Fluor Enterprises, Inc v. Department of Treasury

477 Mich 170 ENTERPRISES, FLUOR OF TREASURY INC v DEPARTMENT (Cаlendar 12). Argued Docket No. 129149. October No. 2,May Decided 2007. Inc., Enterprises, brought Fluor an action in the Court of Claims against Department Treasury, seeking single of to recover busi- paid protest. performed had ness taxes under Fluor architectural and engineering projects services outside for construction Michigan, department and the had assessed taxes for the out-of-state activities, determining they were taxable sales under MCL 208.53(c) Single Act, etseq. of the Business Tax MCL 208.1 The Court Claims, Manderfield, J., granted summary disposition Paula J. on the basis that the out-of-state activities were not appealed and, taxable sales under act. The defendant in an opinion per curiam, Appeals, Cavanagh, PJ., the Court of and Jansen Gage, JJ., agreed 53(c), interpretation § with the defendant’s provision Clause, but concluded that the violates the Commerce Const, I, 8, holding summary disposition § art cl 3. After was erroneously granted, Appeals the Cоurt of remanded the matter for App reconsideration of the tax calculations. 265 Mich The Supreme granted application Court the defendant’s for leave to appeal plaintiffs application appeal and the for leave to as cross- appellant. 474 Mich 1097 opinion by joined by In an Chief Justice Justices Taylor, Supreme Court held: Corrigan, Young, Markman, receipts question The are taxable under the statute. That part judgment Appeals of the of the Court of must be affirmed. 53(c) part Section is constitutional and is enforceable. The 53(c) judgment Appeals holding of the Court of is unconsti- tutional must be reversed and the matter must be remanded to the proceedings. Court of Claims for further 53(c) receipts 1. Section indicates that derived from services performed planning state, per- activities within this state, per- formed for activities within this and services formed for construction activities within this state arе deemed Michigan receipts. subjects receipts 2. The statute to taxation for services activities, support design activities, or construction activities, long take this state. as those activities within performedmust themselvesbe not state that the services statute does receipts derived from such this state in order for within Michiganreceipts. servicesto be deemed may plaintiffs architec- tax the for the 3. The state performed support engineering in services that were tural and Michigan. in construction activities that occurred applicable four-pronged 4. 53 meets the test chal- Section applied lenges to an under the Commerce Clause because it is taxing state, fairly activity having a nexus substantial with commerce, apportioned, against discriminate interstate does not provided by fairly and is related to the services the state. joined by Cavanagh concur- Justice Justices and Weaver, Kelly, part ring, agreed majority’s decision to affirm in with the However, judgment Appeals. part of the Court of reverse disagreed separately because she with the Justice wrote Kelly analysis. majority’s statutory interpretation and constitutional 205.53(c) receipts requires that the derived from services MCL design, planning, performed or construction out of state for Michigan receipts. performed in the state be treated as activities properly taxes on the revenue for the The defendant assessed plaintiff provided engineering design services the for construc- projects Michigan, regardless of occurred tion which services Michigan. The tax at issue does not violate the Commerce outside Michigan and Clause. A substantial nexus exists between taxed, being fairly of the that is and the tax is apportioned internally it is consistent. because part, part, affirmed in and remanded to the Court

Reversed of Claims. Single— —Receipts Performed. Business Tax Act for Services

1. Taxation Receipts performed for activities derived from services state, performed within this activities within state, performed for construction activities this and services Single Michigan receipts deemed under the within this state are long place Business Tax Act as as those activities take within state; performed require the act does not that the services performed within this state in order for the must themselves be receipts to be deemed derived from such services receipts; geographic limit on the services take there is no where (MCL type being performed. are or on what of services 208.53M). Opinion of the Court Single — — — 2. Taxation Constitutional Business Tax Act Commerce Law Clause. Single provides The section of the Business Tax Act receipts planning, design, derived from services construction activities within this state shall be deemed receipts apportionment рrong does not violate the fair of the (US [c]). Const, I, 8, Commerce Clause art cl MCL 208.53 Miller, Schwartz & Cohn LLP Honigman, (by Patrick R. Van and Daniel L. Stanley) for the plaintiff. Tiflin Cox,

Michael A. Casey, Thomas L. General, Attorney and Ross H. General, Solicitor Bishop, Assistant Attor- ney General, for the defendant. requires C.J. This case us to construe the TAYLOR, (SBTA) Tax

provision Single Business Act found at MCL 208.53 that explicates how to allocate sales of intangible personal property so as to determine whether they can be taxed Michigan. Specifically, we must decide services, for plaintiffs entirely outside for construction projects located in Michigan, are deemed under taxable sales the statute and, are, if they whether that interpretation of the statute results in the being statute’s unconstitutional aas viola- Clause, Const, tion of the I, 8,§ Commerce art cl 3. The Court of held Appeals that the services were taxable but that this section of the statute violatеs the Commerce Clause of the constitution and thus unenforceable. Fluor Inc v Enterprises, Dep’t Treasury, App 711; 697 NW2d 539 in part We reverse and affirm in part, agreeing that such receipts are taxable under the statute, but holding that this provision is not unconstitu- tional and thus is enforceable.

i The Court of Appeals accurately summarized facts this case: Opinion of the Court The at undisputed. case are

