Elias Bros. Restaurants, Inc. v. Treasury Dept.

Decision Date02 July 1996
Docket NumberNo. 17,Docket No. 101226,17
Citation549 N.W.2d 837,452 Mich. 144
PartiesELIAS BROTHERS RESTAURANTS, INC., Plaintiff-Appellee, v. TREASURY DEPARTMENT, Defendant-Appellant. Calendar
CourtMichigan Supreme Court

WEAVER, Justice.

Petitioner-Appellee, Elias Brothers Restaurants, Inc., owns the Big Boy restaurant chain. Twenty-five percent of the Big Boy restaurants are company owned and operated. The remaining seventy-five percent are franchised. Food for both company-owned and franchised restaurants is produced at a facility called the Commissary, which Elias Brothers owns and operates.

We are asked to determine whether the cost of equipment and supplies used at Elias Brothers' Commissary for production of food and beverages for its company-owned restaurants is exempt from use tax. 1 We find that Elias Brothers is exempt from use tax for these costs. 2

The Department of Treasury allowed Elias Brothers' industrial processing exemption claim only with regard to the equipment and supply costs attributable to its franchised restaurants. 3 The department denied an exemption for the proportionate cost of equipment and supplies attributable to company-owned stores. It claimed such cost was incurred in the "preparation of food and beverages by a retailer for retail sale," 4 which is specifically excluded from the industrial processing exemption.

In response to the department's assessment, Elias Brothers filed a use tax assessment appeal. 5 The Tax Tribunal canceled the tax assessments by the department and found that Elias Brothers could claim an industrial processing exemption with respect to the cost of the food processing equipment and related supplies attributable to production of goods for company-owned restaurants.

The department appealed the Tax Tribunal's opinion in the Court of Appeals. In an unpublished opinion per curiam, the Court of Appeals affirmed. 6

We hold that Elias Brothers is entitled to an industrial processing exemption for the cost of equipment and supplies used by the Commissary and attributable to company-owned restaurants. Accordingly, we affirm the decision of the Court of Appeals. 7


The Commissary is a 250,000 square foot food processing and distribution facility located in Warren, Michigan. The Commissary produces virtually all the food and beverages prepared and ultimately sold to consumers at both company-owned and retail restaurants. 8 The food-processing equipment used by the Commissary is of a type and size not found in a typical restaurant, but in a food-processing business that sells to retail establishments.

The department concedes that Elias Brothers is an industrial processor with respect to the Commissary's production for franchised restaurants.

Elias Brothers treats the Commissary as a distinct operation and profit center, separate from its company-owned restaurants. It is physically separate and distinct from any individual restaurant. Elias Brothers maintains separate billing records, income statements, and asset listings for the Commissary.

The Commissary's internal procedures and operations are the same both for company-owned and franchised restaurants. Its ordering, processing, handling, delivery, invoicing, billing, and sales procedures are identical for company-owned and franchised restaurants. The two types of restaurants pay the same price for the food and beverages processed by the Commissary.

The department asserts that Elias Brothers cannot claim an industrial processing exemption when it produces food and beverages at the Commissary and then transfers them to customers in company-owned restaurants. According to the department, when Elias Brothers "sells" or transfers to itself, it is merely a "retailer" preparing its own food for retail sale and, therefore, is specifically excluded from the industrial processing exemption.


Whether the cost of equipment and supplies used by the Commissary attributable to company-owned restaurants is exempt under the "industrial processing" exemption or excluded from the exemption by the restaurant food preparation exclusion, as the "preparation of food and beverages by a retailer for retail sale," both contained in § 4(g)(i) of the Use Tax Act, is a question of statutory interpretation.

