Birchwood Manor, Inc. v. COMM'R OF REVENUE, Docket No. 236646

CourtCourt of Appeal of Michigan (US)
Writing for the CourtSAAD, J.
Citation261 Mich. App. 248,680 N.W.2d 504
PartiesBIRCHWOOD MANOR, INC., Petitioner-Appellant, v. COMMISSIONER OF REVENUE, Respondent-Appellee.
Docket NumberDocket No. 236646,Docket No. 236699.,Docket No. 236698
Decision Date08 June 2004

Cooper & Walinski (by W. Miles McKee, Janet E. Hales, and Libbey W. Call Best), Toledo, Ohio, for the petitioners.

Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and Glenn R. White, Assistant Attorney General, for the respondent.



Pursuant to MCR 7.215(J), this Court convened a special panel to resolve the conflict between this Court's vacated opinion in Birchwood Manor, Inc v. Comm'r of Revenue, 258 Mich.App 801, 673 N.W.2d 438 (2003), and this Court's prior opinion in CompuPharm-LTC v. Dep't of Treasury, 225 Mich.App. 274, 570 N.W.2d 476 (1997). We conclude that CompuPharm was wrongly decided and, therefore, we reverse the Tax Tribunal's grant of summary disposition to the Commissioner of Revenue.

I. Nature of the Case and Holding

Three nursing homes, Birchwood Manor, Inc., Health Care and Retirement Corporation, and Knollview Manor, Inc. (collectively, "petitioners"), challenged the Commissioner of Revenue's use tax assessment on petitioners' purchase of over-the-counter or "nonlegend"1 drugs for use by nursing home residents. Specifically, petitioners argued that the drugs are exempt from use tax under MCL 205.94d because, as explained in Birchwood, supra, the drugs "were dispensed by a licensed pharmacist pursuant to a prescription written by a physician for a designated resident." Birchwood, supra at 802, 673 N.W.2d 438. After the Commissioner of Revenue rejected petitioners' argument, the Tax Tribunal upheld the use tax assessment on the basis of this Court's decision in CompuPharm and granted summary disposition to the Commissioner of Revenue.

On appeal, this Court affirmed the Tax Tribunal's decision because it was bound by CompuPharm. MCR 7.215(J)(1). However, the Birchwood Court called for this special panel and explained that, "were we not bound by CompuPharm, we would hold that under MCL 205.94d, a drug, whether legend or nonlegend, dispensed by a pharmacist pursuant to a written prescription prescribed by a licensed physician is a prescription drug for purposes of exemption from use tax." Birchwood, supra at 811, 673 N.W.2d 438. We agree with much of the analysis in Birchwood and the panel's conclusion that CompuPharm was wrongly decided. Accordingly, for the reasons set forth in this opinion, we hold that the drugs purchased by petitioners are exempt from use tax under MCL 205.94d.

Before we examine the numerous bases for our decision, we offer the following summary of our holding: The CompuPharm panel misinterpreted Syntex Laboratories, Inc. v. Dep't of Treasury, 188 Mich.App. 383, 470 N.W.2d 665 (1991), in which this Court defined "prescription drug" as stated in the Michigan Constitution. The Syntex panel correctly applied principles of constitutional construction to give "prescription drug" the meaning commonly understood by the general population. Here, however, and as the Court should have done in CompuPharm, this Court must use principles of statutory construction to define "prescription drug" under the Use Tax Act and apply the plain language of the statute.2 A plain language analysis compels the conclusion that the drugs at issue here are "prescription drugs" within the meaning of the Use Tax Act because they are drugs, and they were dispensed by licensed pharmacists, pursuant to prescriptions issued by licensed physicians, for designated persons. MCL 205.94d(2).

Though the statutory provision appears to broaden the tax exemption contained in the Constitution, the Michigan Legislature has the right to further define and expand the definition of "prescription drug" in order to implement the constitutional mandate. Furthermore, if the Legislature wished to exempt only those drugs that can be purchased only with a doctor's prescription, it could have easily said so in the statute. Our holding has additional support in the Public Health Code, which explicitly defines prescription drugs to include the drugs at issue here. Finally, and because the parties agree that pharmacists dispensed the drugs pursuant to written prescriptions or orders from licensed physicians, each of the drugs was issued pursuant to a "written prescription" and, contrary to the panel's inclination in the prior Birchwood opinion, it is unnecessary to remand this case for further findings of fact on this issue. Accordingly, we reverse the grant of summary disposition to the Commissioner of Revenue.