The facts in this by engineering and archi- plaintiff for issue were received improvement related to real estate tectural Michigan. per- The services were constructed projects employees at out-of-state facilities. plaintiffs formed (SBT) timely single returns for Plaintiff filed However, report years plaintiff did not at issue. audit, Following Michigan receipts. an receipts at issue as (intents assess) to three bills for taxes due defendant issued $182,312. totaling defen- requested an informal conference with

Plaintiff Hearings Following an informаl confer- dant’s Division. ence, to department referee issued recommendation hearing agreed referee of Revenue. The the Commissioner 53(c). However, § plaintiffs interpretation of with disagreed the referee’s of Revenue with Commissioner origi- analysis be assessed as and directed that taxes order, nally Following the commissioner’s de- determined. (final assessments) three for taxes due fendant issued bills $343,340.96, which for total tax and interest subsequently paid Plaintiff an paid protest. then under $3,077.35 in interest. additional to action in the Court of Claims Plaintiff filed this $346,618.31 protest plus additional paid recover under costs, statutory interest, attorney parties fees. summary disposition. filed motions for Plaintiff both 2.116(A) summary disposition pursuant moved for to MCR facts). (judgment stipulated on Defendant moved sum- 2.116(C)(8) mary disposition pursuant to MCR language plain that the The Court of Claims concluded judg- supported plaintiffs position and entered the statute plaintiff, ordering pay dеfendant ment in favor of $346,418.31 713-714.] at [Id. and interest. regard the Court of reversed with appeal, Appeals

On of the SBTA of Claims construction of 53 to the Court for a for and held that the even if the Michigan, located in project construction state, “Michi- in another were services were 477 Mich 170 Opinion of the Court gan receipts,” but that this section of the statute was unconstitutional as violation the Commerce Clause. sought Court,

Defendant appeal leave this seeking to ruling unconstitutionality have re- Plaintiff sought versed. leave to cross-appeal, arguing the Court of Appeals construction of the statute erroneous. granted parties’ applications was We leave to appeal cross-appeal.1

II This Court reviews de novo a trial court’s decision to grant deny or a motion for summary disposition. City of Co, v Taylor Detroit Edison Mich (2006). Likewise, questions NW2d of constitutional statutory construction are reviewed de novo statute, Court. Id. When interpreting we exаmine the language statute itself. “If the statute is unam biguous it must be enforced as written.” Office, Title Inc Treasurer, Van Buren Co NW2d 207

ill SBTA, MCL 208.1 et is a seq., business activity tax that was enacted “to provide the imposition, levy, computation, collection, assessment and enforce- ment ... commercial, of taxes on certain business, and activities____” financial 1975 PA 228. As provided by the act: activity”

“Business legal equi- means a transfer of or table title property, real, to or rental of personal, whether mixed, tangible intangible, or or performance or the services, thereof, in, or a combination engaged made or engaged in, caused state, to be made or within this 474 Mich 1097 Dep’t v of Opinion of the Court interstate, commerce, intrastate, foreign or with benefit, advantage, direct or object gain, whether of 208.3(2).] indirect, [MCL .... taxpayer to the or to others of encompasses taxation Thus, the act definition only not within state performed that are services state”) this but also some in ... within (“engaged state, as as the reason those long out of performed are this state are in has its source within engaged state”). (“caused this engaged ... in within [] to be out of activity performed is partially business When a of state, system apportion the statute ‍‌‌‌​​‌‌‌‌‌​‌​‌‌​​‌​‌‌​​​​‌‌‌​​‌​‌‌​‌​‌‌​​‌‌‌‌​​‌‍establishes receipts those ment, seq., only 208.40 et so that MCL are taxed here. be taxed in appropriate to a fraction whereby is based on a formula Apportioning to out-of-state Michigan activity the ratio of reflecting sales, established. i.e., Michigan is activity, sales/total Treasury, Corp of Jefferson Smurfit case, In 1; 639 this App 273 n NW2d issue, the is which question the sales factor is at where in its total sales should be included plaintiffs sales of numerator. “Michigan sales” intangible property, To ascertain services, “Michigan sales,” we turn to comprise such 208.53. It provides: MCL

Sales, tangible personal property, are than other sales in this state if:

2 See MCL 208.51: (1) fraction, is the faсtor is a the numerator of which The sales during year, taxpayer and the in this state

total sales of taxpayer everywhere of the denominator of which is the total sales during year. the tax (2) fraction, foreign person, the sales factor is For a taxpayer in the total sales of the numerator of which is year, during of which is the total sales the tax and the denominator during year. taxpayer the tax in the United States Mich 170 Opinion Court

(a) activity performed The business in this state. Ob) activity performed business both and, performance, outside this state based on costs greater proportion performed this state than is outside this state.

