HERALD WHOLESALE INC V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
HERALD WHOLESALE, INC.
FOR PUBLICATION
July 6, 2004
9:10 a.m.
Plaintiff-Appellant,
v
No. 245644
Court of Claims
LC No. 02-000002-MT
DEPARTMENT OF TREASURY,
Defendant-Appellee.
Official Reported Version
Before: Murray, P.J., and Neff and Donofrio, JJ.
NEFF, J.
Plaintiff Herald Wholesale, Inc., appeals as of right an order of the Court of Claims
granting defendant Department of Treasury summary disposition and upholding the defendant's
assessment of tax under the Single Business Tax Act (SBTA),1 MCL 208.1 et seq., for
compensation paid to officer-employees under a client services agreement. We reverse.
I
This appeal presents the unusual situation of requiring this Court to answer a narrow
question of statutory interpretation under the SBTA that has already been expressly and
specifically answered by the Legislature through amending legislation, 2002 PA 603. The
question is whether plaintiff must include in its single business tax (SBT) tax base, compensation
paid to two corporate officer-managers by Amstaff, Inc.,2 a human resource management
services company used by plaintiff. MCL 208.4(4), as amended by 2002 PA 603, makes it clear
that such compensation shall not be included in the tax base of the managed corporation, e.g.,
plaintiff, but instead shall be included in the SBT tax base of the human resource management
services company ("professional employer organization").
1
The Legislature has repealed the SBTA effective for tax years beginning after December 31,
2009. 2002 PA 531, enacting § 1.
2
Amstaff, Inc., is also known as American Staffing, Inc.
-1-
The amendment of the SBTA was enacted specifically to defeat the legal position
assumed by defendant in this case, and to "reverse" Bandit Industries, Inc v Dep't of Treasury,3
which was the basis for the decision by the Court of Claims in this case. House Legislative
Analysis, HB 5403, January 15, 2003.4 Because the statutory amendment applies to tax years
that begin after December 31, 2003, it does not resolve this appeal, which concerns tax years
1993 through 1995.5 MCL 208.4(4).
We hold, independently of the recently enacted amendment, that where the corporate
officers received no compensation as officers and were compensated solely on the basis of their
day-to-day management responsibilities, the SBTA, as in effect during the tax years at issue,
does not require plaintiff to include in its SBT tax base the compensation paid by Amstaff to the
officer-employees. The Court of Claims erred in upholding the SBT tax assessment on the basis
that the managers' mere status as corporate officers required that they be deemed employees of
plaintiff for the purpose of calculating plaintiff 's SBT tax base.
II
Plaintiff is a Michigan corporation that sells bathroom and lighting fixtures, mirrors,
doors, and other building and interior design materials. In March 1991, plaintiff entered into a
"staff leasing" agreement with Amstaff to fulfill plaintiff 's personnel needs, including hiring,
firing, payment of wages, and withholding for federal tax purposes. Amstaff provided all of
plaintiff 's personnel. The companies' agreement provided that Amstaff would be the employer
of the employees it provided to plaintiff and would be responsible "for such administrative
employment matters as payment of all federal, state and local employment taxes, providing
workers' compensation coverage, as well as non-obligatory fringe benefit programs for its
employees."
The agreement also provided that Amstaff would control employment decisions:
"AMSTAFF shall have the sole responsibility of hiring, evaluating, supervising, disciplining and
firing of individuals assigned to fill CLIENT'S Job Function Positions. Under no circumstances
shall CLIENT terminate any employee without the consent of AMSTAFF, it being understood
3
Unpublished opinion of the Court of Claims, issued September 7, 2000 (Docket No. 99-17260CM).
4
This legislation became effective December 20, 2002, less than one month after the Court of
Claims decision in this case
5
It is curious that neither party referenced the amending legislation in presenting this appeal,
either in the briefs or at oral argument in response to pertinent questions by the panel. Because
the legislation undercuts defendant's argument in this case, we presume that defense counsel
either was unaware of the legislation or misled the panel in his presentation of the case on
appeal. Certainly, defendant must be generally aware of the legislation because it was
specifically enacted to defeat the legal position assumed by defendant with regard to SBTA
taxation.
