                           STATE OF MICHIGAN

                            COURT OF APPEALS



ALTICOR INC.,                                                        UNPUBLISHED
                                                                     February 9, 2016
               Plaintiff-Appellant/Cross-Appellee,

v                                                                    No. 323350
                                                                     Court of Claims
DEPARTMENT OF TREASURY,                                              LC No. 12-000139-MT

               Defendant-Appellee/Cross-
               Appellant.


Before: RIORDAN, P.J., and JANSEN and FORT HOOD, JJ.

JANSEN, J. (dissenting).

        I respectfully dissent. I would reverse the decision of the Court of Claims on both issues
and conclude that (1) the reimbursements for services rendered by the shared employees did not
constitute sales because the reimbursements were for services rendered by employees to their
employers, and (2) the payments made by Quixtar to plaintiff with regard to plaintiff’s customer
list constituted sales rather than royalties.

         I first conclude that the Court of Claims erred when it determined that the
reimbursements for services rendered by the shared employees were sales. As articulated in the
majority opinion, the services must constitute business activities in order for the reimbursement
to be considered a sale. See 2000 PA 477; 1982 PA 376. The Single Business Tax Act (SBTA)
defines “business activities” to include, in relevant part, “the performance of services . . . with
the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others,
but shall not include the services rendered by an employee to his employer.” MCL 208.3(2)
(emphasis added). Thus, the definition of “business activities” specifically excludes “services
rendered by an employee to his employer.” Id. In this case, the employees at issue were referred
to as “the shared employees” in the Court of Claims. Plaintiff contends that under Kaiser
Optical Sys, Inc v Dep’t of Treasury, 254 Mich App 517; 657 NW2d 813 (2002), the shared
employees of a parent company who perform services on behalf of an affiliate represent business
activities of the affiliate company rather than the parent company. In Kaiser, a Michigan-based
affiliate corporation reimbursed its parent company, based in California, for the services that the
parent company’s accounting staff, which was also based in California, regularly rendered to the
affiliate. Id. at 519. This Court declined to hold that the parent company was the actual
employer of the shared employees because the facts did not establish that the affiliate had no
right to control the shared employees. Id. at 524. This Court also held that the employees

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established a sufficient physical presence in California for the affiliate to establish a sufficient
nexus with the State of California for tax purposes. Id. at 527. Similarly, in this case, the shared
employees’ services cannot be business activities because the shared employees were acting as
the affiliates’ employees and were rendering a service to their employer (the affiliates). Like in
Kaiser, the facts do not establish that the affiliates had no right to control the shared employees.
See id. at 524. Thus, the services at issue are excluded from the definition of a business activity
because they were services rendered by employees to their employer. Therefore, the
reimbursement payments were not “sales” within the meaning of the SBTA because they were
not reimbursements for business activities. See MCL 208.3(2)

        I also conclude that the Court of Claims erred in determining that the payments from
Quixtar to plaintiff were royalties rather than sales. As noted in the majority opinion, the term
“royalties” is not defined in the SBTA. The main arguments advanced by the parties can be
separated into two issues. First, whether the Supreme Court’s definition of “royalties”
announced in Mobil Oil Corp v Dep’t of Treasury, 422 Mich 473; 373 NW2d 730 (1985), applies
outside of the context of oil and gas royalties. Second, whether royalties must take the form of
either a product itself or the proceeds from the sale of a product.

       In Mobil Oil, our Supreme Court discussed the meaning of the term “royalties” in the
context of oil and gas leases under the SBTA. Mobil Oil, 422 Mich at 484. The Court
explained:

       The Random House College Dictionary defines a “royalty” as

               a compensation or portion of the proceeds paid to the owner of a
               right, as a patent or oil or mineral right, for the use of it . . . an
               agreed portion of the income from a work paid to its author,
               composer, etc., usually a percentage of the retail price of each copy
               sold . . . a royal right, as over minerals, granted by a sovereign to a
               person or corporation . . . the payment made for such a right.

       This definition includes mineral and oil “royalties” with the “royalties” paid for
       patents and copyrights and refers to them as a “payment.” Black’s Law
       Dictionary defines a “royalty” as

               Compensation for the use of property, usually copyrighted material
               or natural resources, expressed as a percentage of receipts from
               using the property or as an account per unit produced. A payment
               which is made to an author or composer by an assignee, licensee or
               copyright holder in respect of each copy of his work which is sold,
               or to an inventor in respect of each article sold under the patent.
               Royalty is share of product or profit reserved by owner for
               permitting another to use the property. . . . In mining and oil
               operations, a share of the product or profit paid to the owner of the
               property. [Id. (citations omitted).]




