Pm One, Ltd v. Department of TreasuryPm One, Ltd v. Department of Treasury
Lead Opinion
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),
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.
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.
H. 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.
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 capaсity, 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,
“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 clоse 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”
(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”
(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
HI. 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.
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.
Generally speaking, PM One used the CDA to make three separate types of payments: (1) payments from the cda to PM One for its management fees, (2) payments from the cda to PM One as reimbursement for the costs of PM One’s personnel, such as site managers, leasing agents, or maintenance staff assigned to its clients’ properties, and (3) payments from the cda to third-party vendors who provide goods and services to each client’s property. It is the third category that is critical; the department did not challenge PM One’s claim that it included its management fees, category one, and reimbursement for personnel expenses, category two, when calculating its gross receipts and paying the corresponding sbt. With respect to category three, PM One admitted that it did not consider the money that flowed through the CDA to third-party vendors when calculating its SBT for the relevant tax years. Consequently, out of the three categories of payments PM One made using the cda, the parties only dispute whether sbt was payable fоr this third category of transactions.
As noted above, to pay third-party vendors, PM One used a two-step process of transferring money into and out of the cda. Despite the Michigan Tax Tribunal’s conclusion that the money flowing through the cda to third-party vendors constituted consideration to PM One in the form of reimbursement, the record commands a contrary inference. In short, as discussed in more detail below, these transactions cannot be considered PM One’s “sales,”
b. the flow of funds into the cda
Focusing on the first step, transferring money into the CDA, the record does not make clear that this money belonged to PM One either in the individual client’s depository account from which it originated or while in the CDA for that brief and almost theorеtical moment before being transferred to a third party. For instance, the depository accounts were not only separated for each client, but also kept in each client’s name. This supports the testimony of PM One’s president that PM One did not have any right or title to the money in those individual accounts, regardless of how the funds were routed to the third-party vendors.
PM One’s president also stated that none of the funds in the cda belonged to PM One. That none of PM One’s clients had access to the CDA, which PM One exclusively managed, does not undermine the notion that the funds in the CDA belonged to the client. As a zero-balance account, there would have been no practical way for clients to manage or even access the money in the CDA because the payments to third-party vendors out of the account were practically instantaneous, virtually coinciding with the moment of a
Critically, although they resided only very briefly in the CDA, from which PM One has authority to draw checks, the funds continued to belong to the client at this stage. PM One did not have any access to the money in the sense that it could use the funds in the cda in a manner it chose or to benefit itself as a business might ordinarily use the consideration it earned from conducting business. See
C. THE FLOW OF FUNDS OUT OF THE CDA
There is even less evidence that funds flowing out of the CDA constituted consideration to. or from PM One for “the performance of services.”
V. GROSS RECEIPTS
A. STATUTORY PROVISIONS
As noted above, gross receipts are “the sum of sales” and “rental or lease receipts.”
B. THE AGENCY EXCLUSION AND REIMBURSEMENT
Gross receipts do not “include the amounts received in an agency or other representative capacity, solely on behalf of another or others . . . .”
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 the direction of the laws of the federal government or ofany state or local governments.” [Id. (emphasis supplied).]
As a result, the plain language of
Despite the clear language, the Michigan Tax Tribunal stated that the agency
exclusion . . . does not apply to the amounts at issue because Petitioner [PM One] does not receive such amounts solely on behalf of another, instead, Petitioner has 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 it or by others acting under its direction or control. [Emphasis supplied.]
However, as we discussed in the context of “sales,” the evidence on the record strongly supports the conclusion that to the extent that PM One might ever have “received” money that flowed into the CDA, it did so solely on behalf of its clients because of an express agency relationship. Accordingly, we conclude that the agency exclusion applies in this case.
However, there is an exception to the agency exclusion, and the only reason that the agency exclusion would not apply to the challenged transactions is if that exception operated here. As
“It is not so much the actual exercise of control which is regarded, as the right to exercise such control. To escape liability the original master must resign full control of the servant for the time being, it not being sufficient that the servant is partially under control of a third person. Subject to these rules the original master is not liable for injuries resulting from acts of the servant while under the control of a third person.” [Hoffman, supra at 469.]
