Little Caesar Enterprises v. Department of Treasury

• Decision Date: 05 December 1997
• Docket Number: Docket No. 194029
• Citation: 226 Mich.App. 624,575 N.W.2d 562
• Parties: LITTLE CAESAR ENTERPRISES, INC, Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 562

575 N.W.2d 562

226 Mich.App. 624

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

Docket No. 194029.

Court of Appeals of Michigan.

Submitted Sept. 9, 1997, at Lansing.

Decided Dec. 5, 1997, at 9:05 a.m.

Released for Publication March 10, 1998.

Miller, Canfield, Paddock, and Stone, P.L.C. by Samuel J. McKimm, III, and Joanne B. Faycurry, Detroit, for Plaintiff-Appellant.

Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Terry P. Gomoll and Jack Coevering, Assistant Attorneys General, for Defendant-Appellee.

Before SAWYER, P.J., and HOOD and HOEKSTRA, JJ.

HOEKSTRA, Judge.

Plaintiff appeals as of right from an order granting defendant summary disposition pursuant to MCR 2.116(C)(10). The lower court upheld defendant's single business tax assessments against plaintiff for deficiencies during the tax years 1985-89. We reverse.

Plaintiff is in the business of entering into franchise agreements that permit others to operate retail food operations under its name nationally and internationally. Plaintiff receives various payments from its franchisees pursuant to these agreements, two of which are relevant here. The first is a one-time payment that plaintiff usually receives at the time a franchise agreement is signed, although plaintiff notes that the payment could be paid in installments. Plaintiff applies these proceeds to site approval, lease approval, construction approval, franchisee training, and assistance in opening the restaurant. The fee is nonrefundable even in the event that the franchise does not come to fruition.

The second at-issue payment plaintiff receives is a monthly payment equal to five percent of a franchise's gross receipts. Plaintiff labels this payment a "royalty" in the offering circular it provides to potential investors. A franchisee pays royalties "in consideration of the continuing right to use the proprietary marks, trade secrets, processes and know-how that accompany the Little Caesar franchise." During months that the amount of a franchise's gross receipts would result in a percentage less than a specified minimum amount, the franchisee is obligated by its agreement with plaintiff to make the specified minimum payment.

Plaintiff timely filed its 1985-89 tax returns, deducting the whole amount of royalties paid to it by franchisees from its tax base in accordance with plaintiff's interpretation of the Single Business Tax Act (SBTA), M.C.L. § 208.1 et seq.; M.S.A. § 7.558(1) et seq. Defendant, which is charged with administering and enforcing the SBTA, M.C.L. § 208.80; M.S.A. § 7.558(80), subsequently conducted an audit of plaintiff and billed plaintiff for tax deficiencies during those years. Although the parties agreed that the monthly payments were royalties, defendant asserted that plaintiff's nondeductible franchise fee income was comprised of not only a franchisee's first payment but also a franchisee's ongoing monthly payments.

The issue we must decide is whether the Legislature, in enacting M.C.L. § 208.9(7)(c)(ii); M.S.A. § 7.558(9)(7)(c)(ii), intended to preclude plaintiff from deducting its franchisees' monthly royalty payments from its Michigan single business tax base. Statutory interpretation is a question of law subject to review de novo. Michigan Automotive Research Corp. v. Dep't of Treasury (After Remand), 222 Mich.App. 227, 231, 564 N.W.2d 503 (1997). Moreover, review de novo is appropriate because the lower court decided this issue upon defendant's motion for summary disposition. Westfield Cos. v. Grand Valley Health Plan, 224 Mich.App. 385, 387, 568 N.W.2d 854 (1997).

The first step in determining a taxpayer's single business tax liability is to determine its tax base. Caterpillar, Inc. v. Dep't of Treasury, 440 Mich. 400, 409, 488 N.W.2d 182 (1992). The tax base is the taxpayer's business income before apportionment, subject to certain upward or downward adjustments. Mobil Oil Corp. v. Dep't of Treasury, 422 Mich. 473, 476, 373 N.W.2d 730 (1985). See M.C.L. § 208.9; M.S.A. § 7.558(9), M.C.L. § 208.41; M.S.A. § 7.558(41), M.C.L. § 208.45; M.S.A. § 7.558(45). One adjustment to the tax base is the deduction of royalties that a taxpayer receives, which is the adjustment at issue here. M.C.L. § 208.9(7)(c); M.S.A. § 7.558(9)(7)(c). A taxpayer has been permitted to deduct "all royalties" from its single business tax base since the enactment of the SBTA in 1975, but the SBTA does not supply a definition of the term "royalty." In an SBTA case addressing oil and gas royalties, our Supreme Court observed that the common understanding of the term "royalty" is as a "payment received by the transferor in patent, copyright, mineral, and oil and gas transactions." Mobil Oil, supra at 485, 373 N.W.2d 730 (emphasis in original).