-2-
that AMSTAFF shall retain full control over all personnel decisions." The parties' contract
remained in effect during the tax years at issue, those ending August 1993 through August 1995.
Among the employees Amstaff assigned to plaintiff were Gerald and Janice Katz. In
addition to performing managerial, administrative, and executive duties, the Katzes served as
plaintiff 's corporate officers: Gerald Katz as president and Janice Katz as vice president and
secretary. However, the Katzes received no compensation for their activities as officers, which
were minimal.
Following an audit, defendant assessed plaintiff single business tax of $27,128, plus
$7,713.96 interest for the tax periods ending August 1993 through August 1995, on the ground
that plaintiff failed to include the compensation paid to the Katzes in its SBT tax base as required
by the SBTA, which provides that a corporation must include in its tax base compensation paid
to employees. MCL 208.9(5). Plaintiff had not included the Katzes' compensation in its SBT
tax base because, in its view, pursuant to MCL 208.5(1), the Katzes were Amstaff employees.6
Defendant concluded to the contrary that the Katzes, as officers, were plaintiff 's employees for
purposes of the SBTA. Plaintiff paid the tax and interest and appealed the assessment.
Following a hearing, defendant's referee ruled in plaintiff 's favor, recommending the tax
and interest be refunded. But in October 2001, the commissioner of revenue rejected the
referee's recommendation and upheld the assessment. Plaintiff appealed to the Court of Claims.
The Court of Claims upheld the tax assessment and granted defendant's motion for summary
disposition, relying on Bandit Industries, which raised the same issues.
III
This Court reviews de novo the Court of Claims decision on a motion for summary
disposition. Auto-Owners Ins Co v Dep't of Treasury, 226 Mich App 618, 621; 575 NW2d 770
(1997). Likewise, statutory interpretation is a question of law, which we review de novo. Id.
With regard to the Court of Claims interpretation of the SBTA, our review is subject to the
general rules of statutory interpretation:
The primary objective of judicial construction is to ascertain and give
effect to the Legislature's intent. The language of the statute is the best source for
ascertaining intent. An act must be read in its entirety and the meaning given to
one section arrived at after due consideration of the other sections so as to
produce, if possible, a harmonious and consistent enactment as a whole. Longstanding administrative interpretations by those charged with administering a
statute are entitled to considerable weight. However, an administrative
interpretation is not conclusive and cannot be used to overcome a logical reading
of the statute. If an act is clear and unambiguous, then judicial construction or
6
MCL 208.5(1) provides that "[a] person from whom an employer is required to withhold for
federal income tax purposes shall prima facie be deemed an employee."
-3-
interpretation is unwarranted. If a statute is ambiguous or susceptible to two or
more constructions that could cause reasonable minds to disagree as to its
meaning, the statute must be interpreted. [Stratton-Cheeseman Mgt Co v Dep't of
Treasury, 159 Mich App 719, 724-725; 407 NW2d 398 (1987) (citations
omitted).]
IV
Plaintiff argues that the Court of Claims erred in holding that compensation paid to the
Katzes must be included in plaintiff 's SBT tax base notwithstanding that the compensation was
paid solely by Amstaff and was received by the Katzes solely in their capacities as Amstaff
employees, not as officers of the corporation.
Defendant responds that the Court of Claims correctly upheld the tax assessment on the
basis that the Katzes were employees of plaintiff. Defendant's position is that a corporation may
not lease its officers because its corporate existence is dependent on its officers, so the Katzes'
compensation must be included in plaintiff 's SBT tax base regardless of whether the
compensation was paid for being an officer or for other services the Katzes provided to the
corporation.
As noted, the Legislature has resolved this dispute by enacting 2002 PA 603, which
provides in relevant part:
For tax years that begin after December 31, 2003, for purposes of
determining compensation of a professional employer organization, compensation
includes payments by the professional employer organization to the officers and
employees of an entity whose employment operations are managed by the
professional employer organization. Compensation of the entity whose
employment operations are managed by a professional employer organization
does not include compensation paid by the professional employer organization to
the officers and employees of the entity whose employment operations are
managed by the professional employer organization. As used in this subsection,
"professional employer organization" means an organization that provides the
management and administration of the human resources and employer risk of
another entity by contractually assuming substantial employer rights,
responsibilities, and risk through a professional employer agreement that
establishes an employer relationship with the leased officers or employees
assigned to the other entity by doing all of the following:
(a) Maintaining the right of direction and control of employees' work,
although this responsibility may be shared with the other entity.
