University of Michigan Bd. of Regents v. Department of Treasury

• Decision Date: 23 July 1996
• Docket Number: Docket No. 171668
• Citation: 217 Mich.App. 665,553 N.W.2d 349
• Parties: , 112 Ed. Law Rep. 1034 UNIVERSITY OF MICHIGAN BOARD OF REGENTS, Petitioner-Appellee/Cross-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellant/Cross-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 349

553 N.W.2d 349

217 Mich.App. 665, 112 Ed. Law Rep. 1034

UNIVERSITY OF MICHIGAN BOARD OF REGENTS Petitioner-Appellee/Cross-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellant/Cross-Appellee.

Docket No. 171668.

Court of Appeals of Michigan.

Submitted Feb. 7, 1996, at Lansing.

Decided July 23, 1996, at 9:25 a.m.

Released for Publication Sept. 13, 1996.

Maria G. Alfaro-Lopez, Ann Arbor, for the University of Michigan Board of Regents.

Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Russell E. Prins and Michael R. Bell, Assistant Attorneys General, for the Department of Treasury.

Eileen Jennings, Mt. Pleasant, for Amicus Curiae Central Michigan University.

Kenneth McKanders, Ypsilanti, for Amicus Curiae Eastern Michigan University.

Steven Dykema, Grand Rapids, for Amicus Curiae Ferris State University.

Thomas Butcher, Allendale, for Amicus Curiae Grand Valley State University.

Sally Harwood, East Lansing, for Amicus Curiae Michigan State University.

Charles A. Duerr, Jr., Ann Arbor, for Amicus Curiae Northern Michigan University.

Susan Gerrits, Rochester, for Amicus Curiae Oakland University.

William C. Collins, Midland, for Amicus Curiae Saginaw Valley State University.

Daniel Bernard, Detroit, for Amicus Curiae Wayne State University.

Keith A. Pretty, Kalamazoo, for Amicus Curiae Western Michigan University.

Before TAYLOR, P.J., and MacKENZIE and M.J. TALBOT, ^* JJ.

MacKENZIE, Judge.

Following a sales and use tax audit for the period of December 1, 1981, to June 30, 1983, respondent Department of Treasury assessed against the University of Michigan sales tax in the amount of $62,829.46 inclusive of interest, and use tax in the amount of $17,030.91 inclusive of interest. The university paid the assessments under protest and petitioner the University of Michigan Board of Regents sought review and a refund in the Court of Claims. The court granted summary disposition for the university pursuant to MCR 2.116(C)(10) and ordered a refund of the sales tax assessment and a partial refund of the use tax assessment. The Department of Treasury appeals as of right from the grant of summary disposition for the university, and the university cross appeals as of right with regard to the portion of the use tax assessment upheld by the Court of Claims. Ferris State University, Michigan State University, Eastern Michigan University, Saginaw Valley State University, Central Michigan University, Grand Valley State University, Oakland University, Northern Michigan University, Western Michigan University, and Wayne State University have filed an amici curiae brief aligned with the University of Michigan's position. We affirm in part and reverse in part.

The sales tax assessment

The General Sales Tax Act, M.C.L. § 205.51 et seq.; M.S.A. § 7.521 et seq., imposes on "all persons engaged in the business of making sales at retail" a tax "for the privilege of engaging in that business." M.C.L. § 205.52(1); M.S.A. § 7.522(1). "Sale at retail" means "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." M.C.L. § 205.51(1)(b); M.S.A. § 7.521(1)(b).

As relevant to this appeal, the sales tax assessment against the university covered (1) photocopies costing five cents each made by students or others at photocopier machines placed at the university's libraries, student dormitories, and student union, (2) replacement diplomas ordered by graduates, costing $5 each, (3) meals provided to participants in the Executive Development Program, a three- to four-week residential nondegree-granting program offered through the university's Graduate School of Business Administration that teaches business theory and techniques to corporate executives, and (4) meals provided to participants in five of sixteen summer sports camps for students ages eight to eighteen. The Court of Claims ruled that the department's assessment regarding each of these items was unlawful. This ruling forms the basis of the department's appeal.