(c) Receipts plan- derived from services ning, design, or construction activities within this state shall deemed receipts. be asserts, Plaintiff and the Court of agreed, Claims 53(c) deems receipts for services taxable as only if receipts the services are performed is, within this state. That phrase “within this state” not just modifies “activities” but “planning,” also “de- sign,” and plaintiffs “construction.” Because planning design and services were not performed within this state, plaintiff argues, receipts its for those servives should not be taxable. We respectfully disagree with approach. this Plaintiff essentially is rewriting the statute so that “within this state” modifies “services performed.” This not how the statute reads. 53(c)

The subject of “receipts”; the statute states that certain “receipts” “shall be deemed Michigan re- 53(c) ceipts.” Section then narrows the category of receipts that will be “deemed Michigan receipts.” The term “receipts” is modified by phrase “derived from services performed.” Thus, the statute specifies that to be “deemed receipts,” “receipts” must be 53(c) “derived from services performed.” Section fur- specifies ther which performed” “services will allow “receipts” to be “deemed Michigan receipts,” namely, perfоrmed planning, “for design, or construc- tion activities within this state.” The prepositional phrase “for planning, design, or construction activities” “performed,” modifies and indicates the purpose for which the services must be performed. phrase The Opinion of the Court term “activities.” modifies the “within this state” “for,” object preposition “activities” term by preceding phrase “planning, modified and is in the of the term “or” The use or construction.” design, indicates construction” design, or “planning, phrase each other. The are correlative to all three terms modifying an clearly adjective “construction” is term “plan- terms Consequently, the term “activities.” modify adjectives also “design” and are ning” grammar otherwise Parsing the term “activities.” adjective, “plan- an and “construction” would make nouns, grammatical construc- “design” and ning” in this unequal make correlative terms tion that would Therefore, modi- “activities” is way avoided. should be “design,” “рlanning,” fied each of the terms result, As the statute indicates “construction.” plan- “[r]eeeipts derived from” “services state,” this within “services ning activities state,” and “services activities within state” construction activities within this performed for Michigan receipts.” The statute thus are to be “deemed performed” for “services subjects taxation activities, design activities, or con- support activities, long take as those activities struction that the The statute does not state “within this state.” must themselves be performed” “services “[r]eceipts for derived “within state” in order this Michigan receipts.3 such to be deemed from” 3 ambiguous interpre because other finds the statute The concurrence 473, 479; citing Adair, proposed, People 452 Mich tations have been (1996), ambiguity when there can be for the rule exists NW2d However, meaning. disagreement our current over a statute’s reasonable Comm, 154, Lansing Mayor Mich v Pub Service law is set forth in provision (2004), “[A] this Court held: 680 NW2d 840 where ‘irreconcilably ambiguous only conflict^]’ with another if it law is single provision equally susceptible more it than when 477 Mich 170 Opinion of the Court we

Consequently, receipts must look at are derived from “services for” one of the enu activities, merated with no limit geographic on where the services on place, type took and no limit what being services are performed.

The statute thus establishes a two-part analysis. First, it must determined be whether the actions sought to be taxed performed” were “services for “planning activities,” “design activities,” or “construction activi- Second, ties.” if the actions performed” are “services for activities, such it must be determined whether activities occurred “within state.” If this the activities occurred state,” “within this then the actions are tax- 208.53(c). able under MCL If the activities did not occur in Michigan, then the actions are not taxable under 208.53(c). MCL case, plaintiff

In this engaged architectural and engineering services performed for various Michigan construction activities. Because these actions constitute performed” activities,” “services for “construction those “construction took place activities” “within this state,” the state may plaintiffs architectural and (citation meaning.” omitted; emphasis original). finding “[A] only ambiguity is to be reached after ‘all other conventional means of [] interpretation’ applied wanting.” been quoting have and found Id. at Ins, Klapp v United 663 NW2d 447 meaning of MCL 208.53 can be determined from the text of the statute by using statutory Nothing conventional means of construction. irreconcilably equally susceptible statute conflicts or it makes to more meaning. than one phrase Michigan receipts” We note that the “deemed itself reinforces extraterritoriality provision, phrase suggests of this because this receipts ordinarily for activities that would not be considered receipts considered, as, Miсhigan receipts purposes bewill or treated for receipts of the statute. Because ordinarily activities would Michigan receipts, implies be considered that are Michigan receipts” “deemed are that take activities outside the state. Dep’t 179 v Opinion of the Court to Although attempts plaintiff services. engineering design did and performing it as describe what took in Califor- activities, that those activities and in that indicates the statute nia, ignores language services, engaged are are for and services paid receipts per- It that undisputed activities. is for engineering services formed its architectural and that occurred of “construction activities” support services fall within Michigan. Consequently, plaintiffs 208.53(c), plaintiffs receipts MCL language of Michigan. are taxable in Plaintiffs such services “planning as to construe its services attempt its recognize plaintiff performed fails to activities” for “construction activities” within the state services 208.53(c), to are pursuant MCL Michigan. receipts, Michigan receipts. deemed therefore

IV plaintiffs that the allows Having determined statute we Michigan receipts, services to be taxed re- whether such a construction question turn to Clause, US a the Commerce sults in violates before, a 8, cl As Const, I, explained art 3. we have scrutiny Clause tax withstands under Commerce state if it constitutionally and will be found valid challenge in Complete test articulated four-pronged meets 279; Transit, v S Ct Brady, Auto Inc 2d Inc Caterpillar, 51L Ed See 400, 415; 488 Treasury, 440 Mich NW2d (1) activity having an applied A tax: valid (2) state, fairly taxing substantial nexus with (3) against inter- not discriminate apportioned, does (4) to the commerce, fairly related Id. by the state. provided Opinion of the Court argues first does