In 1985, the Legislature amended the royalty deduction provision to except franchise fees. 1985 P.A. 27, M.C.L. § 208.9(7)(c)(ii); M.S.A. § 7.558(9)(7)(c)(ii). Over a five-year period ending in 1991, the amount a taxpayer could deduct for franchise fees was reduced to zero. M.C.L. § 208.9(7)(c)(ii)(A)-(C); M.S.A. § 7.558(9)(7)(c)(ii)(A)-(C). The Legislature did not define "franchise fee" within the SBTA, but instead incorporated the definition of "franchise fee" found in the Franchise Investment Law (FIL), M.C.L. § 445.1501 et seq.; M.S.A. § 19.854(1) et seq. This definition is as follows:

"Franchise fee" means a fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including but not limited to payments for goods and services. The following are not the payment of a franchise fee:

(a) The purchase or agreement to purchase goods, equipment, or fixtures directly or on consignment at a bona fide wholesale price.

(b) The payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring the credit card.

(c) Amounts paid to a trading stamp company by a person issuing trading stamps in connection with the retail sale of merchandise or service.

(d) Payments made in connection with the lease or agreement to lease of a franchised business operated by a franchisee on the premises of a franchisor as long as the franchised business is incidental to the business conducted by the franchisor at such premises. [M.C.L. § 445.1503(1); M.S.A. § 19.854(3)(1).]

The parties dispute whether the Legislature intended for royalties arising from a franchise agreement to be encompassed within the 1985 franchise fee exception. To the words "is required to pay or agrees to pay" in the definition, defendant ascribes a legislative intent to include both the initial payment to start a franchise and the ongoing royalty payments within the franchise fee exception because a prospective franchisee must agree to make both types of payments before the franchisee gains "the right to enter into a business under a franchise agreement." In contrast, plaintiff argues that the phrase "right to enter into a business under a franchise agreement" limits the franchise fee definition to the initial franchise fee paid by franchisees, regardless of whether a franchisee "is required to pay" that fee in one lump sum or "agrees to pay" in installments during the course of the franchise. Both interpretations are logically derived from these provisions; therefore, we find that the meaning of the franchise fee exception in M.C.L. § 208.9(7)(c)(ii); M.S.A. § 7.558(9)(7)(c)(ii) is ambiguous. Where a statute is ambiguous or susceptible to two or more constructions, the statute must be interpreted. Shelby Charter Twp. v. State Boundary Comm., 425 Mich. 50, 72, 387 N.W.2d 792 (1986).

The primary goal of judicial interpretation of statutes is to ascertain and give effect to the intent of the Legislature. Int'l Business Machines v. Dep't of Treasury, 220 Mich.App. 83, 86, 558 N.W.2d 456 (1996). Defendant correctly notes that the Legislature stated that the FIL should be "broadly construed to effectuate its purpose of providing protection to the public." M.C.L. § 445.1501; M.S.A. § 19.854(1). However, the rule of liberal construction does not override other rules if the application would defeat the evident meaning of the act. People v. Whiteside, 437 Mich. 188, 197, 468 N.W.2d 504 (1991). Moreover, where there is doubt over their interpretation, tax statutes are construed more strongly against the government. Comerica Bank-Detroit v. Dep't of Treasury, 194 Mich.App. 77, 92, 486 N.W.2d 338 (1992).

We agree with plaintiff that several sections of the FIL would be rendered unworkable if we interpreted the definition of franchise fee as defendant does. It is reasonable to conclude that words used in one place in a statute have the same meaning in every other place in the statute. Peiffer v General Motors Corp., 177 Mich.App. 674, 677, 443 N.W.2d 178 (1989). One place where the FIL employs the phrase "franchise fee" is the small-franchise exemption. M.C.L. § 445.1506(1); M.S.A. § 19.854(6)(1). This section provides that a franchisor is exempt from certain filing and disclosure requirements if the "prospective franchisee is required to pay, directly or indirectly, a franchisee fee which does not exceed $500." M.C.L. § 445.1506(1)(c); M.S.A. § 19.854(6)(1)(c).

Defendant argues that the phrase "directly or indirectly" within the exemption is consistent with its position that the Legislature meant to include royalties within the franchise fee exception. However, applying defendant's interpretation to this provision would render the exemption meaningless. If royalties are encompassed within the definition of "franchise fee," then a franchisor would be unable to determine whether the exemption applied because a franchisor cannot predict a prospective franchisee's royalties and thereby determine, with any certainty, whether the franchise fee exceeds $500. At the time a...