                           STATE OF MICHIGAN

                            COURT OF APPEALS



BRUNT ASSOCIATES, INC.,                                              FOR PUBLICATION
                                                                     November 17, 2016
               Petitioner-Appellant,                                 9:05 a.m.

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

               Respondent-Appellee.


Before: OWENS, P.J., and HOEKSTRA and BECKERING, JJ.

PER CURIAM.

       Petitioner Brunt Associates, Inc., appeals by right from a final order and judgment of the
Michigan Tax Tribunal holding petitioner liable for a use tax deficiency. 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 books 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 remitting use tax as sales tax. The
auditor further found that petitioner is a real property contractor that did not make any sales at
retail, and concluded that petitioner 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 resulted in a $21,152.52 increase in use tax owed, bringing
petitioner’s total use tax deficit to $305,236, excluding interest.


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        On October 9, 2013,2 petitioner filed a verified petition in the tax tribunal, alleging that it
did not owe use taxes, that it had not engaged in activity during the audit period that would
produce use taxes, and that the transactions for which the auditor had assessed use taxes involved
customers with tax exemptions. In a prehearing statement submitted 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, shelves, and decorative panels” it installs
retain the character of tangible personal property after installation, are removable without
impairing the value of the realty, and do not “serve the function of the realty. Respondent
answered by calling attention to petitioner’s response to a question in respondent’s first set of
interrogatories in which petitioner stated that it was a “carpentry contractor” and “does not sell
products, only carpentry services.” Petitioner moved to withdraw and amend its answers to
respondent’s first set of interrogatories. The tribunal denied petitioner’s request, but allowed the
amended answers to remain part of the record as supplemental responses.

        At the tribunal hearing, Brian Brunt, petitioner’s manager, explained that petitioner is a
“finish carpentry contractor” that produces and installs custom office furnishings and interior
finishes such as reception desks, nurses stations, cabinets, and finished components for break
rooms, typically in consultation with a design team. He explained that petitioner manufactures
the custom-ordered pieces in its workshop, delivers them to jobsites, and uses its own workforce
to install them. Brunt said that some of the furnishings and finishes 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 desks, although transported in
sections, reassembled at the job site, and held in place by their size and weight, could also be
removed without causing damage. Brunt surmised from his experience working with the general
contractors and interior designers that they had not intended for petitioner’s products to be
permanent affixations to realty, and explained that all of petitioner’s furnishings, cabinets, and
wall panels were decorative and that nothing required engineer’s drawings or structural approval.

         David Rea, petitioner’s accountant, testified that, based on his knowledge, petitioner was
a manufacturer/retailer, not a manufacturer/contractor. He opined that the items that petitioner
sells to customers meets the definition of tangible personal property under the Sales Tax Act, and
that the definition of tangible personal property was essentially identical under the Use Tax Act.


2
  The timeliness of petitioner’s petition is not at issue. Respondent 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 representative. 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 both the taxpayer, MCL 205.28(1)(a),
and the taxpayer’s personal representative as provided in the taxpayer’s written request, MCL
205.8. Thus, the appeals period in the instant case began to run on September 19, 2013, the date
petitioner’s representative received actual notice of the final assessment. Therefore, petitioner’s
petition to the tribunal was timely.


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He further opined that things that 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 auditor 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, provide 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 conclusion 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. She testified that she derived her
understanding of petitioner’s business from petitioner’s business classification, a discussion with
Rea, a review of petitioner’s website explaining their business activities, and a discussion with
her supervisor. The auditor denied that her conclusion that petitioner was a contractor would
change even if certain pieces of furniture and equipment were not attached to realty, and
affirmed that freestanding desks and other items would be considered permanently affixed to
realty for purposes of the audit.

         Both parties submitted post-hearing briefs, summing up the arguments they had advanced
at the hearing. Petitioner argued that it was a retailer because it manufactured tangible personal
property for sale, with installation, for the use and consumption of its customers. Petitioner
further argued that it was entitled to an industrial processor exemption because it “changes the
form, composition, quality, combination or character of tangible 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 after installation.” Respondent
argued that petitioner was a real property contractor and was not entitled to an industrial
processing exemption because it did not ultimately sell its products at retail.

