Andrie, Inc. v. Dep't of Treasury

• Decision Date: 26 April 2012
• Docket Number: Docket No. 301615.
• Citation: 296 Mich.App. 355,819 N.W.2d 920
• Parties: ANDRIE, INC. v. DEPARTMENT of TREASURY.
• Court: Court of Appeal of Michigan — District of US

296 Mich.App. 355

819 N.W.2d 920

ANDRIE, INC.

v.DEPARTMENT of TREASURY.

Docket No. 301615.

Court of Appeals of Michigan.

Submitted Feb. 8, 2012, at Lansing.

Decided April 26, 2012, 9:00 a.m. Leave to appeal sought.

Bill Schuette, Attorney General, John J. Bursch, Solicitor General, Richard A. Bandstra, Chief Legal Counsel, and Jessica A. McGivney and Bradley K. Morton, Assistant Attorneys General, for the Department of Treasury.

Before: FITZGERALD, P.J., and WILDER and MURRAY, JJ.

WILDER, J.

Defendant appeals as of right an order granting plaintiff a partial refund on use taxes paid under protest. On appeal, defendant contends that it properly assessed use taxes on plaintiff for the years 1999 through 2006. We affirm in part, reverse in part, and remand.

I. BASIC FACTS

A. TUG–BARGE UNITS

Plaintiff is a marine transportation and marine construction business headquartered in Muskegon, Michigan. The marine-transportation activities, which form the basis for the instant litigation, involve shipping asphalt to various customers in the Great Lakes area. Typically, plaintiff loaded asphalt from an oil refinery and shipped it to various ports in Indiana, Wisconsin, Michigan, Illinois, Ohio, New York, and Ontario.

The years at issue in this tax-dispute case are 1999 through 2006. During this time, plaintiff used three barges to transport the asphalt. Because the barges were unmanned and incapable of independent movement, they could only move with outside assistance. In providing that assistance, plaintiff assigned a particular tug boat (tug) to each of its barges. Barge A–410 was paired with the Tug Rebecca Lynn, Barge A–390 was paired with the Tug Barbara Andrie, and Barge A–397 was paired with the Tug Karen Andrie. It is undisputed that each tug has a registeredtonnage of less than 500 tons, and each barge has a registered tonnage of over 500 tons. Captain Richard DiNapoli, an expert in the field of maritime construction, operations, and contracts, testified that the tugs in question are simply “detachable mode[s] of power sources” for the barges.

To prepare for this case, DiNapoli reviewed the deck logs for the tugs and barges in dispute between 1999 and 2006. After reviewing these deck logs, DiNapoli concluded that he had no doubt that each tug-barge pair operated in “dedicated service.” ¹ In other words, each particular tug was “married” to a particular barge, forming a singular “unit.” He explained that dedicated tug-barge units are common for longer shipments between different harbors. He stated that the term “dedicated service” is a term of art in the industry but acknowledged it may not be included in a specific Coast Guard regulation. Non-dedicated tugs, DiNapoli explained, are often “harbor tugs” because they generally move multiple barges within a single harbor. DiNapoli further explained that while Coast Guard regulations require separate deck logs for harbor tugs and nondedicatedbarges, only one deck log is required for dedicated, “single marine transportation units,” such as plaintiff's tug-barge units.

DiNapoli's review of the deck logs indicated that the tugs had participated in “extraneous activities,” but they never violated the “dedicated service profile.” For example, a tug may have worked independently from its barge to refuel or break ice in the harbor's entrance channel while the barge unloaded its contents. Further, according to DiNapoli, the Karen Andrie had participated in an annual tugboat race. We also note that at least at one time during the period in question, one of the tugs worked with a barge to which it was not assigned.² DiNapoli opined that these types of activities did not invalidate the “dedicated service profile” because each barge essentially depended on its tug “for everything,” and the tugs' activities never caused a delay in the barges' movements.

B. TAX DISPUTE

Defendant audited plaintiff for the period between 1999 and the middle of 2006. Defendant determined that plaintiff owed a total of $613,183 for unpaid use-tax liability. This assessment was based on the auditor determining that plaintiff's tugs did not qualify for the fuel and supplies exemption specified in MCL 205.94(1)(j)³.

But because the barges were vessels over 500 tons, defendant determined that they did qualify for the fuel and supplies exemption. Defendant concluded that 93 percent of plaintiff's voyage miles were interstate commerce. Defendant calculated this apportionment by dividing the number of miles traveled between a Michigan port and a port of another state by the total number of miles traveled. The remaining seven percent consisted of either (1) voyages between two Michigan ports (intrastate commerce) or (2) voyages between a Michigan port and a Canadian port (foreign commerce). Defendant determined that fuel and supplies used by the barges for the interstate commerce voyage miles were exempt under MCL 205.94(1)(j), whereas the remaining seven percent were subject to tax. Again, defendant concluded that none of the fuel and supplies used by the tugs was tax exempt because the tugs had a registered tonnage of less than 500 tons.

