Consumers Power Company v. TREASURY DEPT.

• Decision Date: 27 July 1999
• Docket Number: Docket No. 203894.
• Citation: 235 Mich. App. 380,597 N.W.2d 274
• Parties: CONSUMERS POWER COMPANY, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

597 N.W.2d 274

235 Mich. App. 380

CONSUMERS POWER COMPANY, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.

Docket No. 203894.

Court of Appeals of Michigan.

Submitted January 5, 1999, at Lansing.

Decided April 30, 1999, at 9:00 a.m.

Released for Publication July 27, 1999.

Virginia P. Allen, Theodore J. Vogel, and Eric V. Luoma, Jackson, for the plaintiff.

Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Jack L. Van Coevering and Glenn R. White, Assistant Attorneys General, for the defendant.

Before: SMOLENSKI, P.J., and SAAD and GAGE, JJ.

AMENDED

GAGE, J.

Defendant appeals as of right a Court of Claims judgment for plaintiff that refunded $35,685 in certain taxes and $19,900.12 in interest defendant had assessed plaintiff. We reverse.

Plaintiff is a Michigan corporation. The instant dispute involves the proper amount owed by plaintiff pursuant to the Single Business Tax Act (SBTA), M.C.L. § 208.1 et seq.; M.S.A. § 7.558(1) et seq. The Single Business Tax (SBT) constitutes a percentage of "the adjusted tax base of every person with business activity in [Michigan] that is allocated or apportioned to this state." M.C.L. § 208.31(2); M.S.A. § 7.558(31)(2). This Court has recognized the nature of the SBT as a value-added tax that measures "the increase in the value of goods and services brought about by whatever a business does to them between the time of purchase and the time of sale." Cowen v. Dep't of Treasury, 204 Mich.App. 428, 432, 516 N.W.2d 511 (1994), quoting Haughey, The economic logic of the single business tax, 22 Wayne L.R. 1017, 1018 (1976). The SBT's intended effect is to impose a tax on the privilege of conducting business activity within Michigan. Id. The SBT does not constitute an income tax; it taxes what a business has added to the economy, as distinguished from the income tax's taxation of what the business has derived from the economy. Town & Country Dodge, Inc. v. Dep't of Treasury, 118 Mich.App. 778, 786, 325 N.W.2d 577 (1982), aff'd. 420 Mich. 226, 362 N.W.2d 618 (1984).

The SBTA defines one's "tax base," M.C.L. § 208.9(1); M.S.A. § 7.558(9)(1), as "business income," which is itself defined as "federal taxable income."¹ M.C.L. § 208.3(3); M.S.A. § 7.558(3)(3). To calculate one's adjusted tax base for purposes of the SBT, one must incorporate the specific additions and deductions described in SBTA subsections 9(2) through 9(9). Therefore, the SBT tax base consists of one's federal taxable income, taking into consideration subsection 9's various adjustments. The specific adjustment at issue in this case is found in subsection 9(3), which requires the addition to federal taxable income of "all taxes on or measured by net income and the tax imposed by this act to the extent the taxes were deducted in arriving at federal taxable income."

Pursuant to the Internal Revenue Code (IRC), 26 U.S.C. § 1 et seq., in the 1987, 1988, and 1989 tax years, plaintiff, in calculating its federal taxable income, deducted the amounts of federal environmental tax it had paid.² 26 U.S.C. § 164(a)(5). However, plaintiff did not in any of these years incorporate the amounts it had paid in federal environmental taxes into its SBT adjusted tax base. In 1991, defendant audited plaintiff's 1985-89 tax returns and discovered plaintiff's failure to incorporate the federal environmental taxes. On January 2, 1992, defendant issued plaintiff an intent to assess the $35,685³ deficiency caused by plaintiff's failure to add its federal environmental taxes into its SBT adjusted tax base. The parties on September 9, 1993, met before a treasury department referee, who recommended cancellation of defendant's intent to assess. On April 7, 1995, the Commissioner of Revenue rejected the referee's recommendation, and defendant, on July 7, 1995, issued plaintiff a final assessment.

Plaintiff paid the assessment under protest, then filed the instant suit in the Court of Claims, seeking a refund. The court accepted plaintiff's argument that the federal environmental tax was not a tax on or measured by income, but more closely resembled an excise tax:

The purpose of the tax, that is the Federal Environmental Tax when one reviews the legislative history was not to raise general revenues but to fund the Superfund to aid in environmental cleanup.

The conference agreement also required a corporate taxpayee to pay the Environmental Tax whether or not the taxpayer had Alternative Minim [sic] Taxable Income.