        In a written opinion and judgment, the tribunal found that petitioner affixed its products
to the realty of its customers, either actually or constructively, concluding therefrom that
petitioner is a contractor liable for use tax on all of its products, regardless of how they were
affixed to customers’ realty. The tribunal further concluded that petitioner was not entitled to an
industrial processing exemption, and affirmed respondent’s final 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 concluding that it was a construction
contractor engaged in the business of constructing, altering, repairing, or improving the real
estate of others. We disagree. Because fraud has not been asserted, our “review of a decision by
the Tax Tribunal is limited to determining whether the tribunal erred in applying the law or
adopted a wrong principle; its factual findings are conclusive if supported by competent,
material, and substantial evidence on the whole record.” Michigan Bell Tel Co v Dep’t of
Treasury, 445 Mich 470, 476; 518 NW2d 808, cert den 513 US 1016; 115 S Ct 577; 130 L Ed 2d
492 (1994). “Substantial evidence must be more than a scintilla of evidence, although it may be
substantially less than a preponderance of the evidence required in most civil cases.” Dow Chem
Co v Dep’t of Treasury, 185 Mich App 458, 463; 462 NW2d 765 (1990). To the extent that

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resolution of an issue involves a question of statutory interpretation, 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 person3 in Michigan who
purchases tangible personal property is subject to a use tax “for the privilege of using, storing, or
consuming tangible personal property in this state . . . .” MCL 205.93(1). “The provisions of the
[UTA] complement those of the General Sales Tax Act [GSTA], MCL 205.51 et seq., and were
generally designed to avoid the imposition of both use and sales 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 does in fact resell the property. MCL 205.94(1)(c)(i) and (2).
Exemption statutes are strictly construed in favor of the taxing 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 his right to exemption, and an alleged grant of exemption will be
strictly construed and cannot be made out by inference or implication 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 question is whether petitioner is a
retailer liable only for sales tax or a contractor liable for use tax. Neither the GSTA nor the UTA
define “contractor”; however, Mich Admin Code, R 205.71 provides the following guidance:

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

                                               * * *

         (6) Where a manufacturer affixes his product to real estate for others, he qualifies
         as a contractor and shall remit use tax on the inventory value of the property at the
         time the property is converted to the contract which value shall include all costs of
         manufacturing, fabricating, and processing. . . .

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

        Petitioner argues that it is not a contractor because, although it affixes some of its
furnishings and finishes to the real estate of its customers using bolts, clips, fasteners, or screws,
these products, as well as its freestanding furniture, can easily be removed without damaging the
product or diminishing the value of the customer’s realty. However, contrary to petitioner’s
implication, that an item is removable is not dispositive of whether 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).


                                                 -4-
(affirming that grain bins bolted to a concrete foundation but easily removable were attached to
realty nonetheless). The unobtrusiveness of the hardware petitioner 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 physically 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 not 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 their character of tangible
personal property after installation, and contends that the tribunal committed legal error when it
failed to use the “3-part fixture test” to determine whether its 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 “fixtures” once installed is irrelevant
to the issue at hand, which is whether petitioner is a contractor. 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 whether the petitioner was a
contractor was whether he attached grain bins to realty).

        In light of the foregoing, we conclude that the tribunal’s finding that petitioner
manufactures product that it affixes to the real estate of others, either actually or constructively,
is conclusive because it is supported by competent, material, and substantial evidence on the
whole record. Michigan Bell Tel Co, 445 Mich at 476. We further conclude 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, repairing, or improving real estate for
others” under Mich Admin Code, R 205.71.

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

        We first turn to the question of whether petitioner is entitled 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) provides the following relevant
definitions:

       (a) “Industrial processing” means the activity of converting or conditioning
       tangible personal property by changing the form, composition, quality,
       combination, or character of the property for ultimate sale at retail or for use in



4
  An industrial processing exemption “is limited to the percentage of exempt use to total use
determined by a reasonable formula or method approved by the department [of treasury].” MCL
205.94o(2).


                                                -5-
       the manufacturing of a product to be ultimately sold at retail or affixed to and
       made a structural part of real estate located in another state. . . .

       (b) “Industrial processor” means a person who performs the activity 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 affixed to and made a
       structural part of real estate located in another state.

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

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

       Affirmed.



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




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