Defendant also concluded that plaintiff failed to pay use tax on certain transactions in the state of Michigan where it could provide no supporting documentation to show that sales tax had already been paid.

C. COURT OF CLAIMS PROCEEDING

Plaintiff paid the tax assessment under protest and then filed this case with the Court of Claims to obtain a refund. Plaintiff's challenge to the tax assessment raised four distinct issues: (1) whether defendant improperly found that fuel and supplies purchased for the tugs were not entitled to the fuel and supplies exemption; (2) whether defendant's apportionment of the voyage miles was contrary to law; (3) whether defendant improperly attempted to assess use tax on purchases that had been subject to sales tax; and (4) whether the use-tax exemptionapportionment violated the Duty of Tonnage Clause of the United States Constitution.⁴

On November 22, 2010, the trial court issued its opinion and order explaining that plaintiff's tugs would be entitled to the use-tax exemption under MCL 205.94(1)(j) if (1) they constituted “vessels,” (2) the vessels had a registered tonnage of 500 tons or more, (3) the fuel, provisions, supplies, and repairs were used exclusively by these vessels, and (4) these vessels were engaged in interstate commerce.

The trial court held that each of plaintiff's tugs qualified for the exemption because they were part of a tug-barge unit that constituted “a vessel” under MCL 205.94(1)(j). The trial court also noted that (1) the barges alone had registered tonnages exceeding 500 tons, (2) the tug-barge units were engaged in interstate commerce at least some of the time, and (3) the parties did not dispute that the fuel and supplies at issue were used exclusively by the tug-barge units. Thus, the court concluded that plaintiff was entitled to a use-tax exemption under MCL 205.94(1)(j) for fuel and supplies used by the tugs and the barges, not only the barges.

The trial court then concluded that plaintiff was entitled to the exemption only for the supplies used in interstate commerce. But the court also determined that defendant's classification of “intrastate” commerce was actually “interstate” commerce. Thus, because plaintiff was entitled to a use-tax exemption for its so-called “intrastate commerce” activities as well, plaintiff was entitled to a use-tax exemption for everything except its foreign commerce.

The trial court further explained that defendant was not entitled to assess use tax on all fuel and supplies used in foreign commerce. Rather, defendant was only entitled to assess use tax on the fuel and supplies used in foreign commerce while the tug-barge units were on Michigan waters.

The trial court also concluded that plaintiff was entitled to the presumption that the sales tax was paid on the disputed transactions. Because defendant did not rebut that presumption, plaintiff could not be assessed the use tax on the disputed transactions.

The trial court declined to address plaintiff's fourth issue regarding the Tonnage Clause since it was not necessary for the resolution of the case.

II. ANALYSIS

A. USE TAX

Defendant argues that the trial court erred when it determined that each of plaintiff's tug-barge combinations were a single “vessel,” as opposed to separate ones, for purposes of Michigan's use tax. We agree.

Resolution of this issue involves the interpretation of the relevant exemption, which we review de novo. Herman v. Berrien Co., 481 Mich. 352, 358, 750 N.W.2d 570 (2008). An “application of the facts to the law” is also subject to de novo review. Van Buren Charter Twp. v. Garter Belt, Inc., 258 Mich.App. 594, 598, 673 N.W.2d 111 (2003). And we review a trial court's findings of fact at a bench trial for clear error. Chelsea Investment Group LLC v. City of Chelsea, 288 Mich.App. 239, 250, 792 N.W.2d 781 (2010). A finding is clearly erroneous if we are left with a definite and firm conviction that a mistake was made. Id. at 251, 792 N.W.2d 781.

The Use Tax Act, MCL 205.91 et seq., imposes a “tax for the privilege of using, storing, or consuming tangible personal property in this state....” MCL 205.93(1). The legal obligation of the use tax is imposed on the consumer or the purchaser. Combustion Engineering, Inc. v. Dep't of Treasury, 216 Mich.App. 465, 468, 549 N.W.2d 364 (1996). But MCL 205.94 provides for exemptions to the use tax. Relevant for the present case, MCL 205.94(1)(j) provides two types of exemptions: (1) “[a] vessel designed for commercial use of registered tonnage of 500 tons or more, if produced upon special order of the purchaser,” and (2) “bunker and galley fuel, provisions, supplies, maintenance, and repairs for the exclusive use of a vessel of 500 tons or more engaged in interstate commerce.” Because this case involves the taxing of the tug boats' fuel and supplies, only...