PM One, Ltd. v. TREASURY DEPT.

• Decision Date: 02 June 2000
• Docket Number: Docket No. 210644.
• Citation: 611 N.W.2d 318,240 Mich. App. 255
• Parties: PM ONE, LIMITED, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.
• Court: Court of Appeal of Michigan — District of US

611 N.W.2d 318

240 Mich. App. 255

PM ONE, LIMITED, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 210644.

Court of Appeals of Michigan.

Submitted November 10, 1999, at Lansing.

Decided March 17, 2000, at 9:20 a.m.

Released for Publication June 2, 2000.

Howard & Howard Attorneys, P.C. (by Michele L. Halloran and Donna M. Donovan), Lansing, for P.M. One, Ltd.

Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Jack Van Coevering, Assistant Attorney

General, for the Department of Treasury.

Before: SAWYER, P.J., and HOOD and WHITBECK, JJ.

WHITBECK, J.

Petitioner P.M. One, Ltd. (PM One), appeals as of right from a decision of the Michigan Tax Tribunal, which held that certain amounts PM One collected constituted "gross receipts" under § 7 of the Single Business Tax Act (SBTA), M.C.L. § 208.7; MSA 7.558(7). The Michigan Tax Tribunal stated that "[t]he substance of these purchase, supply and payment arrangements is the reimbursement and compensation of Petitioner [PM One] for necessary expenses it incurs to provide the services required by the terms of its management agreement with an owner; accordingly, the amounts at issue are gross receipts of Petitioner." Here, the Michigan Tax Tribunal conflated two related, but logically separate, theories in order to impose liability under the SBTA. The first theory is that the payments in question constituted "reimbursements" to PM One. The second theory is that the payments in question were indirect payments to PM One for performing management services and were therefore "compensation." As we outline below, we find both these theories to be incorrect because the payments in question neither fit within the definition of gross receipts nor, even if they were gross receipts, did they derive from the activities described in the SBTA. We therefore reverse.

I. Basic Facts And Procedural History

PM One is a corporation engaged in the management of real estate developments. PM One's clients are property owners who hire petitioner to operate their properties. PM One's responsibilities include leasing properties, maintenance of the properties, purchase of goods and services, disbursements, document preparation, and coordination of activities with governmental housing agencies. In exchange for the performance of these functions, PM One receives a management fee, which is generally determined as a percentage of the rents collected.¹ In order to carry out its management agreement, PM One provides on-site staff members to collect rent, lease properties, order supplies, and coordinate services to occupants of the property. Furthermore, PM One provides maintenance staff to perform necessary repairs to the property.² When a specific replacement or repair is required, PM One orders any necessary parts or goods and uses on-site personnel to make the repair or replacement. In the alternative, PM One retains outside contractors to furnish both goods and services.³ In either event, the request for goods and services is issued in the name of the individual client. To cover a specific cost incurred for goods or services received, PM One transfers an equal amount of money from a client's individual account into a central depository account (CDA). PM One then issues a check, made payable to the proper third-party vendor, from the CDA to pay for the incurred cost.

The Department of Treasury (the department) audited PM One for the taxable period covering January 1, 1990, through December 31, 1992. The department concluded that there were deficiencies for tax years 1990 and 1992, when PM One employed the gross-receipts method in computing its business tax liability. While PM One had included its management fees and reimbursed compensation expenses for employees as gross receipts, it did not include payments made from the CDA to third-party vendors within its calculation of gross receipts. PM One asserted that excluding payments from the CDA was proper because the goods and services underlying the payments benefited the client only and could not be construed as PM One's gross receipts. PM One claimed that it did not retain warehouse goods on behalf of its clients and was not entitled to retain any goods or services in the event of termination of the management agreement. The department, however, concluded that PM One did not receive the funds in an agency capacity and the funds expended through the CDA should have been included as gross receipts. The Michigan Tax Tribunal affirmed the assessments and PM One appealed.