II. Analysis
A. Standards of Review

As this Court correctly stated in Birchwood, supra at 802, 673 N.W.2d 438:

This Court's review of Tax Tribunal decisions is very limited. Michigan Milk Producers Ass'n v. Dep't of Treasury, 242 Mich.App. 486, 490, 618 N.W.2d 917 (2000). On appeal, absent a claim of fraud, this Court can determine only whether the tribunal committed an error of law or adopted a wrong legal principle. Id.; Michigan Bell Telephone Co. v. Dep't of Treasury, 229 Mich.App. 200, 206, 581 N.W.2d 770 (1998). Further, 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. Michigan Milk Producers, supra at 490-491, 618 N.W.2d 917; Canterbury Health Care, Inc. v. Dep't of Treasury, 220 Mich.App. 23, 28, 558 N.W.2d 444 (1996). "Statutory interpretation is a question of law that is reviewed de novo." Inter Co-op. Council v. Dep't of Treasury, 257 Mich.App. 219, 222, 668 N.W.2d 181 (2003)

. "Although tax laws are construed against the government, tax-exemption statutes are strictly construed in favor of the taxing unit." Id.

B. Syntex and CompuPharm

"The precise question petitioners request be decided is whether nonlegend drugs dispensed to nursing home residents by licensed pharmacists pursuant to physicians' written prescriptions are exempt from use tax." Birchwood, supra at 803, 673 N.W.2d 438. In CompuPharm, this Court ruled that such drugs are not exempt from sales tax because they are not "prescription drugs" under Michigan law. We hold that, in so ruling, the CompuPharm panel misinterpreted and misapplied Michigan law.

Article 9, § 8 of the Michigan Constitution provides that "[n]o sales tax or use tax shall be charged or collected from and after January 1, 1975 on the sale or use of prescription drugs for human use...." As noted in Birchwood, "the Constitution does not define `prescription drugs for human use.'" Birchwood, supra at 803, 673 N.W.2d 438. The Use Tax Act, MCL 205.94d(2), also exempts "prescription drugs for human use" and offers the following definition:

"Prescription drug for human use" means insulin or a drug dispensed by a licensed pharmacist pursuant to a written prescription prescribed by a licensed physician or other health professional as defined in section 21005 of the public health code, 1978 PA 368, MCL 333.21005, for the use of a designated person, or oxygen dispensed pursuant to a written prescription or order issued by a licensed physician or other health professional as defined in section 21005 of the public health code, 1978 PA 368, MCL 333.21005.

In Syntex, this Court considered whether the Constitution's use tax exemption applies to legend drug samples distributed by drug manufacturers for marketing purposes. The Court explicitly ruled that the drug samples did not satisfy the statutory definition of a "prescription drug" under MCL 205.94d(2), "because they were not dispensed by a pharmacist to fill a prescription prescribed by a physician." Id. at 389, 470 N.W.2d 665.

However, the Syntex Court ruled that the imposition of use tax on the drug samples violates the Constitution, Article 9, § 8. In determining whether the drug samples constitute a "prescription drug" within the constitutional exemption, the Syntex Court correctly applied the rules of constitutional interpretation by employing the "common understanding of the words used." Id. at 385, 470 N.W.2d 665. As our Supreme Court recently explained in Lapeer Co. Clerk v. Lapeer Circuit Court, 469 Mich. 146, 155, 665 N.W.2d 452 (2003):

When interpreting the constitution, our task is to give effect to the common understanding of the text:

"A constitution is made for the people and by the people. The interpretation that should be given it is that which reasonable minds, the great mass of the people themselves, would give it. `For as the Constitution does not derive its force from the convention which framed, but from the people who ratified it, the intent to be arrived at is that of the people, and it is not to be supposed that they have looked for any dark or abstruse meaning in the words employed, but rather that they have accepted them in the sense most obvious to the common understanding, and ratified the instrument in the belief that that was the sense designed to be conveyed.' (Cooley's Const Lim 81)." [Quoting Traverse City School Dist. v. Attorney General, 384 Mich. 390, 405, 185 N.W.2d 9 (1971) (emphasis omitted).]

Thus, the Syntex Court relied on the dictionary definition of prescription drug:

A "prescription drug" is defined as "a drug that can be bought only as prescribed by a physician—compare over-the-counter" drug. Webster's Third New International Dictionary, Unabridged Edition (1961), p 1792. Also see The American Heritage Dictionary, Second College Edition, p 979. In turn, an "over-the-counter" drug is defined as "capable of being sold legally without the prescription of a physician, dentist, or veterinarian." Webster's, p 1611. These definitions focus on the nature of the drug, instead of on whether the drug has actually been dispensed pursuant to a prescription. He

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