Farnell Contracting Inc v. Department of Treasury ( 2017 )


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  •                           STATE OF MICHIGAN
    COURT OF APPEALS
    FARNELL CONTRACTING, INC,                                           UNPUBLISHED
    December 19, 2017
    Petitioner-Appellant,
    v                                                                   No. 334667
    Michigan Tax Tribunal
    DEPARTMENT OF TREASURY,                                             LC No. 15-003818-TT
    Respondent-Appellee.
    Before: MURPHY, P.J., and KELLY and SWARTZLE, JJ.
    PER CURIAM.
    The central issue in this tax dispute is whether petitioner Farnell Contracting, Inc. is a
    contractor subject to the Use Tax Act (UTA), MCL 205.91 et seq., or whether petitioner is a
    retailer subject to the General Sales Tax Act (GSTA), MCL 205.51 et seq. Respondent
    Department of Treasury found that petitioner was a contractor subject to the UTA and assessed
    petitioner $217,050 in unpaid use taxes. Petitioner appealed to the Michigan Tax Tribunal. The
    tribunal agreed that petitioner was generally a contractor subject to the UTA but found that
    respondent had improperly categorized certain of petitioner’s sales as subject to use tax, when in
    fact they were retail sales of tangible personal property not subject to use tax. Therefore, the
    tribunal modified the assessment, reducing it by $25,375 to $191,675. Petitioner appeals as of
    right, arguing that the remaining sales should have been deemed retail sales of tangible personal
    property. We affirm.
    I. BACKGROUND
    Petitioner, a Michigan corporation, is a supplier and installer of fixed institutional
    furniture including casework, counter tops, fixtures, and sinks, as well as laboratory fume hoods
    and test chambers. Petitioner does not manufacture the furniture; instead, petitioner sells pre-
    manufactured furniture to its customers (usually schools or universities), delivers and unloads it,
    and may install it on the premises according to the customer’s specifications.
    In April 2012, respondent commenced an audit of petitioner’s use taxes for the period
    between March 2008 and February 2012. As the audit proceeded, respondent realized that
    petitioner had not remitted any use taxes on the purchases of materials it used and instead was
    charging its customers sales tax on those materials. Moreover, because many of its customers
    are exempt from sales tax, petitioner obtained exemption certificates from those customers and
    -1-
    did not remit any tax related to these materials. At the conclusion of the audit, respondent issued
    petitioner a Bill for Taxes Due for $282,312.45 in unpaid use tax, including interest.
    Petitioner disputed the tax due and requested an informal conference before respondent.
    Petitioner took the position that it is a retailer subject to the collection of sales taxes from its
    customers, whereas respondent asserted that petitioner is a contractor subject to use tax on the
    materials it installs on its customers’ real property. The hearing referee agreed with respondent,
    finding that petitioner was a contractor subject to use tax for the materials it uses, but reduced the
    amount of unpaid use tax to $217,050 based on additional job information petitioner submitted.
    Petitioner then filed a petition with the Michigan Tax Tribunal alleging that the audit was
    “incomplete and erroneous.” At the hearing before the tribunal, petitioner presented the
    testimonies of Douglas B. Farnell, petitioner’s president, Kathleen M. Farnell, petitioner’s
    treasurer, and Joyce M. King, petitioner’s accountant. Douglas characterized petitioner’s
    business as a retailer of personal property, but later admitted that petitioner supplied and installed
    furniture as a contractor or subcontractor. Kathleen testified that sales tax was generally remitted
    on all retail sales of furniture, but that no sales tax was remitted if a customer provided an
    exemption certificate. King testified that she prepared petitioner’s tax returns and assisted
    petitioner in preparation for the audit. Respondent provided only the testimony of its auditor,
    who described the audit process and the methodology she used to arrive at the tax deficiency
    owed.