Similarly, in the worker’s compensation context, the courts must determine if a plaintiff was an “employee” before determining if the plaintiff was improperly denied benefits. See Oxley v Dep’t of Military Affairs,
True,
With these examples in mind, it is difficult to conceive of, for example, a representativе of the telephone company being under PM One’s “direction and control” when fulfilling a request to activate telephone service to an apartment unit. Similarly, it is unlikely that the employees of separate businesses who perform landscaping services, snow removal, or paint an apartment building were under PM One’s “direction and control.” PM One could not hire, fire, or discipline any of these individuals. Nor did any of these individuals fully relinquish their position of employee for the third-party vendor when performing work for PM One’s clients. Further, there is no evidence whatsoever that PM One rendered the services corresponding to the challenged transactions through the CDA “itself” by using its own personnel to perform services or by selling its own stock, inventory, or property. Therefore, there was no factual basis for the Michigan Tax Tribunal’s conclusion that the exception to the agency exclusion applies in this case.
C. CASES INTERPRETING REIMBURSEMENT IN THE GROSS RECEIPT CONTEXT
Not only does the plain language of
(1) STRATTON-CHEESEMAN
In Stratton-Cheeseman Management Co v Dep’t of Treasury,
[W]e are of the opinion that when plaintiff received and deposited into bank accounts designated by the insurance company premiums and other monies it was acting as an agent; these funds were intended by the Legislature to be excluded from the meaning of gross receipts in § 7(3) of the sbta. However, the payments received by plaintiff as reimbursement for costs incurred in managing the insurance company’s business clearly were not. Plaintiff did not receive this money from the insurance company as a representative of the insurance company. Instead, the substance of the reimbursement payments for tax purposes was to compensate plaintiff for services provided in managing the insurance company’s business. The fact that the insurance company reserved the right to approve costs prior to making payments and required plaintiff to operate within an approved budget does not alter this conclusion. In this regard, the insurance company’s right to approve the amount of reasonable costs subject to reimbursement must be distinguished from plaintiff’s right to authorize the actual expenditures. Plaintiff’s contention that the insurance company “retained control” over costs fails to make this distinction.
As the department correctly contends, to accept plaintiff’s theory would result in only the monthly fees received by plaintiff, which are computed based on a fixed rate per policyholder, being subject to the tax. Since the monthly fees essentially represent gross profits above and beyond plaintiffs costs, the purpose of the sbta to impose а tax on the value of business activity, and not its income, would be defeated. [Stratton-Cheeseman, supra at 727-728.]
In this case we address a problem inverse to the one that Stratton-Cheeseman describes. PM One is not attempting to avoid paying sbt on the money that passes through the CDA to reimburse it for the expenses it pays for with its own money or for its personnel expenses. Stratton-Cheeseman clearly requires PM One to incorporate those gross receipts when calculating its sbt, and it does so. Rather, the transactions that the department is attempting to tax are analogous to the transactions this Court protected from the SBT in Stratton-Cheeseman under the agency relationship between the plaintiff corporation and the Michigan Physicians Mutual Liability Company. Quite clearly, in Stratton-Cheeseman this Court concluded that managing and transferring money on behalf of a client could fit within the agency exclusion as long as the agent is not reimbursed for expenses associated with those activities and as long as it pays sbt on a separate fee agreement that contemplates, or otherwise accounts for, the costs of those services, whether designated as costs or profits. Id. at 727. This rule applies no differently here. Because PM One accounted for the costs of maintaining the CDA in its separate fee agreements with its clients and it paid SBT on those fee agreements, the agency exclusion protects it from tax liability for the funds that pass through the CDA to third-party vendors. These vendors are, in reality, very similar to the claimants that the plaintiff corporation in Stratton-Cheeseman paid on behalf of the Michigan Physicians Mutual liability Company with the money it managed for that principal.
