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### STATE OF MICHIGAN

COURT OF APPEALS

BRUNT ASSOCIATES, INC.,

Petitioner-Appellant, FOR PUBLICATION November 17, 2016

9:05 a.m.

v No. 328253 Michigan Tax Tribunal DEPARTMENT OF TREASURY, LC No. 00-461270

Respondent-Appellee.

Before: O WENS , P.J., and H OEKSTRA and B ECKERING , JJ.

P ER C URIAM

.

Petitioner Brunt Associates, Inc ., appeals by right from a fin al order and judgment of the Michigan Tax Tribunal holding petitioner liable for a use tax d eficiency. At the time of the hearing, petitioner owed $305,234.52 in use tax, plus accruing interest. For the reasons stated below, we affirm the tribunal’s decision.

I. STATEMENT OF FACTS

Petitioner is a domestic for-profit company in the business of producing and installing custom office furnishings and interior finishes, such as custom cabinetry, decorative panels, and freestanding furniture, for commercial applications. In August of 2006, respondent Department of Treasury opened a sales and use tax audit of petitioner’s bo oks that eventually covered the period November 1, 2005 through December 31, 2009. The auditor found that petitioner had reported no use tax during the audit period and was actually re mitting use tax as sales tax. The auditor further found that petit ioner is a real property contra ctor that did not make any sales at retail, and concluded that pe titioner owed $284,082 in use tax, plus $41,674 in interest, for a total of $325,756. 1 On September 28, 2010, respondent issued petitioner a notice of intent to assess, followed by a final assessment on December 7, 2010.

1 On May 5, 2014, respondent amended the audit using additional information provided by the petitioner. The amendment re sulted in a $21,152.52 increase in use tax owed, bringing petitioner’s total use tax de ficit to $305,236, excluding inter est.-2- On October 9, 2013, 2 petitioner filed a verified petition in the tax tribunal, alle ging that it did not owe use taxes, that it had not engaged in activity duri ng the audit period that would produce use taxes, and that the tr ansactions for w hich the audi tor had assessed us e taxes involved customers with tax exemptions. In a prehearing statement submi tted several months later, petitioner alleged that it was an industrial processor, that it made sales of tangible personal property at retail, and that it made retail sales to tax-exempt customers. With the tribunal’s permission, petitioner amended its petition to accord with its prehearing claims. Petitioner further indicated that the “furniture, fixtures, cabinets, shel ves, and decorative panels” it installs retain the character of tangible personal property after instal lation, are removable without impairing the value of the rea lty, and do not “serve the functi on of the realty. Respondent answered by calling attention to petitioner’s response to a que stion in respondent’s first set of interrogatories in which petiti oner stated that it was a “carpe ntry contractor” and “does not sell products, only carpentry services.” Petitioner moved to withdr aw and amend its answers to respondent’s first set of interro gatories. The tribunal denied petitioner’s request, but allowed the amended answers to remain part of the record as supplemental re sponses.

At the tribunal hearing, Brian B runt, petitioner’s manager, ex plained that petitioner is a “finish carpentry contractor” th at produces and installs custom office furnishings and interior finishes such as reception desks, nurses stations, cabinets, an d finished components for break rooms, typically in consultation with a design team. He explai ned that petitioner manufactures the custom-ordered pieces in its workshop, delivers them to job sites, and uses its own workforce to install them. Brunt said that some of the furnishings and f inishes were attached to customers’ buildings with screws, bolts, clips, or fasteners, but could be removed without damaging the realty. Larger, freestanding furnishings, such as reception de sks, although transported in sections, reassembled at the job site, and held in place by the ir size and weight, could also be removed without causing damage. Brunt surmised from his experi ence working with the general contractors and interior designe rs that they had not intended f or petitioner’s products to be permanent affixations to realty, and explained that all of peti tioner’s furnishings, cabinets, and wall panels were decorative a nd that nothing req uired engineer’ s drawings or struc tural approval.

David Rea, petitioner’s accountant, testified that, based on h is knowledge, petitioner was a manufacturer/retailer, not a manufacturer/contractor. He opi ned that the items that petitioner
sells to customers meets the de finition of tangi ble personal pr operty under the Sa les Tax Act, and that the definition of tangible personal property was essential ly identical under the Use Tax Act.

2 The timeliness of petitioner’s petition is not at issue. Resp ondent mailed the final assessment to petitioner’s address of record in December of 2010. However , respondent did not mail the final assessment to petitioner’s authorized repre sentative. In Fradco, Inc v Dep’t of Treasury

, 495 Mich 104; 845 NW2d 81 (2014), Michigan’s Supreme Court held that the appeal period did not begin to run until respondent provided actual notice to bot h the taxpayer, MCL 205.28(1)(a), and the taxpayer’s personal representative as provided in the t axpayer’s written request, MCL 205.8. Thus, the appeals period i n the instant case began to r un on September 19, 2013, the date petitioner’s representative rece ived actual notice of the final assessment. Therefore, petitioner’s petition to the tribunal was timely.-3- He further opined that things t hat could be moved and put into a different room had nothing to do with constructing, altering, or repairing real estate.

