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Brunt Associates, Inc. v. Department of Treasury

Court of Appeals of Michigan

November 17, 2016

BRUNT ASSOCIATES, INC., Petitioner-Appellant,
DEPARTMENT OF TREASURY, Respondent-Appellee.

         Michigan Tax Tribunal LC No. 00-461270

          Before: Owens, P.J., and Hoekstra and Beckering, JJ.

          Per Curiam.

         Petitioner Brunt Associates, Inc., appeals by right from a final order and judgment of the Michigan Tax Tribunal holding petitioner liable for a use tax deficiency. At the time of the hearing, petitioner owed $305, 234.52 in use tax, plus accruing interest. For the reasons stated below, we affirm the tribunal's decision.


         Petitioner is a domestic for-profit company in the business of producing and installing custom office furnishings and interior finishes, such as custom cabinetry, decorative panels, and freestanding furniture, for commercial applications. In August of 2006, respondent Department of Treasury opened a sales and use tax audit of petitioner's books that eventually covered the period November 1, 2005 through December 31, 2009. The auditor found that petitioner had reported no use tax during the audit period and was actually remitting use tax as sales tax. The auditor further found that petitioner is a real property contractor that did not make any sales at retail, and concluded that petitioner owed $284, 082 in use tax, plus $41, 674 in interest, for a total of $325, 756.[1] On September 28, 2010, respondent issued petitioner a notice of intent to assess, followed by a final assessment on December 7, 2010.

         On October 9, 2013, [2] petitioner filed a verified petition in the tax tribunal, alleging that it did not owe use taxes, that it had not engaged in activity during the audit period that would produce use taxes, and that the transactions for which the auditor had assessed use taxes involved customers with tax exemptions. In a prehearing statement submitted several months later, petitioner alleged that it was an industrial processor, that it made sales of tangible personal property at retail, and that it made retail sales to tax-exempt customers. With the tribunal's permission, petitioner amended its petition to accord with its prehearing claims. Petitioner further indicated that the "furniture, fixtures, cabinets, shelves, and decorative panels" it installs retain the character of tangible personal property after installation, are removable without impairing the value of the realty, and do not "serve the function of the realty. Respondent answered by calling attention to petitioner's response to a question in respondent's first set of interrogatories in which petitioner stated that it was a "carpentry contractor" and "does not sell products, only carpentry services." Petitioner moved to withdraw and amend its answers to respondent's first set of interrogatories. The tribunal denied petitioner's request, but allowed the amended answers to remain part of the record as supplemental responses.

         At the tribunal hearing, Brian Brunt, petitioner's manager, explained that petitioner is a "finish carpentry contractor" that produces and installs custom office furnishings and interior finishes such as reception desks, nurses stations, cabinets, and finished components for break rooms, typically in consultation with a design team. He explained that petitioner manufactures the custom-ordered pieces in its workshop, delivers them to jobsites, and uses its own workforce to install them. Brunt said that some of the furnishings and finishes were attached to customers' buildings with screws, bolts, clips, or fasteners, but could be removed without damaging the realty. Larger, freestanding furnishings, such as reception desks, although transported in sections, reassembled at the job site, and held in place by their size and weight, could also be removed without causing damage. Brunt surmised from his experience working with the general contractors and interior designers that they had not intended for petitioner's products to be permanent affixations to realty, and explained that all of petitioner's furnishings, cabinets, and wall panels were decorative and that nothing required engineer's drawings or structural approval.

         David Rea, petitioner's accountant, testified that, based on his knowledge, petitioner was a manufacturer/retailer, not a manufacturer/contractor. He opined that the items that petitioner sells to customers meets the definition of tangible personal property under the Sales Tax Act, and that the definition of tangible personal property was essentially identical under the Use Tax Act. He further opined that things that could be moved and put into a different room had nothing to do with constructing, altering, or repairing real estate.

         Testifying with regard to her audit findings, respondent's auditor said she determined that petitioner was a contractor and not a retailer from the initial audit conference with Rea, where she was told that petitioner did not maintain an inventory, provide a publication list or price list, or make retail sales. She also based her determination on the nature of petitioner's business activities. The auditor further stated that she based her conclusion that the items fabricated by petitioner did not retain their character of tangible personal property on her understanding that petitioner affixed the items to the realty of its customers. She testified that she derived her understanding of petitioner's business from petitioner's business classification, a discussion with Rea, a review of petitioner's website explaining their business activities, and a discussion with her supervisor. The auditor denied that her conclusion that petitioner was a contractor would change even if certain pieces of furniture and equipment were not attached to realty, and affirmed that freestanding desks and other items would be considered permanently affixed to realty for purposes of the audit.

         Both parties submitted post-hearing briefs, summing up the arguments they had advanced at the hearing. Petitioner argued that it was a retailer because it manufactured tangible personal property for sale, with installation, for the use and consumption of its customers. Petitioner further argued that it was entitled to an industrial processor exemption because it "changes the form, composition, quality, combination or character of tangible personal property for ultimate sale at retail." Finally, petitioner asserted that it was not a contractor because "the manufactured products never become a permanent affixation to the realty after installation." Respondent argued that petitioner was a real property contractor and was not entitled to an industrial processing exemption because it did not ultimately sell its products at retail.

         In a written opinion and judgment, the tribunal found that petitioner affixed its products to the realty of its customers, either actually or constructively, concluding therefrom that petitioner is a contractor liable for use tax on all of its products, regardless of how they were affixed to customers' realty. The tribunal further concluded that petitioner was not entitled to an industrial processing exemption, and affirmed respondent's final assessment of $305, 234.52 owed in use tax, and the interest accruing thereon. After the tribunal denied petitioner's motion for reconsideration, petitioner filed a timely appeal with this Court.

         II. ANALYSIS

         Petitioner first contends that the tribunal erred in concluding that it was a construction contractor engaged in the business of constructing, altering, repairing, or improving the real estate of others. We disagree. Because fraud has not been asserted, our "review of a decision by the Tax Tribunal is limited to determining whether the tribunal erred in applying the law or adopted a wrong principle; its factual findings are conclusive if supported by competent, material, and substantial evidence on the whole record." Michigan Bell Tel Co v Dep't of Treasury, 445 Mich. 470, 476; 518 N.W.2d 808, cert den 513 U.S. 1016; 115 S.Ct. 577; 130 L.Ed.2d 492 (1994). "Substantial evidence must be more than a scintilla of evidence, although it may be substantially less than a preponderance of the evidence required in most civil cases." Dow Chem Co v Dep't of Treasury, 185 Mich.App. 458, 463; 462 N.W.2d 765 (1990). To the extent that resolution of an issue ...

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