    After the hearing, the tribunal entered a Final Opinion and Judgment, finding that
    petitioner was “in part a contractor in the business of ‘constructing, altering, repairing, or
    improving the real estate of others,’ by installing fixtures” and also in part a retailer, selling
    tangible personal property to institutions exempt from sales tax. Relying on Douglas’s testimony
    and petitioner’s evidence, the Tribunal found that the floor cabinets, countertops, wall shelves,
    desks, mail box cubbies, free standing shelving, wall cabinets, rods, and fume hoods sold by
    petitioner were fixtures annexed to the realty, and therefore subject to use tax. Comparatively,
    the tribunal found that petitioner’s sale of tables and cabinets on wheels were not sales of
    fixtures, but rather sales of tangible personal property not subject to use tax. As a result, the
    tribunal reduced the assessment by $25,375 to $191,675, with interest to be calculated by
    respondent.
    II. ANALYSIS
    “Review of a decision by the [Michigan Tax Tribunal] is very limited.” Drew v Cass
    County, 
    299 Mich App 495
    , 498; 830 NW2d 832 (2013). Unless fraud is alleged, this Court
    reviews the tribunal’s decision for a “misapplication of the law or adoption of a wrong
    principle.” Liberty Hill Housing Corp v City of Livonia, 
    480 Mich 44
    , 49; 746 NW2d 282
    (2008) (internal citation and quotation notation omitted). “The tribunal’s factual findings will
    not be disturbed as long as they are supported by competent, material, and substantial evidence
    on the whole record.” Drew, 299 Mich App at 499 (internal citation and quotation marks
    omitted). “Substantial evidence” is “more than a scintilla of evidence, although it may be
    substantially less than a preponderance of the evidence.” Leahy v Orion Twp, 
    269 Mich App 527
    , 529-530; 711 NW2d 438 (2006) (internal citation and quotation notation omitted).
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    Petitioner is a Contractor Subject to Use Tax. Petitioner first claims that the tribunal
    erred by concluding that petitioner is a contractor. According to petitioner, an examination of its
    activities shows that it does not meet the fixture test, which courts have traditionally used to
    determine whether an entity is acting as a contractor and, as such, is subject to use tax.
    “The provisions of the [UTA] complement those of the [GSTA] and were generally
    designed to avoid the imposition of both use and sales tax on the same property.” Granger Land
    Dev Co v Dep’t of Treasury, 
    286 Mich App 601
    , 608; 780 NW2d 611 (2009). Under the UTA,
    every person who acquires tangible personal property is subject to a use tax “for the privilege of
    using, storing, or consuming tangible personal property in this state.” MCL 205.93(1).
    Comparatively, under the GSTA, a retailer that sells tangible personal property must collect sales
    taxes from its customers and remit them to respondent. See MCL 205.52(1).
    Generally, a contractor is subject to use tax as opposed to sales tax because it uses
    material to improve real property and does not, unlike a retailer, sell items of tangible personal
    property. Although neither the UTA nor the GSTA define “contractor,” the Mich Admin Code,
    R 205.71 provides the following guidance:
    (1) “Contractor” includes only prime, general, and subcontractors directly
    engaged in the business of constructing, altering, repairing, or improving real
    estate for others.
    (2) Contractors are consumers of the materials used by them. All sales to
    or purchases by contractors of tangible personal property are taxable, except when
    affixed and made a structural part of real estate for a qualified exempt nonprofit
    hospital or a nonprofit housing entity qualified as exempt under the sales and use
    tax acts. All materials consumed in the performance of such contracts and not
    affixed and made a structural part of real property are taxable. [Emphasis added.]
    Notably, this definition of “contractor” incorporates by reference the UTA’s definition of
    “consumer,” which provides:
    (g) “Consumer” means the person who has purchased tangible personal property
    or services for storage, use, or other consumption in this state and includes, but is
    not limited to, 1 or more of the following:
    (i) A person acquiring tangible personal property if engaged in the business of
    constructing, altering, repairing, or improving the real estate of others. [MCL
    205.92(g)(i).]