(b) Paying wages and employment taxes of the employees out of its own
accounts.
(c) Reporting, collecting, and depositing state and federal employment
taxes for the employees.
-4-
(d) Retaining the right to hire and fire employees. [MCL 208.4(4).]
The above provisions make it clear that in situations such as those presented in this case, the
compensation paid to leased employees and officers is properly included in the SBT tax base of
the lessor, human resources management company. As noted, the statutory amendment does not
apply to the tax years involved in this case. However, we find the amendment instructive to our
analysis and decision.7
Of significance is the time frame in which the amendment was passed, promptly
reversing the holding in Bandit, which was decided in September 2000; the Legislature enacted
the amendment in late 2002, only two years later. From the rapid action of the Legislature, the
legislative history of the amendment and our own analysis of the statutory language before
amendment, we deduce that the amendment did not signal any change in the SBTA, but was
intended lay to rest a misinterpretation of the statute and to clear up any confusion about the
issue raised, concerning whether officers of a corporation can be considered employees of a
human resources management company.
However, even without the benefit of this express statutory provision, we would conclude
that defendant's position is unsupported by the SBTA.
V
The SBTA requires generally that in calculating its Single Business Tax (SBT) tax base,
a corporation include compensation paid.8 MCL 208.9(5); Mid America Mgt Corp v Dep't of
Treasury, 153 Mich App 446, 461; 395 NW2d 702 (1986). The SBTA defines "compensation"
as
all wages, salaries, fees, bonuses, commissions, or other payments made in the
taxable year on behalf of or for the benefit of employees, officers, or directors of
the taxpayers. Compensation includes, but is not limited to, payments that are
7
We respectfully disagree with the concurring opinion statement that the amendment (2002 PA
603) is wholly inapplicable to this case. The amendment undermines defendant's core argument
in this case—that a corporation cannot, as a matter of law, lease its officers. The amendment and
its legislative history are also relevant to this Court's understanding and interpretation of the
SBTA and to evaluating the merit of the arguments advanced by both parties in this case.
Moreover, an amendment enacted soon after controversies arise can be regarded as an
interpretation of the original act. Detroit v Walker, 445 Mich 682, 697; 520 NW2d 135 (1994).
8
The SBTA imposes a tax on the adjusted tax base of every person with business activity in
Michigan that is allocated or apportioned to this state. MCL 208.31(1); Mid America, supra at
461. To calculate its tax base, a corporation begins with its federal taxable income and makes
adjustments in the form of additions or subtractions to arrive at the tax base. MCL 208.9; Mobil
Oil Corp v Dep't of Treasury, 422 Mich 473, 497; 373 NW2d 730 (1985).
-5-
subject to or specifically exempt or excepted from withholding under sections
3401 to 3406 of the internal revenue code. [MCL 208.4(3).]
The SBTA incorporates by reference the definitions of "employee" and "employer" used
in 26 USC 3401(c) and (d) of the Internal Revenue Code (IRC). MCL 208.5(1) and (2). In
addition, the SBTA provides that "[a] person from whom an employer is required to withhold for
federal income tax purposes shall prima facie be deemed an employee," and "[a] person required
to withhold for federal income tax purposes shall prima facie be deemed an employer." MCL
208.5(1), (2).
Plaintiff argues that under subsection 5(1) of the SBTA, the Katzes are employees of
Amstaff. We agree. Amstaff was required to withhold from the Katzes for federal income tax
purposes. This circumstance creates a rebuttable presumption that the Katzes are employees of
Amstaff. Mid America, supra at 465. A rebuttable presumption establishes a prima facie case
and places the burden of proof on the opposing party. Id. Defendant has failed to rebut that
presumption.
