’ statement in isolation. The court’s analysis,
however, focused on the totality of the transaction under the incidental services test. Moreover,
the evidence provided by plaintiff does not support a finding that plaintiff sold paints alone.
Instead, it is clear that the paints were sold in conjunction with the repair service. Plaintiff does
not otherwise explain how it is engaged in retail sales, as opposed to the sale of repair service,
other than relying on an unpublished case, which is not binding on this Court, and which we do
not find persuasive.7 See MCR 7.215(C)(1).

                                       3. CAPITAL ASSETS

        Plaintiff argues that the Court of Claims misapplied the standard for reviewing a
summary disposition motion under MCR 2.116(C)(10) with regard to certain captial assets.
Plaintiff claims that the court failed to view the evidence in the light most favorable to plaintiff
and wrongly ignored James Paetschow’s8 testimony that the assets were not subject to tax. Once
the moving party meets its burden of supporting its motion under MCR 2.116(C)(10) with
documentary evidence, the burden shifts to the nonmoving party to set forth specific facts
showing that a genuine issue of disputed fact exists. Smith v Globe Life Ins Co, 460 Mich 446,
455; 597 NW2d 28 (1999). In this regard, the nonmoving party may not rely on mere allegations


6
 Although the Michigan Supreme Court articulated this test in a case involving the GSTA, this
Court has previously applied the incidental to services test in the context of the UTA. Auto-
Owners Ins Co v Dep’t of Treasury, 313 Mich App 56, 79 n 4; 880 NW2d 337 (2015).
7
 The decision plaintiff relies on is Central Mich Cementing Servs, LLC v Dep’t of Treasury,
unpublished per curiam opinion of the Court of Appeals, issued December 8, 2015 (Docket No.
323405).
8
    Paetschow is plaintiff’s owner and president.


                                                    -9-
or denials in pleadings, but must go beyond the pleadings [and present documentary evidence] to
set forth specific facts showing that a genuine issue of material fact exists.” Quinto v Cross &
Peters Co, 451 Mich 358, 362-363; 547 NW2d 314 (1996).

         Plaintiff’s federal depreciation schedule listed the captial assets in dispute; because
plaintiff was unable to produce an invoice showing that sales tax had been paid on these items,
the Department included those items in the assessment. Contrary to plaintiff’s argument on
appeal, it failed to produce the required documentary evidence necessasry to establish a genuine
issue of material fact to avoid summary disposition. Paetschow testified that the tools and the
foam sprayer were attached to the realty, but plaintiff did not present any invoices or
documentary proof. He also testifed that plaintiff purchased a Grand Prix, but could not produce
an invoice; he later attested contradictorily that plaintiff did not purchase the Grand Prix. And,
despite claiming the International 2300 RO on the depreciation schedule, Paetschow testified that
it was purchased for resale and kept as inventory but he did not provide any documentary
evidence to support this assertion. Having reviewed the record, it is plain that all of Paetschow’s
assertions are nothing more than unsubtantiated assertions insufficient to create a question of fact
for trial. See Quinto, 451 Mich at 362-363. The Court of Claims did not err by recognizing that
plaintiff had failed to meet its burden of proof.

                                  4. NEGLIGENCE PENALTY

        Finally, plaintiff argues that the negligence penalty should be waived, given that plaintiff
was arguably eligible for the industrial processing exemption. MCL 205.23(3) requires the
imposition of a 10 percent penalty in the event that a tax deficiency is due to the taxpayer’s
negligence. Negligence, for purposes of imposing such a penalty, “is the lack of due care in
failing to do what a reasonable and ordinarily prudent person would have done under the
particular circumstances.” Mich Admin Code, R 205.1012. Whether a taxapyer was negligenct
is determined on a case-by-case basis, but the “standard for determing negligence is whether the
taxpayer exercised ordinary care and prudence in preparing and filing a return and paying the
applicable tax in accordance with the statute.” Id. Thus, if the taxpayer “demonstrates to the
satisfaction of the department that the deficiency . . . was due to reasonable cause, the department
shall waive the penalty.” MCL 205.23(3).

        Plaintiff did not remit any use taxes during the period and left the portion of its returns
relating to sales and use taxes blank. Paetschow testified that he was not aware of plaintiff’s tax
reporting procedures and did not know whether plaintiff had filed sales or use tax returns for the
years in question. Further, plaintiff’s claim that it believed it was entitled to the industrial
processing exemption is belied by the fact that it did not raise this exemption until litigation and,
in any case, ordinary care would have compelled plaintiff to file returns despite such a belief.
These circumstances show that plaintiff failed to exercise ordinary care. The Court of Claims
did not err by upholding the negligence penalty.

       Affirmed.

                                                              /s/ Brock A. Swartzle
                                                              /s/ Michael J. Kelly
                                                              /s/ Jonathan Tukel

                                                -10-