Testifying with regard to her audit findings, respondent’s aud itor said she determined that petitioner was a contractor and not a retailer from the initial audit conference with Rea, where she was told that petitioner did not maintain an inventory, pro vide a publication list or price list,
or make retail sales. She also based her determination on the nature of petitioner’s business
activities. The auditor further stated that she based her conc lusion that the items fabricated by petitioner did not retain their character of tangible personal property on her understanding that petitioner affixed the items to the realty of its customers. S he testified that she derived her understanding of petitioner’s business from petitioner’s busine ss classification, a discussion with Rea, a review of petitioner’s website explaining their business activities, and a discussion with her supervisor. The auditor deni ed that her conclusion that pe titioner was a contractor would change even if certain pieces of furniture and equipment were n ot attached to realty, and affirmed that freestanding desks and other items would be consi dered permanently affixed to realty for purpos es of the audit.

Both parties submitted post-hearing briefs, summing up the arg uments they had advanced at the hearing. Petitioner argue d that it was a retailer becau se it manufactured tangible personal property for sale, with installation, for the use and consumpti on of its customers. Petitioner further argued that it was enti tled to an industrial processor exemption because it “changes the form, composition, quality, combination or character of tangibl e personal property for ultimate sale at retail.” Finally, petitioner asserted that it was not a contractor because “the manufactured products never become a permanent affixation to the realty afte r installation.” Respondent argued that petitioner was a real property contractor and was n ot entitled to an industrial processing exemption because it did not ultimately sell its pro ducts at retail.

In a written opinion and judgment, the tribunal found that pet itioner affixed its products to the realty of its customers, either actually or constructive ly, concluding therefrom that petitioner is a contractor liable for use tax on all of its pro ducts, regardless of how they were affixed to customers’ realty. T he tribunal further concluded t hat petitioner was not entitled to an industrial processing exemption, and affirmed respondent’s fina l assessment of $305,234.52 owed in use tax, and the interest accruing thereon. After the tribunal denied petitioner’s motion for reconsideration, petitioner filed a timely appeal with this Court.

II. ANALYSIS

Petitioner first contends that the tribunal erred in concludin g that it was a construction contractor engaged in the busin ess of constructing, altering, r epairing, or improving the real estate of others. We disagree. Because fraud has not been ass erted, our “review of a decision by
the Tax Tribunal is limited to d etermining whether the tribunal erred in applying the law or adopted a wrong principle; its fac tual findings are conclusive if supported by competent, material, and substantial ev idence on the whole record.” Michigan Bell Tel Co v Dep’t of Treasury , 445 Mich 470, 476; 518 NW2d 808, cert de n 513 US 1016; 115 S Ct 577; 130 L Ed 2d 492 (1994). “Substantial evidence must be more than a scintill a of evidence, although it may be substantially less than a preponde rance of the evidence require d in most civil cases.” Dow Chem Co v Dep’t of Treasury , 185 Mich App 458, 463; 462 NW2d 765 (1990). To the extent th at-4- resolution of an issue involves a question of statutory interpr etation, review is de novo, with the agency’s interpretation given “respectful consideration.” Devonair Enterprises, LLC v Dep’t of Treasury , 297 Mich App 90, 96; 823 NW2d 328 (2012).

Under the Use Tax Act (UTA), MCL 205.91 et seq ., every person 3 in Michigan who purchases tangible personal prope rty is subject to a use tax “f or the privilege of using, storing, or consuming tangible pers onal property in this state . . . .” MC L 205.93(1). “The pr ovisions of the [UTA] complement those of the Gen eral Sales Tax Act [GSTA], MCL 205.51 et seq ., and were generally designed to avoid the imposition of both use and sale s tax on the same property.” Granger Land Dev Co v Dep’t of Treasury , 286 Mich App 601, 608; 780 NW2d 611 (2009) (citations omitted). Thus, a person who purchases property for resale is exempt from paying use tax as long as the purchaser doe s in fact resell the property. MCL 205.94(1)(c)( i ) and (2). Exemption statutes are strictly construed in favor of the taxin g unit, Mich Baptist Homes & Dev Co v City of Ann Arbor , 396 Mich 660, 670; 242 NW2d 749 (1976). “[T]he burden is on a claimant to establish clearly hi s right to exemption, and an al leged grant of exemption will be strictly construed and cannot be made out by inference or impli cation but must be beyond
reasonable doubt.” Evanston YMCA Camp v State Tax Comm’n , 369 Mich 1, 8; 118 NW2d 818 (1962) (quotation marks and citation omitted).

It is undisputed that petitioner is a manufacturer. The quest ion is whether petitioner is a retailer liable only for sales ta x or a contractor liable for u se tax. Neither the GSTA nor the UTA define “contractor”; however , Mich Admin Code, R 205.71 provide s the following guidance:

(1) “Contractor” includes only prime, general, and subcontracto rs directly engaged in the business of constructing, altering, repairing, o r improving real
estate for others.

