Fluor Enterprises, Inc. v. DEPT. OF TREASURY

• Decision Date: 14 March 2005
• Docket Number: Docket No. 251005.
• Citation: 265 Mich. App. 711,697 N.W.2d 539
• Parties: FLUOR ENTERPRISES, INC., Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

697 N.W.2d 539

265 Mich. App. 711

FLUOR ENTERPRISES, INC., Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.

Docket No. 251005.

Court of Appeals of Michigan.

Submitted April 6, 2005, at Lansing.

Decided April 14, 2005, at 9:10 a.m.

Honigman Miller Schwartz and Cohn, L.L.P. (by Patrick R. Van Tiflin and Daniel L. Stanley), Lansing, for the plaintiff.

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

Before: MARK J. CAVANAGH, P.J., and JANSEN and GAGE, JJ.

PER CURIAM.

Plaintiff, a California corporation that engages in engineering, construction, and technical services, performed architectural and engineering services at its out-of-state offices for projects located in Michigan during the tax years 1989 to 1994.¹ The Court of Claims held that receipts from the services performed outside Michigan for projects constructed in Michigan were not "in this state" for the purpose of calculating the sales factor to be used in apportioning plaintiff's tax base under the Single Business Tax Act (SBTA), M.C.L. § 208.1 et seq.² Defendant appeals as of right the September 2, 2003, judgment of the Court of Claims, arguing that the court incorrectly interpreted M.C.L. § 208.53(c). We agree with defendant's interpretation of the provision, but conclude that the provision violates the Commerce Clause, U.S. Const., art. I, § 8, cl. 3.

I. Factual background and procedure

The facts in this case are undisputed. The receipts at issue were received by plaintiff for engineering and architectural services related to real estate improvement projects constructed in Michigan. The services were performed by plaintiff's employees at out-of-state facilities. Plaintiff timely filed single business tax (SBT) returns for the years at issue. However, plaintiff did not report the receipts at issue as Michigan receipts. Following an audit, defendant issued three bills for taxes due (intents to assess) totaling $182,312.

Plaintiff requested an informal conference with defendant's Hearings Division. Following an informal conference, the department referee issued a recommendation to the Commissioner of Revenue. The hearing referee agreed with plaintiff's interpretation of § 53(c). However, the Commissioner of Revenue disagreed with the referee's analysis and directed that the taxes be assessed as originally determined. Following the commissioner's order, defendant issued three bills for taxes due (final assessments) for total tax and interest of $343,340.96, which plaintiff then paid under protest. Plaintiff subsequently paid an additional $3,077.35 in interest.

Plaintiff filed this action in the Court of Claims to recover $346,618.31 paid under protest plus additional statutory interest, costs, and attorney fees. The parties both filed motions for summary disposition. Plaintiff moved for summary disposition pursuant to MCR 2.116(A) (judgment on stipulated facts). Defendant moved for summary disposition pursuant to MCR 2.116(C)(8) and (10). The Court of Claims concluded that the plain language of the statute supported plaintiff's position and entered judgment in favor of plaintiff, ordering defendant to pay $346,418.31 and interest.

II. Overview of the SBTA

The SBT is a form of value added tax. Trinova Corp. v. Dep't of Treasury, 433 Mich. 141, 149, 445 N.W.2d 428 (1989), aff'd and rem Trinova Corp. v. Michigan Dep't of Treasury, 498 U.S. 358, 111 S.Ct. 818, 112 L.Ed.2d 884 (1991).

"Value added is defined as 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." [Haughey, The economic logic of the single business tax, 22 Wayne L R 1018 n 6 (1976).] In short, a value added tax is a tax upon business activity. The [SBTA] employs a value added measure of business activity.... It is not a tax on income. [Trinova, 433 Mich. at 149, 445 N.W.2d 428.]

The Michigan Supreme Court's decision in Mobil Oil Corp. v. Dep't of Treasury, 422 Mich. 473, 373 N.W.2d 730 (1985), includes an extensive discussion of value-added taxes and a comparison with income taxes. The Court explained:

Both income taxes and value-added taxes are taxes on the economic process; the difference between them lies in what point of the process they attach to or, to put it another way, in what elements of the economic process they tax. The income tax taxes what has been received from the economy, when it becomes "income." The VAT [value added tax] taxes economic activity itself and can be described in two ways: as a tax on the economic actor's use of the scarce resources of society, or as a tax on the value the economic actor adds to the economy. In the end, the income tax and the VAT tax the same things, but at different stages of the economic process, and thus generate the same amount of revenue and affect the economy identically.

