The State of Michigan Court of Appeals has issued a ruling in the case Rehab & Mobility Systems, LLC (RMS) v Department of Treasury which upholds the findings of the Michigan Department of Treasury (Department) regarding the statutory sales tax exemption claimed by RMS, a Michigan taxpayer, on products they sold. The Department previously issued tax assessments for the years 2017 – 2019, with 2017 showing an overpayment by RMS and balances due for 2018 and 2019. However, the Department subsequently reviewed and cancelled the 2017 balance, which left a remaining balance due. When RMS made a payment in February 2022, the Department applied the payment to the outstanding balance, which caused RMS to object to the assessments and request a refund for the 2017 balance.
RMS appealed to the Court of Claims with two issues. First, RMS argued that the products it sold were exempt under Administrative Rule 89, which includes example items such as pressure pads, bandages, belts and other orthotic supports as exempt when sold pursuant to a written prescription. This argument was based on an earlier version of Michigan Compiled Laws (MCL) 205.54a(1)(k), which exempts the sales of prosthetic devices from sales tax.; and Second, they sought a refund of the credit for the 2017 overpayment. RMS sells items such as prescription incontinence devices/briefs, prescription medical tape, prescription wound dressing materials, and other items which are prescribed by medical doctors to patients for use in treatment of ailments. Both RMS and the Department agreed these items were sold to individuals with disabilities pursuant to written prescriptions from licensed healthcare providers. However, the Court of Claims determined that since an Administrative Rule could not overrule provisions of the MCL to broaden the exemption and because MCL 205.54a(1)(k) is strict in its requirements for prosthetic devices, RMS’s sales did not qualify as prosthetics. Thus, the Department had been correct in the assessment that the exemption did not apply to RMS’s products as they did not meet the statute’s requirements to be considered prosthetic devices. Further, for 2017, there would be no refund to RMS as the balance of the credit was applied to the balance due for 2018 and 2019.
In their review, the Court of Appeals highlighted the statutory language of MCL 205.54a(1)(k) and compared it to Administrative Rule 89 in coming to their decision. The Court of Appeals pointed out that MCL 205.54a(1)(k) had not been effective until 2023 and that Rule 89 would have been in effect for the periods in question. However, since Rule 89 was based on a previous iteration of the MCL, the Court again pointed out that interpretive Administrative Rules cannot be in conflict with the overarching statute, and highlighted that as the Court of Claims noted, this is particularly true in cases where the interpretive rule expands the scope of the statutory exemption since the general concept of the MCL is that “taxation is rule” and exemptions are exceptions to the rule which must be strictly construed. The Court of Appeals held that the language of MCL 205.54a(1)(k) was clear and that the requirement any exempt device must be a “replacement, corrective, or supportive device” was crucial to the definition of a prosthetic device. RMS, the Court held, did not demonstrate that any of their items were designed to do any of the required functions and the items could not be considered prosthetics. Though RMS claimed that this design requirement was not necessary, the Court pointed to the plain meaning of the word device, which states a mechanism must be designed to serve a specific purpose. Further, the Court wondered, “if a disposable glove is deemed a prosthetic, what item would not fall under such a definition?” (8). Finally, the Court of Appeals considered the claim regarding the 2017 refund, pointing out that RMS did not offer any supporting legal authority and only provided a single paragraph contending they were entitled to it. For this lack of legal authority, the Court of Appeals considered the contention to be forfeited, as the Court of Appeals is not responsible for rationalizing the basis for claims made by appellants.
The two main considerations taxpayers should take away from this case are the applicability of Administrative Rules as they come into conflict with state laws and the final point on the refund application, where a lack of cited authorities undid the claims of the taxpayer. Something taxpayers should be aware of as states change and update tax laws, codes, and guidance is that when it comes to situations where tax guidance offered by a state agency conflicts with a plain reading of the law, the state law will usually take precedence. And as this case highlights, that is especially true when it comes to administrative rules which expand exemptions set out in state laws. When taxpayers do find themselves trying to appeal rulings, it is important to have and provide the best backup documentation available for claims as courts will interpret claims made but will not investigate and rationalize claims made in filings. (Opinion dated 5/18/2026, Rehab & Mobility Systems, LLC (RMS) v Department of Treasury, Case number 370829 Michigan Court of Appeals)