Plaintiff it not have a sufficient subject with this state to be to the tax. “The nexus if ‘nexus’ is the requisite supplied corporation avails itself of the on privilege ‘substаntial busi carrying . . ness’ within the State . .” Mobil Oil vCorp Comm’r of Vermont, 425, 437; 1223; 445 US Taxes 100 S Ct 63 L “ Ed 2d 510 that a tax contingent ‘[The] fact is upon brought pass events without a state does not destroy the nexus between a tax and such transactions ” Id., within a the tax which is an exaction.’ quoting Co, 435, Penney 445; Wisconsin v J C 311 US 61 246; Inc, S Ct 85 L Ed See 267 also Caterpillar, at supra 416-417. The at in issue this case were for services that plaintiff provided for construction projects Michigan, and therefore “the incidence of as as tax well its measure is tied to earnings which the State ... has made ....” J C possible Penney Co, Thus, supra at 446. is a there substantial nexus between the state the activity being taxed. at

Also issue in this case is whether the tax imposed 208.53(c) by is, MCL fairly That apportioned. the tax fairly apportioned is not if it allows to tax more than fair its share of interstate activity. at Caterpillar, supra fairly 417. A tax is not apportioned “ if it is not internally ‘To internally consistent. be consistent, a tax be must structured so if every Stаte impose tax, were to an identical no multiple result,’ or, taxation would words, ... other no more than one percent hundred of the taxpayer’s business be 419, would taxed.” Id. at v quoting Goldberg Sweet, 582; US 109 Ct 102 L S Ed 2d 607 (1989).5 As the Supreme said, United States has Court consistency internal taxing externally consistent, Inc, Caterpillar, A statute must be also

supra 419, challenge this, at but because not does we examine only consistency. its internal v Opinion of Court tax to see of the at issue to the structure simply looks every State application its identical disadvantage at a place interstate commerce would Union A of inter intrastate. failure compared with commerce a State consistency of law that as a matter nal shows taxes from than fair share of to take more its attempting transaction, allowing a tax in one such since the interstate mercy of commerce at ‍‌‌‌​​‌‌‌‌‌​‌​‌‌​​‌​‌‌​​​​‌‌‌​​‌​‌‌​‌​‌‌​​‌‌‌‌​​‌‍the State interstate would impose tax. remaining might an identical States those Lines, Inc, US v [Oklahoma Tax Comm Jefferson (1995).] 1331; 185; L Ed 2d 261 115 S Ct test, consistency” In the “internal applying has considered entire Court Supreme United States tax scheme, provi- individual simply and not taxing Co, See, e.g., D H Holmes in a case. specific sion at issue 1619; Ct 100 L Ed McNamara, 108 S Ltd (1988) larger (considering 2d 21 provision scheme). considered, entirety If the MCL 208.53 survey the internally consistent. When we the statute 53(c) § a whole, is more as a we conclude statute general pre- the subsections specific exception to 53[b]). (§§ Enertel, See, e.g., Jones v 53[a] cede it and (2002) Inc, Mich 650 NW2d 334 (“ a a and general provision a statute contains ‘[W]here ” controls.’ specific provision the specific provision, 53(a) omitted.]). words, § to applies In other [Citation activity Michigan; in solely performed that is 53(b) in activity § that occurs both applies to business 53(c) § and a rule Michigan; applies special and outside activities, which and construction planning, design, to for one of performed are long is that as as the services activities, the is located within this activity those regardless state, are taxable receipts for services language are This performed. of where the services 53(a) § rules of from the broad excepts receipts certain (b). then, general rule is, specific exception It to Therefore, if California and falls within the Jones test. [May- 477 Mich 170 Opinion Court 208.53, had a tax statute identical to MCL in order to determine whether tax plaintiffs California could re- case, ceipts for services it would first have to consider whether the performed plan- services were ning activities, design activities, or construction activi- ties. Because the services this case were performed activities, for construction California be pre- would cluded from considering counterpart its to 53(a) (b) § either receipts allowed the for the services taxed, to be because the more specific provisions of 53(c) govern. Having would determined that the ser- vices activities,” were for “construction Cali- fornia would then consider whether these activities occurred within that state. Because construction activities, fact, in Michigan, occurred California would unable to tax be these under its counterpart statute. Consequently, because the activity, design activity, or construction can take place only time, in one at a only one state can receipts for the “services for” those activi- Therefore, ties. if every state had a counterpart statute 208.53, MCL interstate commerce would not be unfairly any burdened or placed at disadvantage. Therefore, because MCL 208.53 not does discriminate against commerce, interstate the statute does not vio- late the consistency” “internal test.

We conclude that MCL 208.53 is not ambiguous and that plaintiffs taxable, services are regardless occurred, where the they because were performed for construction projects located in Michigan. We also hold that this interpretation does not violate apportionment” the “fair prong of the Com- merce internally Clause because the statute consis- Treasury of Concurring Opinion J. Kelly, and its taxed Likewise, plaintiff we hold that tent. this state. nexus with We activity have a substantial Appeals judgment the Court of part affirm therefore to fair regard analysis the of part reverse it in with but the we remand the case to Court and apportionment, proceedings not inconsistent with for further Claims opinion. this JJ., concurred with

Corrigan, Young, Markman, Taylor, C.J. the This case involves Michi- (concurring).