The economic process consists of the use of various inputs in order to produce final goods. These inputs include: raw materials or land, intermediate goods, labor, capital, and profits. The value added to the economy by the production of final goods is the sum total of all the inputs into their production. Haughey, The economic logic of the single business tax, 22 Wayne L R 1017, 1018-1020 (1976). The value added by the production of a final good is the sum of the value of the raw materials, intermediate goods, labor, capital, and the profit which were combined in order to produce that final good. The value-added tax is imposed on the value added by the production of the final good or, to say the same thing in another way, upon the use of all these inputs in adding value to the economy.

The value of the inputs used is measured by the cost to the producer of obtaining the use of those inputs. The value of the worker's labor is the wages the laborer is paid to produce the good. The value of the raw materials, intermediate goods, and capital is what the producer must pay in order to obtain the use of these things. And the profit is what keeps the producer-entrepreneur in business, which is measured by the difference between the cost of production and the receipts from sales.

It is apparent that the income tax and the VAT are in reality opposite sides of the same coin. The value of the labor used in production, and the cost to the producer of obtaining the labor, is the wages paid to the laborer, and the income the worker receives for providing labor to the economy. The value of the capital and intermediate goods used is what the producer must pay to obtain them, and that is equivalent to the receipts of their suppliers for providing the labor, entrepreneurial effort, and capital with which to produce them. The profit which keeps the producer in the business of producing is the income received for doing so.

Both the income tax and the VAT tax the value of the inputs used in the economic process as measured by the value, or price, ascribed to that input by the economy. The basic difference is that the VAT taxes the price paid for the input and the income tax taxes the price received for the input. The VAT taxes the use of the resources of society; the income tax taxes the return received for supplying those resources to the economy. [Mobil Oil, 422 Mich. at 492-495, 373 N.W.2d 730.]

The SBTA "`measures the increase in value of goods and services brought about by whatever a business does to them between the time of purchase and time of sale.' The tax is on what a business has added to the Michigan economy, not on what the business has derived from this state's economy." Columbia Assoc., LP v. Dep't of Treasury, 250 Mich.App. 656, 666-667, 649 N.W.2d 760 (2002), quoting Guardian Photo, Inc. v. Dep't of Treasury, 243 Mich.App. 270, 277, 621 N.W.2d 233 (2000).

The first step in computing the tax is the calculation of the taxpayer's tax base. See Trinova, 433 Mich. at 150, 445 N.W.2d 428, and Mobil Oil, 422 Mich. at 495-497, 373 N.W.2d 730, which discuss the methods of calculating the tax base. Plaintiff's tax base is not at issue here.

The dispute in the present case concerns the second step of computing the tax, that is allocation or apportionment. "Once the taxpayer's tax base is determined, it must then be allocated to the state where the business activity of the taxpayer can be fairly attributed.' As a general principle, a State may not tax value earned outside its borders.'" Trinova, 433 Mich. at 151,445 N.W.2d 428, quoting ASARCO, Inc. v. Idaho State Tax Comm., 458 U.S. 307, 315, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982). Where a "taxpayer's business activity was only partially attributable to Michigan, only a portion of that activity may constitutionally be taxed. Consequently, the act provides a formula for apportioning a taxpayer's tax base between two or more taxing states." Trinova, 433 Mich. at 151,445 N.W.2d 428. Apportionment is permissible because precise geographic measurement of value added is not feasible. Trinova, 498 U.S. at 374-377,111 S.Ct. 818.

The SBTA apportionment formula is derived from a calculation involving three ratios, which are referred to as the property factor, the payroll factor, and the sales factor. M.C.L. §§ 208.45, 208.45a.³ The formula determines an apportionment factor (a percentage under the current version), which is multiplied by the total tax base; this result, statutorily subject to other adjustments not pertinent in this case, is the taxpayer's "adjusted tax base." Trinova, 433 Mich. at 152-153, 445 N.W.2d 428. The adjusted tax base is used to calculate the SBT liability pursuant to M.C.L. § 208.31. Trinova, 433 Mich. at 153, 445 N.W.2d 428.

The sales factor is the subject of the present dispute. The term "sales" is defined in M.C.L. § 208.7 and includes "the performance of services." M.C.L. § 208.7(1)(a)(ii). The sales factor is defined in M.C.L. § 208.51 as a fraction with the numerator being the "the total sales...