Further, unlike Federal income tax but like excised [sic] taxes, the Environmental Tax was deductible in arriving at Federal taxable income. The Environmental Tax also does not allow any credits to be taken against it.

Finally, the effective date intermination [sic] date of the new Environmental Tax was tied to the dates of the excised [sic] taxes opposed [sic] on Troli [sic] and chemical feed stocks.

I believe that—or I find that the legislative history of this case and the analysis by the hearing officer who also reviewed the entire matter supports [plaintiff's] position that the new Environmental Tax is not a tax based on or measured by net income. The revenue raised by the tax is here marked for environmental cleanup, a specific purpose.

The Environmental Tax would seem to be an excised [sic] tax or more akin to an excised [sic] tax rather than an income tax. As a result of that the Court finds that the Federal Environmental Tax is not a tax on or measured by net income for the reasons set forth in [plaintiff's] brief.

Therefore, the court ordered that defendant refund the tax and interest paid by plaintiff. Defendant now argues that the court erred in determining that the federal environmental tax appeared to be an excise tax.

The issue involved in this dispute may be simply stated as whether the federal environmental tax constitutes a tax "on or measured by net income" for purposes of SBTA subsection 9(3). This issue clearly depends on our interpretation of subsection 9(3)'s language. Statutory interpretation issues are questions of law and are therefore reviewed de novo. Oakland Co. Bd. of Co. Rd. Comm'rs v. Michigan Property & Casualty Guaranty Ass'n, 456 Mich. 590, 610, 575 N.W.2d 751 (1998). Our review of this matter leads us to conclude that the federal environmental tax is indeed a tax on or measured by net income.

The primary rule of statutory construction is to determine and effectuate the Legislature's intent through reasonable construction in light of the statute's purpose. Frankenmuth Mut. Ins. Co. v. Marlette Homes, Inc., 456 Mich. 511, 515, 573 N.W.2d 611 (1998). If reasonable minds can differ regarding the meaning of statutory language, then judicial construction is appropriate. Adrian School Dist. v. Michigan Public School Employees Retirement System, 458 Mich. 326, 332, 582 N.W.2d 767 (1998). Where, as here, the statutory language is unclear, a court must look to the object of the statute in light of the harm it is designed to remedy, and strive to apply a reasonable construction that will best accomplish the Legislature's purpose. Marquis v. Hartford Accident & Indemnity (After Remand), 444 Mich. 638, 644, 513 N.W.2d 799 (1994). Language not defined within a statute should be given its plain and ordinary meaning. Western Michigan Univ. Bd. of Control v. Michigan, 455 Mich. 531, 539, 565 N.W.2d 828 (1997). In construing statutory language, a court is guided by various rules of statutory construction. Marquis, supra.

The SBTA does not define "net income." Although subsection 2(2), M.C.L. § 208.2(2); M.S.A. § 7.558(2)(2), explains that terms not defined within the SBTA are to be accorded "the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes," the IRC also lacks a standard definition of net income. For further guidance, we may consult Black's Law Dictionary,⁴ which provides the following definition of "net income":

Income subject to taxation after allowable deductions and exemptions have been subtracted from gross income. The excess of all revenues and gains for a period over all expenses and losses of the period. Net income for income tax purposes is what remains out of gross income after subtracting ordinary and necessary expenses incurred in efforts to obtain or to keep it. [Black's Law Dictionary (6th ed).]

Within both Michigan and federal tax law, no set formula applies when calculating net income in various contexts.⁵ Net income is defined differently for different purposes,⁶ with its value dependent on whatever deductions the legislature permits in a particular setting.

To properly ascertain whether the federal environmental tax constitutes a tax on or measured by net income, we must examine the operation and effect of the environmental tax. Trainer v. United States, 800 F.2d 1086, 1089 (Fed.Cir., 1986). Before considering the nature of the environmental tax, however, we note the following observations regarding the SBT that affect our determination whether the environmental tax falls within SBTA subsection 9(3)'s definition of a tax "on or measured by" net income. First, every word of a statute should be given meaning and no word should be treated as surplusage or rendered nugatory if at all possible. Altman v. Meridian Twp., 439 Mich. 623, 635, 487 N.W.2d 155 (1992). The Legislature, in enacting SBTA subsection 9(3), required that all taxes on and all taxes measured by net income would be included in the SBT base. Second, we presume that the Legislature was aware of all existing statutes when enacting new laws. Walen v. Dep't of Corrections, 443 Mich. 240, 248, 505 N.W.2d 519 (1993). We thus presume that the Legislature knew that statutory sections defined "net income" differently. Given the Legislature's awareness of these different definitions and the Legislature's failure to narrowly define "net income" within subsection 9(3), we may at least assume that the Legislature...