KELLY, SBT). (the two There are issues. single business gan Single Tax Act The first Business De- (SBTA), 208.53(c), allows the defendant at MCL characterize from to partment entirely rendered outside services does, If it we also Michigan as sales. must rendеrs statute interpretation address whether Commerce Clause. unconstitutional violative I, 8, cl conclude that MCL 208.53 is Const, art 3.1 are ambiguous plaintiffs receipts and that conclude, also, not I the statute does taxable. violate the Commerce Clause. agree majority’s I decision

Although with judgment part affirm and reverse part I disagree I because separately Court write Appeals, In addi- majority’s statutory interpretation. with tion, analysis I flaws in of the constitutional see its issue.

FACTS AND PROCEDURAL HISTORY imposed This on case concerns SBT ending 31,1989, through Octo- the fiscal October years engineering, Plaintiff a multinational 1994. ber [May- 477 Mich 170 Concurring Opinion by Kelly, J. construction, company having and technical service its Irvine, in principal California. At issue Michigan are services undertook for construc- projects.1 performed tion Plaintiff construction man- agement and material in procurement activities Michi- gan projects. for these It also engineering cоnducted and architectural for projects the at facilities outside Michigan. timely

Plaintiff filed its SBT annual the returns for years However, in did issue. it not attribute to Michi- sales, as gan, Michigan receipts engineering the for and architectural services that occurred outside the but were for Michigan projects. Following an audit, bills, defendant issued “in- plaintiff three called assess,” tents to for taxes due for in years the issue. The intents to assess were based on position defendant’s for receipts engineering architectural have reported services should been having come from Michigan sales.

Plaintiff requested granted and was a departmental informal conference on objections its the intents to Following conference, assess. the informal hearing referee recommended that all three bills be canceled in their The entirety. referee determined should not coming be considered as from Michigan sales SBT aрportionment for purposes. The Commissioner Revenue disagreed with the referee’s recommendation and ordered the intents to origi- assess made final as nally prepared. The commissioner affirmed the assess- conformity ment in with the department’s long-held interpretation § of 53 of the SBTA. Michigan projects plaintiff performed The for which services include cogeneration plant Midland, refinery in modification for Marathon Detroit, Company expansion building Oil and a steam for what was Upjohn Company then in Kalamazoo. Concurring Opinion Kelly, an and filed protest under the taxes paid

Plaintiff filed parties of Claims. When in the Court appeal the Court of summary disposition, cross-motions granted Claims motion the defendant’s denied plaintiffs construction adopted court plaintiffs. sales to services limited of the SBTA projects construction Michigan. of of the Court right appealed

Defendant Court of judgment reversed the which Appeals, It held that the Court opinion. published in a Claims that 53 of the SBTA determined incorrectly Claims in Michi- sales to limits unconstitutional. the statute was gan, but the tax violated decided Appeals Court of fairly apportioned. it not because was Clause Commerce erro- had been summary disposition holding After remanded for Appeals the Court of neously granted, calculations. of the tax reconsideration Court, to appeal for leave applied Defendant unconstitutionality. ruling to reverse seeking seeking to cross-appeal, to applied Plaintiff leave statutory interpretation. the Court of Claims reinstate Mich 474 parties’ applications. both granted This Court (2006). 1097 OF REVIEW

STANDARD of law question An of a statute is interpretation Lincoln v Motors reviews de novo. Gen that this Court (2000). 483, 489-490; 607 72 Mich NW2d 461 Corp, novo. reviewed de are also questions Constitutional v Comm’r Chiropractic Council Office 363, 369; Services, Mich Ins Financial & (2006). de novo Likewise, reviews this Court NW2d 477 Mich 170 Concurring Opinion Kelly, a trial court’s decision on a motion summary dispo GP,LLC, sition. Ostroth v Warren Regency, 36, 474 Mich (2006). 40; 709 NW2d 589 statute, When interpreting this Court give must effect to the Legislature. intent of the Ford Motor Co v Woodhaven, (2006). 425, 438; 716 NW2d 247 times, At it is possible to discern that intent from the language However, used. Id. where a ambigu statute is ous, it is necessary judicial engage construction to ascertain intent. In re MCI Telecom Complaint, 460 Mich 596 NW2d 164 A statute is ambiguous when there can be reasonable disagreement ‍‌‌‌​​‌‌‌‌‌​‌​‌‌​​‌​‌‌​​​​‌‌‌​​‌​‌‌​‌​‌‌​​‌‌‌‌​​‌‍Adair, over meaning. its People Mich NW2d 505

THE SINGLE BUSINESS TAX ACT The SBT is a value-added tax imposed on any person undertaking activity business in the state of Michigan. MCL 208.31. This includes companies that do all their business in Michigan as well as companies, like plain- tiff, whose is predominantly outside Michigan. A value-added tax measures a firm’s total business activity. Trinova Corp v Michigan Dep’t of Treasury, 358, 364; S Ct 112 L Ed 2d (1991). “The tax is on awhat business has added to economy, not on what the business has derived from this state’s economy.” Assoc, Columbia LP v Dep’t Treasury, 250 Mich App 656, 666-667; 649 of NW2d 760