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        In Michigan United Conservation Clubs v Dep’t of Treasury, 239 Mich App 70, 79; 608
NW2d 141 (1999), aff’d 463 Mich 995 (2001), this Court quoted the definitions of “royalty”
from Mobil Oil and explained that a royalty “has the following elements or characteristics: (1) it
is a payment, (2) in the form of either the product itself or proceeds from the sale of the product,
and (3) made in consideration for the use of the property.” This Court determined that tax credits
were not royalties and clarified that the tax credits did not meet the element that a royalty must
be in the form of the product itself or proceeds from the sale of the product. Id. This Court later
used the same three-part test to determine that network affiliation fees paid by cable operators to
TV networks constituted royalties. Columbia Assoc, LP v Dep’t of Treasury, 250 Mich App 656,
673; 649 NW2d 760 (2002). The Court also explained that the affiliation fees were payment for
the use of copyrighted material based on the number of subscribers, and thus the fees fell within
the definition articulated in Mobil Oil. Id. at 673-674. Thus, it is clear that the definition of
“royalty” from Mobil Oil is applicable outside of the context of oil and gas royalties because this
Court has applied that definition to other contexts as well. It is also clear that the payments made
by Quixtar to plaintiff are not royalties under the three-part definition announced in Michigan
United Conservation Clubs because the payments do not come in the form of the product—
plaintiff’s customer list—or proceeds from the sale of the product. See Michigan United
Conservation Clubs, 239 Mich App at 79. Instead, the payment was a fixed percentage of
Quixtar’s sales regardless of whether the sales were generated from plaintiff’s customer list.

        As plaintiff contends, this Court has stated that the definitions from Mobil Oil were
articulated in the context of oil and gas royalties and the definitions “were not used as an all-
encompassing definition of royalties for SBTA purposes.” Zenith Data Sys v Dep’t of Treasury,
218 Mich App 742, 747; 555 NW2d 264 (1996). However, Zenith is not entirely on point
because it addressed the issue whether a copyright or a mere proprietary interest was needed in
order for a payment to be considered a royalty payment. Id. at 745-746. In other words, Zenith
did not directly address the issue whether royalty payments needed to be in the form of a product
or proceeds from the sale of the product. See id.

         Additionally, plaintiff argues that a royalty can result where a taxpayer pays a percentage
of its gross sales for the right to use a style, trademark, or trade names, citing Mourad Bros, Inc v
Dep’t of Treasury, 171 Mich App 792, 796; 431 NW2d 98 (1988). Plaintiff argues that such a
royalty does not come in the form of the licensed trademark or name. More importantly, Mourad
cited Mobil Oil for the idea that a royalties constitute “payment received for the use of property.”
Id. In other words, this Court in Mourad did not distill a three-part test from Mobil Oil in the
way that this Court in Michigan United Conservation Clubs did. However, Mourad is not
binding on this Court under MCR 7.215(J)(1) because it was published before November 1,
1990, and the later cases discussed above clarify that the three-party test applies in order to
determine whether a payment constitutes a royalty.

        The majority notes that, under the definition of “royalty” quoted in Mobil Oil, a royalty
could come from a percentage of the receipts from the use of property or a share of the profit
resulting from another’s use of property. This definition means that a payment under an
arrangement wherein Quixtar gave plaintiff a percentage of its sales resulting from the use of
plaintiff’s customer list would constitute a royalty. Nevertheless, Quixtar’s payments to plaintiff
do not fall within the definition articulated in Mobil Oil. As defendant points out, the agreement
between plaintiff and Quixtar gave plaintiff a fixed percentage of Quixtar’s sales regardless of

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whether the sales were generated from plaintiff’s customer list. In other words, plaintiff received
payments whether or not Quixtar’s sales resulted from its use of plaintiff’s customer list. Thus,
the payments were not strictly a percentage of the receipts from the use of plaintiff’s property,
and therefore did not constitute royalties. See Mobil Oil, 422 Mich at 484.

        To the extent that plaintiff relies on cases from other jurisdictions to support its position,
the cases are not binding in this matter. See Hiner v Mojica, 271 Mich App 604, 612; 722 NW2d
914, 920 (2006). In any event, defendant is also correct that the most relevant federal case cited
by plaintiff still defined a royalty payment as “ ‘typically a percentage of profits or a specified
sum per item sold.’ ” Bellco Credit Union v United States, 735 F Supp 2d 1286, 1304 (D Colo,
2010) (citation omitted; emphasis added). Bellco Credit Union does support plaintiff’s argument
in that the court in that case held that payments made from an insurance company to a credit
union for the use of the credit union’s member list to solicit insurance were deemed royalty
payments. Id. at 1305-1306. However, the credit union in that case received a commission
based on the number of its customers that bought the insurance, as well as a marketing bonus for
renewing the contract. Id. at 1298. Thus, the credit union’s royalties were based, at least in part,
on sales that actually resulted from the insurance company’s use of the customer list. In that
manner, Bellco Credit Union is distinguishable from this case, wherein plaintiff gets a
percentage of Quixtar’s sales regardless of whether the sales were generated by the use of
plaintiff’s customer list. Accordingly, the payments from Quixtar to plaintiff related to the
customer list constituted sales rather than royalties. For the reasons discussed above, I would
reverse and remand for further proceedings.


                                                              /s/ Kathleen Jansen




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