Furthermore, PM One was not attempting merely to pay sbt on its gross profits instead of the value of the business it conducted. Id. at 728. Unlike the plaintiff corporation in Stratton-Cheeseman, PM One’s agreements with its clients included payments for both costs and profit. Thus, we conclude that allowing PM One to avoid paying SBT on these transactions through the CDA in which the third-party vendors actually receive payment is not tantamount to allowing PM One to evade paying its fair share under the SBTA.
(2) APCOA
This Court again addressed the agency exclusion to gross receipts in APCOA, Inc v Dep’t of Treasury,
Here, APCOA does not support the Michigan Tax Tribunal’s decision because the challenged consideration flowing through the CDA was not for services PM
(3) CREDIT ACCEPTANCE
The most recent case addressing the concept of taxable reimbursement under the sbta is Credit Acceptance Corp v Dep’t of Treasury,
Although concurring with the majority’s opinion, Judge Markman
Applying either the majority’s looser formulation of the agency exclusion or Judge Markman’s more precise blueprint in Credit Acceptance leads to the same result — that the challenged transactions are not part of PM One’s gross receipts —
D. THE INDIRECT PAYMENT THEORY
The department’s theory that the sbt should apply to the challenged transactions because they passed through the CDA and added value to its business by allowing PM One to perform its management obligations under its contracts with its clients has no appreciable merit. While it is true that PM One had a general obligation to keep the properties in good repair and that well-maintained properties often are more marketable, the individual clients compensated PM One by paying the management fees and reimbursing its personnel expenses. PM One included these two forms of compensation within its calculation of its gross receipts and paid the appropriate sbt on them; they are not at issue here.
More importantly, every time an agent performs contractual obligations the agent is ultimately working toward earning its management fee and thus benefits from being able to carry out the terms of an agency agreement. Yet, the department’s auditors excluded mortgage payments and property taxes clients paid through the CDA when calculating PM One’s gross receipts because the auditors determined that these payments “carried with the property.” In terms of fulfilling its obligations under the agency agreements, there is no relevant distinction between PM One’s obligation to pay these taxes on behalf of its clients, which the department determined not to be taxable, and paying the third-party vendors, which the department determined to be taxable. Both types of payments helped PM One perform its obligations and enhanced the value of the services it offered its clients. Thus, the department’s decision to designate only payments to third-party vendors as gross receipts was not well grounded in reality.
Nor is there a textual basis in Credit Acceptance Corp, supra, to suggest that performing any and all duties related to a principal’s expenditures for goods and services provided by third-party vendors brings those expenditures within the definition of gross receipts under the SBTA. To the contrary, both the majority and the concurrence in Credit Acceptance Corp required the taxed activity to generate fees or lead to reimbursement in and of itself, irrespective of any separate agreement. Managing the CDA and drawing on it to pay third-party vendors did not, in and of itself, affect PM One’s compensation for its work as an agent in any manner, whether directly or indirеctly. Accordingly, Credit Acceptance Corp does not permit taxation of these activities.
To hold otherwise in this case would completely obviate the agency exclusion to the definition of gross receipts,
VI. CONCLUSION
We conclude that the payments in question here did not constitute a “sale” by PM One within the meaning of MCL' 208.7(1); MSA 7.558(7)(1). Even if the payments were “sales,” we conclude that the agency exclusion in the definition of “gross receipts,”
Reversed.
Notes
Michael McGhie, PM One’s president, testified that the agreement with the individual clients varied. For example, a client could determine that it would maintain its own facilitiеs and only require that PM One collect rent and pay out necessary expenses, essentially a limited accounting function. The fee for this type of agreement would be negotiated with the client and would be less than the compensation received for all-encompassing management of the property. However, during the relevant tax periods in this dispute, PM One did not have any clients acting under this type of limited management agreement.
The compensation provided to the on-site personnel was reimbursed to petitioner by the client.
PM One would negotiate the type of services that would be performed by on-site personnel and the type of services for which outside contractors would be called in for service. For example, a management agreement admitted during the Tax Tribunal hearing provided that independent contractors would be retained to repair air conditioning systems, еlectrical systems, elevators, and other “extraordinary repairs.” It is important to note that this management agreement was not executed, was not in existence during the tax years in dispute, and was admitted subject to those limitations.