In order to determine thе proper SBT for a multi- state taxpayer, the tax base must be apportioned to Michigan. MCL 208.41. The formula used for apportion- ing the tax base consists of the sum of factor, the sales the payroll factor, and the property factor, divided by Dep’t v of by Concurring Opinion Kelly, J. of plain- the calculation At in this case is three.2 issue fraction, factor is a factor. “The sales tiffs sales taxpayer of which is the total sales numerator of and the denominator during year, the tax this state everywhere taxpayer total sales of the which is the 208.51(1). the tax MCL during year.” 208.52, SBTA, MCL dictates when 52 of the Section in Michigan, is tangible personal property the sale sales, as the sale of other such while 53 covers 53,§ application This case involves services. provides which as follows:

Sales, tangible personal property, are other than sales of in this state if:

(a) activity performed in state. The business (b) activity in and performed both The business and, performance, outside this state based on costs performed in greater proportion of the business this state. this state than is outside January apportionment years beginning before The factor for the tax average weighted percent. See 1991 was the of three factors each at 33V3 Treasury, Corning, App Inc 537 NW2d 466 31, 1990, years beginning after December and before For the tax 1,1993, January apportionment consisted of the sum of the formula following percentages:

(a) multiplied by property The factor 30%.

(b) payroll multiplied by The factor 30%. (c) 208.45(2), multiplied by [MCL as The sales factor 40%. 77, by § 1.] amended 1991 PA 31, years beginning after December 1992: And for the at issue (a) property multiplied by 25%. The factor (b) payroll multiplied by factor 25%. (c) 208.45(4), by multiplied [MCL factor 50%. The sales § 1.] PA

amended 477 Mich 170 Concurring Opinion by Kelly,

(c) Receipts plan- from derived ning, design, or construction activities within this state Michigan receipts. shall be deemed [MCL 208.53.] It is subsection c that controls the disposition case. THE

INTERPRETING STATUTE The first task is to decide whether subsеction c of MCL 208.53 allows defendant to characterize from planning entirely services rendered Michigan outside as sales. Four separate entities have interpreted this provision the course of these proceedings.

The hearing referee and the Court of adopted Claims the interpretation advocated plaintiff and found that 53(c) § does not allow defendant to characterize the out-of-state services Michigan as sales. The Commis- sioner of Revenue and the Appeals Court of agreed with 53(c) defendant’s interpretation and § determined that does allow defendant to characterize the out-of-state services performed for Michigan construction projects as sales. The nonuniformity of these conclu- signals sions that the correct construction of this stat- ute is not obvious.3

When the correct construction of a statute is unclear and reasonable minds differ about interрretation, its it is necessary engage to in judicial construction to ascer- drafting of this meaning statute is awkward and renders the might subsection c less dear than it if parallel be it stood alone. The statute’s grafted structure is flawed. provision Subsection c was onto a standard from (UDITPA). seq. Purposes Act, the Uniform 1 et Division of Income for Tax 7A, I, part ULA, p However, wording 141. its does not conform to the provision. structure of the UDITPA The introduction all three subsections receipts Michigan receipts, is a conditional definition using of sales wording naturally completes word “if.” The of subsections a and b phrase. However, conditional subsection c does not. Opinion by Concurring Kelly, J. MCI, In re 460 Mich at Legislature’s intent.4 tain the courts must statutory provision, construing 411. In of the provisions with other provision reconcile the not And of a statute should statute, part if one possible. nugatory or part as to render another be construed so Meridian, Mich See, Altman v e.g., ineffective. (1992); v Total Petro Farrington 487 NW2d 155 leum, Inc, 442 Mich 501 NW2d derived from According plaintiff, receipts to activities, activities, or construction activities if in only sales the activities occur Michigan are deemed rejected. must be Subsec- interpretation this state. This in Michi- expressly tion a addresses services 53(c) §If to be to mean that the gan. interpreted were in in order to be performed Michigan services had to be sales, c then subsection would be Michigan considered redundancy. reduced to a statutory unambiguous majority proceeds provision as if the The interpretation. language It that the of a

and needs no is bizarre notion only meaning separate statute can have one reasonable when four split interpretation. independent entities have on its correct majority my ambiguity The claims that definition of is inconsistent majority rights disagree with current law. The is within its with the suggesting I in definition use for that word. But it is off base that its “ambiguity” аppears definition of is the current law of the state. It that majority only “ambiguity” believes that the definition of that it favors legal authority may statutory interpretation. I know of no be used for binding supports position. majority appears that to confuse the legal holding necessary of a with the effect of a for the determination case justices nonbinding statutory analysis used to reach it. The effect of analysis comprise majority are entitled to favor one form of or who analysis they in one definition of a word used over another. But cannot justices only approach mandate that all other use their chosen Differing “Ambiguous” is one such word. definitions for these words. analysis may disfavored in the modes of and definitions be considered definitions, But, minority’s majority prefers others. sense that dictionaries, acceptable in cannot be banned. when current Mich Concurring Opinion Kelly,

By finding services for construction sales, in each projects Michigan Michigan located are effect. provision given statute is When statute 53(a) fashion, § in interpreted provides when activity Michigan, the business is in the sales of than tangible personal other are property Michigan 53(b) sales. Section covers situation where business activities are both in Michigan. outside If a greater proportion of the Michigan, then the tangible sales of other than personal property are characterized sales. Section 53(c) addresses the situation where are per- formed for planning, design, or construction projects Michigan.