II. The Single Business Tax Act

The SBTA imposes "a specific tax of 2.35% ... upon the adjusted tax base of every person with business activity in this state which is allocated or apportioned" to Michigan. MCL 208.31(1); MSA 7.558(31)(1). A taxpayer may elect to calculate this tax, known as the Single Business Tax (SBT), on the basis of the gross receipts it receives if its adjusted tax base exceeds a specified level. MCL 208.31(2); MSA 7.558(31)(2). By "gross receipts," the Legislature meant

the sum of sales, as defined in subsection (1), and rental or lease receipts. Gross receipts does not include the amounts received in an agency or other representative capacity, solely on behalf of another or others but not including amounts received by persons having the power or authority to expend or otherwise appropriate such amounts in payment for or in consideration of sales or services made or rendered by themselves or by others acting under their direction and control or by such fiduciaries as guardians, executors, administrators, receivers, conservators, or trustees other than trustees of taxes received or collected from others under direction of the laws of the federal government or of any state or local governments. [MCL 208.7(3); MSA 7.558(7)(3).]

Given this somewhat circular definition, what constitutes gross receipts depends largely on the meaning of "sales" in the SBTA.

The SBTA, M.C.L. § 208.7(1); MSA 7.558(7)(1), provides:

"Sale" or "sales" means the gross receipts arising from a transaction or transactions in which gross receipts constitute consideration: (a) for the transfer of title to, or possession of, property that is stock in trade or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, or (b) for the performance of services, which constitute business activities other than those included in (a), or from any combination of (a) or (b). [Emphasis supplied.]

For the sake of analysis, we can break this lengthy formulation into a diagram with the following components:

A "sale" is comprised of

(1) "gross receipts" (2) arising from a "transaction" in which gross receipts constitute "consideration" for one of the following described in (a), (b), or (c):

(a) transfer of title to, or possession of, property that is

(i) stock in trade; or

(ii) other property of a kind that would be properly included in the inventory of the taxpayer; or

(iii) property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business;

(b) "performance" of "services," that constitute "business activities"⁴ other than those included in (a);

(c) any combination of (a) or (b).

Accordingly, we determine whether PM One owes SBT on the challenged transactions first in light of the definition of "sales" as defined in M.C.L. § 208.7(1); MSA 7.558(7)(1) and outlined above, and then in terms of the exclusions, exceptions, and other conditions in the definition of gross receipts in M.C.L. § 208.7(3); MSA 7.558(7)(3). We note that the structure of M.C.L. § 208.7; MSA 7.558(7) itself mirrors the form of this analysis, first defining "sales" and then defining "gross receipts."

III. Consideration For Transfers Of Property

Office supplies, telephone service, plumbing supplies, appliances for apartment units, electrical supplies, light fixtures, lawn maintenance, snow removal, painting services, and asphalt sealing for parking lots were all among the types of goods and services for which PM One made the payments in question. The record is clear that none of the goods and services constituted PM One's inventory or stock in trade and that PM One did not, itself, acquire any of the goods and services to resell to clients.⁵ PM One also asserts, apparently without challenge from the department, that it obtained the goods and services in the name, and for the benefit, of its clients and their respective properties. Simply put, then, PM One did not acquire either title to or possession of the goods and services the department identified even though PM One issued the checks for the goods and services. The conditions identified in part 2(a) of the above diagram, therefore, do not apply. Accordingly, because part 2(c) of the diagram inherently relies on a transaction that fits to some extent within the definition of transaction in part 2(a), it does not apply in this case.

IV. Consideration For Services That Constitute Business Activities

A. The Depository Accounts And The CDA

Whether, by issuing checks for the goods and services in question, PM One engaged in the "performance" of "services" constituting "business activities," part 2(b) of the above diagram, is a more difficult puzzle to solve. However, PM One's ordinary business dealings with its clients and the way it pays for goods and services for its clients with client funds by using the CDA are quite telling. According to PM One, its personnel collected rents for its clients at each client's separate property or properties. PM One then deposited the rents it collected into a separate depository account maintained for each client in each client's name. To pay for goods and services with client funds, PM One engaged in a two-step process. First, it transferred money...