We find no error in the Court of Claims' determination that photocopies made by students were not subject to sales tax. Fundamentally, the sales tax is a tax upon sellers for the privilege of engaging in the business of making retail sales of tangible personal property. Terco, Inc. v. Dep't of Treasury, 127 Mich.App. 220, 225-226, 339 N.W.2d 17 (1983). "Business" is defined in the sales tax act as "an activity engaged in by a person or caused to be engaged in by that person with the object of gain, benefit, or advantage, either direct or indirect." M.C.L. § 205.51(1)(j); M.S.A. § 7.521(1)(j). The university was not in the business of selling photocopies as a retail enterprise with a profit-making objective; the five-cent charge closely approximated the actual cost of one photocopy. Rather, the university provided an academic library, and the convenience of and charge for photocopies were an incidental part of library operations.

The Wisconsin Court of Appeals addressed an analogous situation in Frisch, Dudek & Slattery, Ltd. v. Dep't of Revenue, 133 Wis.2d 444, 396 N.W.2d 355 (1986). In Frisch, the Wisconsin Department of Revenue determined that a law firm should be required to pay a sales tax for photocopies billed to its clients. The court disagreed. Although the firm separately invoiced the photocopies when it billed its clients, the Frisch court concluded that any "sale" of photocopies was not in the nature of a retailer's "mercantile transaction," but, instead, was incidental to the legal services provided. Because the law firm was not a retailer of photocopies, the court held that no sales tax could be imposed on its client photocopying charges. Id. at 447-449, 396 N.W.2d 355.

Just as the photocopies in Frisch were not supplied as part of a mercantile transaction, the photocopies in this case were not sold at retail to generate a profit. Rather, students' use of the photocopier machines was incidental to the library's circulation services and the university's educational mission. The photocopies produced by students were therefore not subject to sales tax.

We also find no error in the Court of Claims' determination that replacement diplomas were not subject to sales tax. The court concluded that the university, by offering replacement diplomas for $5, was offering a customized service to which the tangible paper was merely incidental. This conclusion is consistent with DAIE v. Dep't of Treasury, 138 Mich.App. 696, 361 N.W.2d 373 (1984), where this Court held that the sale of a customized computer software program was not subject to the sales tax because the purchaser was paying for the service of having a personalized program produced. " 'The focus of the instant transaction is on the personalized service of the software vendors, an intangibles transaction.' " Id. at 699, 361 N.W.2d 373, quoting Maccabees Mutual Life Ins. Co. v. Dep't of Treasury, 122 Mich.App. 660, 666, 332 N.W.2d 561 (1983). Similarly, in this case, the purchaser of a replacement diploma was paying for the services of the university's office of the registrar in reviewing its records and then producing a document containing highly personalized information, including the name of the graduate, the degree obtained, and the date of graduation. The Court of Claims correctly found the department's sales tax assessment on replacement diplomas to be invalid.

We next turn to the department's contention that the Court of Claims erred in its determination that the meals provided to Executive Development Program participants and to summer sports camp participants were not subject to sales tax. Under subsection 4a(c) of the sales tax act, M.C.L. § 205.54a(c); M.S.A. § 7.525(c), sales of food to "bona fide enrolled students" by nonprofit educational institutions such as the university are exempt from sales tax. The department contends that persons attending the two programs were not bona fide enrolled students and, therefore, their meals were taxable. We disagree.

With regard to the Executive Development Program, the department argues that students enrolled in the program are not "bona fide" because they are enrolled in a continuing education program rather than a degree-granting program. While we are aware that the department has made this distinction in the past, we also recognize that its interpretation is not binding on this Court and that the plain language of the statute controls. See Ludington Service Corp. v. Acting Comm'r of Ins., 444 Mich. 481, 505, 511 N.W.2d 661 (1994).

Black's Law Dictionary (6th ed. 1990) defines "bona fide" as "[i]n or with good faith; honestly, openly, and sincerely; without deceit or fraud ... [t]ruly; actually; without simulation and pretense." Random House Webster's College Dictionary (1995) defines "bona fide" as "made, done, etc., in good faith; without deception or fraud ... authentic; genuine; real." Given these definitions, the qualification of "enrolled students" by the phrase "bona fide" appears to be intended to prevent the application of the exemption to persons who...