Indeed, PM One asserts it obtained no benefit from any rebates or discounts the vendors made available, it did not mark up any of the goods and services, and it did not “warehouse” any goods or convert them to its own separate use.
Now Justice Markman.
Dissenting Opinion
(dissenting). I must respectfully dissent, because I do not believe that the record supports the conclusion reached by the majority.
Petitioner contended that the central depository account merely served as the means for handling the client’s financial affairs. Therefore contends the petitioner, the Tax Tribunal’s determination that payments for goods and services made on behalf of its clients constituted gross receipts was an error at law. Unlike the majority, I disagree. Absent fraud, this Court’s review of a decision by the Michigan Tax Tribunal is limited to determining whether the tribunal made an error of law or applied a wrong legal principle. Sandy Pines Wilderness Trails, Inc v Salem Twp,
(1) “Sale” or “sales” means the gross receipts arising from a transaction or transactions in which gross receipts constitute consideration: . . . (b) for the performance of services, which constitute business activities ....
:|: * *
(3) “Gross receipts” means 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 cаpacity, 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....
The plaintiff was compensated by a monthly fee based on the number of policyholders and was reimbursed reasonable costs incurred on the insurance company’s behalf, including, but not limited to, the plaintiff’s salaries, wages, outside contractual services, and allocated overhead. The plaintiff included its fee and sums received as reimbursement for expenditures as gross receipts when filing its tax returns, but later sought a refund, claiming that reimbursed expenditures were not subject to tax as gross receipts. This Court concluded that the amounts characterized as reimbursements were properly included as gross receipts:
We find no ambiguity in the meaning of gross receipts as defined by the sbta [Single Business Tax Act]. The definition clearly excludes from gross receipts the amount received by a taxpayer solely in an agency or representative capacity, while including amounts received as consideration for the performance of personal services. . . .
We turn, then, to the question of whether plaintiff’s reimbursement payments under the services agreement fit within the clear statutory definition of gross receipts. It is the substance of a transaction rather than the terms applied by the parties which determines how to characterize the payment for tax purposes. In a multiparty transaction, this Court should honor the allocation of rights and duties effected by the parties in an agreement, when supported by tax-independent considerations. [Id. at 725 (citations omitted).]
This Court went on to examine the nature of the agency relationship between the plaintiff and the insurance company and concluded:
Mindful of these definitions, we are of the opinion that when plaintiff received and deposited into bank accounts designated by the insurance company premiums and other monies it was acting as an agent; these funds were intended by the Legislature to be excluded from the meaning of gross receipts in § 7(3) of the sbta. However, the payments received by plaintiff as reimbursement for costs incurred in managing the insurance company’s business clearly were not. Plaintiff did not receive this money from the insurance company as a representative of the insurance company. Instead, the substance of the reimbursement payments for tax pmposes was to compensate plaintiff for services provided in managing the insurance company’s business. The fact that the insurance company reserved the right to approve costs prior to making payments and required plaintiff to operate within an approved budget does not alter this conclusion. In this regard, the insurance company’s right to approve the amount of reasonable costs subject to reimbursement must be distinguished from plaintiff’s right to authorize the actual expenditures. Plaintiff’s contention that the insurance company “retained control” over costs fails to make this distinction. [Id. at 727.]
Furthermore, in APCOA, Inc v Dep’t of Treasury,
In the present case, petitioner argues that its management agreement defined its relationship with its clients as one of agency and that it acted as an agent by merely tunneling payments for goods and services received for the benefit of the client. I disagree. While petitioner did, in fact, characterize its relationship with its clients as one of agency, the substance of the parties’ transaction, not the terms employed, determines how to characterize the payment for tax purposes. Stratton-Cheeseman, supra. Furthermore, even if petitioner were deemed an agent, the costs incurred in managing the properties must be received solely on behalf of the client. Id.;
I do not find that the Michigan Tax Tribunal made an error of law or applied a wrong legal principle, or that its factual findings are not supported by competent, material, or substantial evidence. Therefore, I would affirm.