* * *

(6) Where a manufacturer affixe s his product to real estate for others, he qualifies
as a contractor and shall remit use tax on the in ventory value of the property at the time the property is converted t o the contract which value shal l include all costs of manufacturing, fabri cating, and processing. . . .

The dispositive issue with regard to whether petitioner is a c ontractor is whether petitioner “affixes his product to real estate for others.” Mi ch Admin Code, R 205.71(6).

Petitioner argues that it is not a contractor because, althoug h it affixes some of its furnishings and finishes to the real estate of its customers us ing bolts, clips, fasteners, or screws, these products, as well as its freestanding furniture, can easi ly be removed without damaging the product or diminishing the value of the customer’s realty. How ever, contrary to petitioner’s implication, that an item is removable is not dispositive of wh ether it is attached to realty. See Miedema Metal Bldg Sys, Inc v Dep’t of Treasury , 127 Mich App 533; 338 NW2d 924 (1983)

3 “Person” includes firms. MCL 205.92(a).-5- (affirming that grain bins bolted to a concrete foundation but easily removable were attached to realty nonetheless). The unobtru siveness of the hardware petit ioner uses to attach its products and the alleged ease and speed with which its products, whether attached or freestanding, can be removed in no way negates the fact that the petitioner physical ly attaches some of its products to its customers’ buildings, and constructively attaches others. See Velmer v Baraga Area Sch , 430 Mich 385, 395; 424 NW2d 770 (1988) (indicating that, although n ot bolted to the floor, the milling machine at issue was constructively “affixed” to realty by reason of its weight).

In like vein, petitioner asserts that its products retained th eir character of tangible personal property after installation, and contends that the tri bunal committed legal error when it failed to use the “3-part fixture test” to determine whether it s products were sufficiently attached to its customers’ realty to consider them as part of the realty . We find this argument without merit. Determining whether petitioner’s products become “fixtu res” once installed is irrelevant to the issue at hand, which is whether petitioner is a contract or. To determine whether petitioner is a contractor, it is enough to determine that petitioner is a manufacturer that affixes its product to the realty of its customers . Mich Admin Code, R 205.71(6); see also Miedema , 127 Mich App at 536-537 (where the only question relevant to determining whe ther the petitioner was a
contractor was whether he at tached grain bins to realty).

In light of the foregoing, we c onclude that the tribunal’s fin ding that petitioner manufactures product that it affi xes to the real estate of othe rs, either actually or constructively, is conclusive because it is supported by competent, material, a nd substantial evidence on the
whole record. Michigan Bell Tel Co, 445 Mich at 476. We further co nclude that the tribunal did not err in applying the law or adopt a wrong principle when it concluded that petitioner is a
“manufacturer” and “contractor” that “affixes [its] product to real estate for others” and is “directly engaged in the business of constructing, altering, re pairing, or improving real estate for others” under Mich Admin Code, R 205.71.

Petitioner next contends that the tribunal erred by denying it s claim to an industrial processing exemption and by fail ing to apportion its industrial processing claim properly. 4 We disagree.

We first turn to the question of whether petitioner is entitle d to an industrial processing exemption. The UTA industrial-processing statute, MCL 205.94o, provides an exemption for persons engaged in industrial processing. MCL 205.94o(7) provi des the following relevant
definitions:

(a) “Industrial processing” mean s the activity of converting or conditioning tangible personal property by ch anging the form, composition, q uality, combination, or character of the property for ultimate sale at retail or for use in

4 An industrial processing exemp tion “is limited to the percenta ge of exempt use to total use determined by a reasonable formula or method approved by the de partment [of treasury].” MCL 205.94o(2).-6- the manufacturing of a product to be ultimately sold at retail or affixed to and made a structural part of real e state located in another state.

. . .

(b) “Industrial processor” means a person who performs the acti vity of converting or conditioning tangible personal property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail or a ffixed to and made a structural part of real estate located in another state.

Property that is not eligible f or an industrial processing exe mption includes “[t]angible personal property permanently a ffixed and becoming a structural part of real estate . . . .” MCL 205.94o(5)(a). Petitioner contends that it is an industrial pr ocessor because it converts or conditions tangible personal property for ultimate sale at reta il. Petitioner further contends that the exception to the industrial processor exemption does not ap ply to it because its products, even if affixed, are not a “struc tural part of real estate.”

However, as set forth above, petitioner does not manufacture p roducts for “ultimate sale at retail,” and there is no record evidence that petitioner man ufactures products for “use in the manufacturing of a product to be ultimately sold at retail or a ffixed to and made a structural part
of real estate located in anot her state.” MCL 205.94o(7)(b). Consequently, petitioner does not meet the statutory criteria fo r characterization as an “industr ial processor.” Because petitioner is not an industrial processor, we need not address the issue of a pportionment under MCL 205.94o(2).

Affirmed.

/s/ Donald S. Owens
/s/ Joel P. Hoekstra /s/ Jane M. Beckering