Another consideration that weighs my determina- tion is that a construction that nullifies the effective- of a ness statute should be avoided if possible. In re Comm, Petition State Hwy 709, 714-715; 383 Mich Rather, NW2d when engaging injudi- construction, cial a court must bear in mind purpose of the statute. “When faced with two alternative rea- ..., sonable interpretations we give should effect to the interpretation thаt faithfully more legis- advances the purpose lative behind Adair, the statute.” 452 Mich at 479-480.

Apparently, the Legislature added subsection c in response to a concern by advanced Michigan-based engineering that, and architectural it, firms without they would be at a competitive disadvantage with out-of-state They firms. feared that out-of-state archi- engineers tects and gain would a competitive advantage when bidding on Michigan construction if projects their services for in-state projects were not treated as Michi- Concurring by Opinion Kelly, by defendant gan interpretation sales.5 The advocated have appear prompted addresses the concerns that to the enactment of this statute. given to the construction a statute

Finally, we defer to enforce it. Breuhan v agency chosen Schools, Plymouth-Canton Community historically Defendant has 389 NW2d 85 53(c) ascribing § services interpreted to the in which the construction рrojects construction give weight interpretation. occ urs.6I to this clause ANALYZING commerce The decision that the ‍‌‌‌​​‌‌‌‌‌​‌​‌‌​​‌​‌‌​​​​‌‌‌​​‌​‌‌​‌​‌‌​​‌‌‌‌​​‌‍statute the revenues at allows issue to be taxed is not the end of the It is also inquiry. necessary to decide whether the tax violates the Com- merce the United Clause of State Constitution.7

The Commerce Clause provides “Congress shall have Regulate among [t]o Power ... Commerce ... Const, I, 8,§ several ....” States art els and 3. “Though grant as a phrased regulatory power to Congress, long the Clause has been understood have a ‘negative’ aspect that denies the the power States unjustifiably against to discriminate burden July 17, 1975, Consulting Engineers A letter from the Council of 53(c). Inc., Michigan, proposed to Senator John Bowman the addition of surrounding adoption The letter and circumstances of the subsection enacting demonstrate the intent it. It was enacted so that all the projects for construction would be attributed to the state where the services are consumed. 6 Defendant instructs its audit staff that services related to by Michigan receipts. construction activities are statute Defendant does by Michigan-based not attribute to similar received company for construction activities in other states. 7 join majority’s analysis I cannot I find constitutional because it to incomplete conclusory. be Mich 170

192 477 Concurring Opinion Kelly, Oregon interstate flow articles commerce.” Waste Quality, Inc v Environmental Systems, Oregon Dep’t of (1994). 98; 1345; L 2d 93, 511 114 S Ct 128 Ed 13 US The United States Court has held that a Supreme challenge state tax will survive a Commerce Clause (1) applied activity having when the tax is to an (2) state, taxing fairly substantial nexus to the is (3) against does not inter- apportioned, discriminate (4) commerce, fairly related to the services Transit, provided by Complete the state. Auto Inc v 279; Brady, 1076; 430 97 Ct 51 L Ed 2d US S 326 (1977). Plaintiff claims that the tax at issue violates the prongs first two of this test.8.

Several principles kept should be mind when analyzing constitutionality of a tax. States have great latitude tax enacting provisions. when See Also, Trinova at Corp, pre- US 386. a statute is sumed a clear showing constitutional absent to the contrary. Co, Lehnhausen v Lake Shore Auto Parts 356, 364; 93 S Ct L Ed 2d 351 This presumption constitutionality especially strong respect taxing with statutes. Washtenaw Co v State Comm, 346, 371; (1985), Tax 373 NW2d 697 citing City Lansing, Thoman v Mich NW2d 213 argues

Plaintiff the construction defendant gives to statutory provision permits imposition of a tax on activities do not have a substantial Michigan. nexus with It that no claims substantial nexus exists in this case because plaintiffs activities occurred outside and a Michigan, state cannot against Plaintiff also claims that the tax discriminates interstate fairly apportioned. argu commerce because the tax is not Because this violating apportionment, really ment on based the tax fair argues only prongs the tax violates first two of the test. 193 v Concurring Opinion by J. Kelly, I find thаt outside that state. activities that occur for a necessary the connection misconstrues plaintiff taxpayer nexus with the state to have a substantial being taxed. activity a activity, of a tax on an there must be case “[I]n itself, . .. activity connection to the connection [and] Allied-Signal, actor the State seeks to tax ....” to the Director, 778; 112 Taxation, 504 S Inc v Div US (1992). 2251; 2d two Accordingly, Ct 119 L Ed may determining different arise inquiries First, the prong nexus is satisfied. Id. substantial have the to tax. Id. For this authority state must authority to exist the must have a taxpayer physical taxing jurisdiction. Quill in the v presence Corp See Dakota, 298, 311; 1904; L North 504 US 112 Ct 119 Ed S (1992). Second, 2d 91 the state must not exceed its Inc, at legitimate power Allied-Signal, to tax. 504 US power “[T]he 778. State’s to tax an individual’s corporation’s justified by ‘protection, activities is opportunities benefits’ the State confers on those Id., Co, quoting Penney activities.” Wisconsin v J C 435, 444; 246; US 61 S Ct 85 L Ed 267 case, In this the parties stipulated that management pro- сonstruction and material in Michigan. curement activities On the basis of this presence, clearly power plaintiff. has the to tax The question becomes whether the state exceeded the legitimate power. reach of its

A taxpayer arguing that a tax lacks substantial activity to the rely argument nexus taxed cannot on the the source of income is attributable to another Taxes, Mobil Corp state. Oil Vermont Comm’r L 2d 510 S Ct 63 Ed Rather, to mount a challenge ground, successful on this 477 MICH Concurring Opinion Kelly, the income taxed was taxpayer must show unrelated to [the

“earned the course activities taxing] State.” Id. at 439. showing.

