Court Opinion

ID: 9729789
Source: CourtListenerOpinion
Date Created: 2023-08-26 14:48:57.354147+00
Date Added: 2024-06-11T18:25:59.569145
License: Public Domain

Hood, J.
(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, 232 Mich App 1, 9; 591 NW2d 658 (1998). Factual findings by the tribunal are upheld unless they are not supported by competent, material, and substantial evidence. Georgetown Place Cooperative v City of Taylor, 226 Mich App 33, 43; 572 NW2d 232 (1997). The failure of the tribunal to base its decision on competent, material, and substantial evidence is an error of law requiring reversal. Id. I believe that the majority opinion departs from this basic premise.
MCL 208.7; MSA 7.558(7) defines “sales” and “gross receipts” for purposes of the single business tax as follows:
*282(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 capacity, solely on behalf of another or others but not including amounts received by persons having the power or authority to expend or otherwise appropriate such amounts in payment for or in consideration of sales or services made or rendered by themselves or by others acting under their direction and control....
In Stratton-Cheeseman Management Co v Dep’t of Treasury, 159 Mich App 719, 721; 407 NW2d 398 (1987), the plaintiff managed a medical insurance company. The plaintiffs responsibilities included processing insurance applications, issuing policies, collecting premiums, administering claims, and maintaining records and reports. The plaintiff was obligated to abide by the insurance company’s operating budget and could not expend amounts in excess of a set budget unless approval was obtained from the company’s board of directors. Id. at 721-722.
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 reim*283bursed 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 *284fact 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, 212 Mich App 114, 115-116; 536 NW2d 785 (1995), the petitioner operated parking structures on behalf of Wayne County. Wayne County retained control in the form of staff hiring, parking rates, and control systems. The petitioner received a management fee based on a percentage of the gross parking revenues and was reimbursed for all its direct operating expenses, including payroll and insurance payments. The petitioner initially included reimbursement for operating expenses in paying the single business tax, but later sought a refund for those expenses. This Court held that “monies received by a management agent as reimbursement of expenses are properly included in the calculation of the management agent’s single business tax liability.” Id. at 118, citing Stratton-Cheeseman, supra. Finally, in Credit Acceptance Corp v Dep’t of Treasury, 236 Mich App 478, 481-482; 601 NW2d 109 (1999), this Court concluded that reimbursement to the petitioner for the costs of repossession of automobiles constituted gross receipts for purposes of MCL 208.7; MSA 7.558(7). Unlike the majority, I do find that these cases are readily distinguishable from the situation under consideration here.
*285In 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.; MCL 208.7; MSA 7.558(7). While petitioner did manage the properties under the authority of the client, petitioner was afforded discretion in its operation of the properties. Petitioner’s president, Michael McGhie, and chairperson, Robert Pendergast, testified that client approval had to be obtained for some purchases in excess of a particular dollar amount. However, it was also petitioner’s responsibility to lease the rental properties of its clients and take action to fulfill its obligations. Accordingly, petitioner could advertise in an attempt to lease the properties or engage in beautification projects, such as purchasing an aquarium, to make the property more attractive to potential tenants. In essence, the substance of the reimbursement payments for tax purposes was to compensate petitioner for services provided in managing the properties. Stratton-Cheeseman, supra. Petitioner’s services also fulfilled its own business goals to the extent that it increased property rentals, and, in turn, the management fee received by petitioner. Furthermore, McGhie testified that in contracting with rental property cli*286ents, he will “undertake to keep it [the property] in good repair.” The monetary transfer by petitioner from the central depository account was not merely a funneling of funds from the client to a third-party vendor with petitioner acting as the intermediary, but rather evidenced payment for goods and services for the client’s interest that also discharged petitioner’s obligations under the management agreements. Thus, it is not clear from the record, as the majority asserts, that none of the goods and services constituted petitioner’s inventory or stock in trade. Accordingly, the “reimbursements” for expenses incurred was appropriately included as gross receipts for purposes of the single business tax. MCL 208.7; MSA 7.558(7); Stratton-Cheeseman, supra; APCOA, supra.
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.