    The parties agree that the applicable test for determining whether an entity is a
    “contractor” under these definitions is the “fixture test.” Mainly, Michigan courts, in
    determining whether an entity is a contractor as opposed to a retailer of tangible personal
    property, look to whether the entity installs a fixture that is sufficiently affixed to the real
    property as to be considered a part of the realty, and no longer an item of tangible personal
    property, after the installation. Factors to consider include:
    (1) whether the property was actually or constructively annexed to the real estate;
    -3-
    (2) whether the property was adapted or applied to the use or purpose of that part
    of the realty to which the property in question is connected or appropriated; and
    (3) whether the property owner intended to make the property a permanent
    accession to the realty. [Granger Land Dev Co, 286 Mich App at 611 (internal
    citation and quotation notation omitted).]
    In the instant appeal, petitioner recognizes that a contractor is subject to use tax, whereas
    a retailer is subject to sales tax. Petitioner further acknowledges that the test for determining
    whether an entity is a contractor is the three-part fixture test. In contending that it was not
    engaged as a contractor, however, petitioner states in a single sentence, “a careful examination of
    its activities and the items it sold do not meet the . . . fixture test, and the tribunal erred in its
    conclusion that [petitioner] was a ‘contractor’ for sales and use tax purposes.”
    Petitioner makes no effort to explain why an examination of the record would
    purportedly show that the tribunal’s conclusion was erroneous and cites no relevant portions of
    the record. And, aside from summarizing the relevant law, petitioner does not apply the law to
    the facts and cites no legal authority to support the conclusion that the tribunal erroneously
    categorized the instrumentalities that petitioner installed as fixtures. “It is not enough for an
    appellant in his brief simply to announce a position or assert an error and then leave it up to this
    Court to discover and rationalize the basis for his claims, or unravel and elaborate for him his
    arguments, and then search for authority either to sustain or reject his position.” Yee v
    Shiawassee County Bd of Comm’rs, 
    251 Mich App 379
    , 406; 651 NW2d 756 (2002) (internal
    citation and quotation notation omitted). Accordingly, and given petitioner’s complete failure to
    develop its argument beyond a single conclusory sentence, we conclude that petitioner has
    abandoned this assertion of error.
    Notwithstanding our conclusion, we see no error in the tribunal’s determination that
    petitioner was acting as a contractor during the audit period. Douglas testified that petitioner
    secures metal cabinets to the floor or wall; attaches countertops to cabinets with silicone caulking
    or wood screws; installs desks that may be secured to a wall; attaches wall shelves to each other
    and anchors them to the wall; secures mailbox cubbies to the wall; anchors wall cabinets to the
    wall with screws and plastic anchors; hangs laboratory rods inside fume hoods or desks; and
    places fume hoods on cabinets that are eventually connected to mechanical systems, like
    plumbing or electrical. Given this testimony, we conclude that substantial evidence supports the
    tribunal’s finding that these instrumentalities were actually or constructively attached to the real
    property such that they became a part of the realty. The tribunal did not err by concluding that
    petitioner installed fixtures on realty and, therefore, was acting as a contractor and was subject to
    use tax.
    Petitioner Is Not Entitled to Sales Tax Treatment. Petitioner next asserts that it is entitled
    to sales tax treatment, rather than use tax treatment, on two alternative grounds. Specifically,
    petitioner contends that it is entitled to sales tax treatment because (1) it consistently applied
    sales tax and (2) it obtained valid sales tax exemption certificates.
    -4-
    Regarding the first argument, petitioner cites no authority in support of its position, but
    appears to be referring to respondent’s Internal Policy Directive [IPD] 2005-3. The IPD states,
    in relevant part:
    A real property contractor is statutorily considered a consumer of the materials
    used in the activities of constructing, altering, repairing, or improving real estate
    for others.     Its sales and use tax obligation is generally (except for
    manufacturer/contractors) 6% of the cost of materials used in the job.
    This policy of allowing contractors who consistently hold themselves out as
    retailers to treat themselves as retailers who are making sales at retail is grounded
    in the fact that the State of Michigan will receive at least as much sales tax
    revenue from the contractor as it would receive should the contractor pay sales or
    use tax on its purchases. IT IS IMPORTANT TO NOTE THAT WHERE
    THIS IS NOT THE CASE THE ADMINISTRATIVE POLICY WILL NOT
    BE FOLLOWED.