As currently written, § 4(g)(i) provides, in relevant part:

The tax levied does not apply to the following:

* * * * * *

(g) Property sold to the following:

(i) An industrial processor for use or consumption in industrial processing ... Industrial processing does not include ... the preparation of food and beverages by a retailer for retail sale. As used in this subdivision, "industrial processor" means a person who transforms, alters, or modifies tangible personal property by changing the form, composition, or character of the property for ultimate sale at retail or sale to another industrial processor to be further processed for ultimate sale at retail. 9 Because tax exemptions are disfavored, the burden of proving entitlement to an exemption rests on Elias Brothers, the party asserting the right to the exemption. Tercheck v. Treasury Dep't, 171 Mich.App. 508, 510-511, 431 N.W.2d 208 (1988). While we recognize that tax exemptions are strictly construed against the taxpayer because exemptions represent the antithesis of tax equality, we interpret statutory language according to common and approved usage, 10 unless such construction is inconsistent with the manifest intent of the Legislature. 11

Understanding the purpose of, and the distinction between, the industrial processing exemption and the restaurant food preparation exclusion is crucial to the resolution of the controversy before this Court. Because the act fails to define key terms within the statute, and because the application of the statute to the facts presented is ambiguous, it is necessary to ascertain the legislative intent behind the industrial processing exemption. 12

The act does not define the terms "retailer" or "retail sale." Neither does it explain the distinction between industrial processing and the mere act of food and beverage "preparation," which falls under the restaurant food preparation exclusion. 13

Having no statutory definition of "retailer," the department has broadly defined the term to include "all persons who sell to the last or final buyer, user or consumer." 14 Such administrative interpretations are accorded deference. However, the department's definition of retailer, as applied in this case, would unfairly broaden the scope of the restaurant food preparation exclusion 15 and, ultimately, contravene legislative intent, as shown below.

The industrial processing exemption is, in part, the product of a targeted legislative effort to avoid double taxation of the end product offered for retail sale or, in other terms, to avoid "pyramiding the use and sales tax." 16 Pyramiding occurs when both use and sales taxes are imposed on the production and sale of retail goods. A 1987 Senate Fiscal Agency bill analysis described the purpose of the industrial processing exemption as follows:

[I]f the end product is taxed, the components used or consumed in its production are not taxed so that the product is not subject to double taxation. 17

If this Court were to apply the department's definition literally, Elias Brothers would be subject both to sales and use tax on each food item or beverage sold at the company-owned restaurants. However, production costs and sales to franchisees would not be subject to such tax "pyramiding" despite the identical prices charged and procedures employed by the Commissary, such as in production, invoicing, and delivery. Because there was no showing that Elias Brothers would gain an unfair competitive advantage or a windfall if exempted33, the department's assessment appears to contravene the clear and fundamental legislative intent to avoid a pyramiding of sales and use tax.


Because the Use Tax Act fails to define terms central to the inquiry, it is instructive to look to the Sales Tax Act. 18 The provisions in the Sales Tax Act are relevant to use tax determinations because the sales and use tax provisions are complementary and supplementary. 19 Both statutes contain a "recognition in each of the provisions and operation of the other." Don McCullagh, Inc. v. Revenue Dep't, 354 Mich. 413, 425, 93 N.W.2d 252 (1958). 20

The Sales Tax Act has an industrial processing exemption identical to the industrial processing exemption for the use tax. 21 The Sales Tax Act defines a "sale at retail" as:

[A] transaction by which the ownership of tangible personal property is transferred for consideration, if the transfer is made in the ordinary course of the transferor's business and is made to the transferee for consumption or use, or for any purpose other than for resale .... 22

Because the company-owned restaurants purchase the Commissary's goods for the sole purpose of resale to customers, the Commissary's transfer to company-owned stores is not a sale at retail under this provision.

Under the Sales Tax Act, the right to an exemption is not decided by "what type of business the taxpayer is engaged in, but rather upon what use his patron or customer makes of the product which the taxpayer sells." Int'l Research & Development Corp v. Revenue Dep't, 25 Mich.App. 8, 11, 181 N.W.2d 53 (1970). In this case, both company-owned and franchised restaurants purchase almost all wholesale items from the Commissary at the same price and for subsequent retail sale to patrons. Both company-owned and franchised restaurant patrons constitute "the last or final buyer, user, or consumer." 23 Consequently, Elias Brothers is not a retailer and does not make a sale at...

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