Plaintiff cannot make this Because the at plaintiff pro- issue arose from services vided for there is a projects, construction substantial nexus between the state and the taxed. has some being long plaintiff physical As as state, may in the tax presence state out of state that are performs generаlly but Michigan. consumed within See Trinova Corp, 498 US at 374-377.

Plaintiff also claims that the interpretation advo- by cated defendant violates Commerce Clause re- quirement apportionment. According of fair to plaintiff, internally that, the tax is not consistent. It reasons interpretation, every under this with a similar statute could tax all of a business’s activities. The result would be duplicative taxation, unconstitutionally putting interstate com- merce at a competitive disadvantage.

In this Court ruled that apportionment “[f]air requires that each only state tax its fair share of activity.” interstate v Dep’t Inc Caterpillar, (1992). Treasury, 488 NW2d 182 that, Supreme Before the United States Court ruled that, fairly to ascertain whether a tax is it apportioned, must examined be for both internal and external con- Sweet, sistency. 252, 261-262; v 488 US Goldberg S 582; L Ct Ed 2d 607 Plaintiff does not tax; challenge consistency therefore, the external deciding fairly apportioned, whether this is it is consistency оnly. examined for internal by Concurring Opinion Kelly, J. internal Supreme The United States Court discussed Lines, Tax Comm v consistency Oklahoma Jefferson Inc, 1331; 131 L Ed 2d 261 514 US 115 S Ct It stated: consistency imposition of preserved

Internal when the by every question the one in other State a tax identical to add no burden to interstate commerce intrast- would nothing ate commerce would not also bear. This test asks tax, reality degree about the of economic reflected simply but looks to the structure of the tax at issue to see application by every in the its identical State disadvantage place Union interstate commerce at a would A inter- compared with commerce intrastate. failure of consistency that a nal shows as matter of law State attempting to more than its fair share of from take taxes transaction, allowing a tax in one interstate since such mercy of State would interstate commerce at the might remaining impose those States that an identical tax. [Id. 185.] at 208.53,1

Applying principles these to MCL conclude that the tax is c of the internally consistent. Subsection specifically projects. statute deals with construction involved, c, project When a construction subsection being specific provision, applies the more and subsec- tions a and not. c b do Subsection ascribes the business activity9 for the projects construction to the state where Therefore, construction occurs. when a construction involved, is the state where the construc- project only activity, tion occurs taxes the business and there is no double taxation. example helpful why

An to illustrate there is no the internal-consistency problem. Consider situation a both in company performed where services activity, just speak physical When I of business I refer not to the labor goes building project design into the but also to the and that take beforehand. Mich 170 Concurring Opinion by Kelly, J. in If Ohio project Michigan. and Ohio ‍‌‌‌​​‌‌‌‌‌​‌​‌‌​​‌​‌‌​​​​‌‌‌​​‌​‌‌​‌​‌‌​​‌‌‌‌​​‌‍for a construction Michi- adopted apportionment the same tax formula as gan, activity all the both states would ascribe business Because the state where construction occurs. in Michigan, only Michigan construction occurred result, a one only would tax the services. As state would activity tax the business and there would be no internal-consistency problem.10

CONCLUSION 208.53(c) MCL allows defendant to characterize re- ceipts projects from services for construction Michigan Michigan Accordingly, sales. defendant properly engineer- assessed taxes on the revenue for the ing plaintiff provided and for construc- projects tion in Michigan, regardless of which services Michigan. occurred outside Because a substantial nexus activity exists between and the of plaintiff being taxed, fairly because tax is result, the tax apportioned, is cоnstitutional. As a I affirming concur in part reversing part judgment Appeals. Court WEAVER, JJ., KELLY, CAVANAGHand concurred with Appeals applied internal-consistency The Court of test as if other adopted states that the same statute would ascribe construction activities project under subsections a or b. This error. a was When construction involved, Michigan activity all ascribes to the state where Therefore, test, purposes construction occurs. other states that adopt the same statute would also ascribe all business to the state inapplicable. where construction occurs. Subsections a and b would be Admittedly, possible it is that another state a could enact statute that taxation, would allow for double which seems to be the Court of what Appeals However, internal-consistency was concerned about. test say taxpayer subject says does not shall never be to double It taxation. that, every issue, taxpayer if emulates the state at shall not be subject to double taxation.

Case Details

Case Name: Fluor Enterprises, Inc v. Department of Treasury

Court Name: Michigan Supreme Court

Date Published: May 2, 2007

Citation: 730 N.W.2d 722

Docket Number: Docket 129149

Court Abbreviation: Mich.