    * * *
    There are exceptions to this general policy practice of recognizing sales tax
    exemptions. Recall that the policy is fundamentally grounded in the fact that the
    State of Michigan will receive at least as much tax as would otherwise be due.
    This fact negates the Revenue Act, 
    1941 PA 122
     as amended, prohibition against
    compromise of tax. Tax is not compromised because the State of Michigan
    receives full benefit of the tax. However where this is not true the Department
    cannot allow sales tax treatment.
    The Department will look to an aggregation of transactions to determine if
    adequate tax has been remitted. If the Department looks at all transactions for a
    period and finds that the sales tax remitted is less than the sales or use tax that
    should have been remitted on cost of materials, the Department must assess
    additional tax. [IPD 2005-3, pp 1-2 (emphasis in original).]
    Petitioner’s argument mischaracterizes IPD 2005-3 as simply permitting a contractor to
    elect sales tax treatment in the instance that it consistently applied sales tax and ignores the IPD’s
    exception to this rule that sales tax treatment is not permitted where the net amount of tax to be
    received by the state is compromised. In other words, while the IPD allows contractors to remit
    sales tax in some instances, this rule is inapplicable when the state will receive less revenue than
    it would have had the contractor paid use tax. This is because, as respondent recognizes, the
    Revenue Act prohibits respondent from reducing the taxes due to the state. MCL 205.28(1)(e).
    Next, petitioner contends that it is entitled to sales tax treatment, and relatedly immunity
    from remitting sales tax, because it obtained facially valid sales tax exemption certificates from
    its customers. Yet, petitioner’s argument is predicated on a fundamentally incorrect premise:
    that petitioner is liable for sales tax for the sale of items determined to be fixtures. As we have
    explained, however, contractors are liable for use tax on such transactions and the tribunal did
    not err by finding that petitioner acted as a contractor. It follows that the exemption certificates
    -5-
    under the GSTA are wholly irrelevant and petitioner fails to cite any authority indicating
    otherwise. In sum, because petitioner failed to show that the tribunal erred in the first instance by
    finding that petitioner acted as a contractor in relation to the fixtures it installed, the question of
    sales tax exemptions as to these transactions is irrelevant.
    In its brief on appeal, petitioner also cites parallel provisions of the UTA that allow for
    exemptions from use tax upon completion of an exemption certificate. See MCL 205.104b.
    Petitioner, however, does not explain how it is exempt from the UTA or assert that it completed
    an exemption certificate that would have exempted it from use tax liability for the fixtures it
    installed on its customers’ premises. Again, we will not make out petitioner’s argument for it.
    Yee, 251 Mich App at 406.
    The Tribunal Did Not “Rubber Stamp” Respondent’s Audit. Finally, petitioner asserts
    that the tribunal effectively rubber-stamped respondent’s audit and failed to conduct a de novo
    review. Petitioner insists that the tribunal should have ordered a re-computation of tax liability
    based on its finding that petitioner’s records were accurate instead of affirming respondent’s
    computation, which was the result of incomplete data.
    The record does not support petitioner’s argument. First, nothing in the opinion suggests
    that the tribunal blindly adopted respondent’s audit results; there are no indications of undue
    deference to respondent’s evidence or other conclusory statements agreeing to respondent’s
    assessment. Second, a review of the tribunal’s opinion indicates that it properly performed its
    review function: after reviewing the record, it adjusted the assessment downward based on
    petitioner’s evidence given its finding that petitioner’s records were accurate and complete and
    that respondent did not keep a list of jobs. Under these circumstances, we cannot agree with
    petitioner that the tribunal “rubber-stamped” respondent’s assessment. Instead, the tribunal
    conducted an independent de novo review, as statutorily required. See MCL 205.735a(2).
    Affirmed.
    /s/ William B. Murphy
    /s/ Michael J. Kelly
    /s/ Brock A. Swartzle
    -6-
    

Document Info

Docket Number: 334667

Filed Date: 12/19/2017

Precedential Status: Non-Precedential

Modified Date: 12/21/2017