Defendant's argument that the Katzes' roles as officers are not distinct and separate from
their roles as employees is unpersuasive. Defendant does not dispute that the Katzes received no
compensation in their roles as officers. The lease arrangement with Amstaff, and the
compensation paid, related solely to the Katzes' performance as manager-employees. Thus,
defendant's assertion that a corporation cannot lease its officers is irrelevant because plaintiff did
not lease its officers. Moreover, as plaintiff points out, the separate mention of officers and
employees in MCL 208.4(3) supports a conclusion that the Legislature viewed these roles as
separate and distinct. The Legislature clearly contemplated that a taxpayer may compensate
individuals in their capacities as employees, as officers, or in both capacities, and we must
therefore give effect to the statutory language by viewing these roles independently if the facts
support such a view.
The SBTA relies on § 3401(c) of the IRC for the definition of "employee." MCL
208.5(1). 26 USC 3401(c) provides:
[T]he term "employee" includes an officer, employee, or elected official of
the United States, a State, or any political subdivision thereof, or the District of
Columbia, or any agency or instrumentality of any one or more of the foregoing.
The term "employee" also includes an officer of a corporation.
The separate inclusion of an officer of a corporation in the definition of employee further
supports a conclusion that a corporate officer who is not an "employee" in the general sense, is
nevertheless considered an employee for tax purposes and that compensation in these capacities
may be separate and distinct.
Further, the "minor services" exception to the IRC definition of employee, set out in the
federal regulations, is in accordance with our conclusion that the Katzes' roles as officers were
unrelated to their compensation as managers.
-6-
[A]n officer of a corporation who as such does not perform any services or
performs only minor services and who neither receives nor is entitled to receive,
directly or indirectly, any remuneration is not considered to be an employee of the
corporation. A director of a corporation in his capacity as such is not an
employee of the corporation. [26 CFR 31.3401(c)-1(f).]
Plaintiff asserts that the Katzes performed only minimal duties as officers, spending the majority
of their time on administrative, executive, and managerial tasks. Evidence indicates that the
Katzes received no compensation for their roles as officers.
We disagree with defendant that the minor services exception is inapplicable on these
facts because the Katzes received compensation as managers. The regulation does not consider
an officer to be an employee if that officer, "as such," performs no services or minor services and
does not get paid for those services. Id. By its placement, the phrase "as such" relates to the
phrase "an officer . . . who" and indicates an officer who, in that role, performs few or no
services and does not get paid. If the regulation were meant to apply to any of an officer's
services for a corporation and remuneration for those services, the phrase "as such" would be
unnecessary. Defendant's interpretation and that adopted by the Court of Claims in Bandit,
renders this phrase meaningless. This Court avoids constructions that render any part of a statute
surplusage. Hoste v Shanty Creek Mgt, Inc, 459 Mich 561, 574; 592 NW2d 360 (1999).
The logically sound view in this case is that the Katzes' roles as officers and managers are
separate and distinct. Accordingly, because they performed only minor services as officers, and
received no remuneration in that regard, they are not "employees" in their officer capacities
under the IRC definition.
Defendant argues that even if the minor services exception applies factually, this Court
previously held in Mid America that the technical exceptions contained in the IRC have no
application for purposes of the SBTA. We disagree with defendant's broad reading of the
limitation in Mid America. The Mid America Court in part found the technical exception at issue
in that case, 26 USC 3401(d)(1), irrelevant to the purpose of the SBTA, because the purpose of
the exception was to fix responsibility for withholding employment taxes,9 while the purpose of
the SBTA was to tax the incremental value of a taxpayer's economic activity. Mid America,
supra at 464. We find no conflict in purpose with regard to the minor services exception and the
SBTA, and while not controlling, the exception reflects a recognition in the law that an officer of
a corporation may provide only minor services in that capacity, for which the officer receives no
remuneration, as in this case. In that circumstance, the officer is not considered an employee for
tax purposes.
9
26 USC 3401(d)(1) provides "if the person for whom the individual performs or performed the
services does not have control of the payment of the wages for such services, the term 'employer'
(except for purposes of subsection [a]) means the person having control of the payment of such
wages . . . ."
-7-
Finally, we are unpersuaded by defendant's argument that the Katzes were plaintiff 's
employees because Amstaff paid the Katzes' compensation merely for administrative
convenience. Defendant asserts that plaintiff was the Katzes' true employer. The companies'
agreement provided that Amstaff would be the employer of the employees it provided to plaintiff
and would be responsible "for such administrative employment matters as payment of all federal,
state and local employment taxes, providing workers' compensation coverage, as well as nonobligatory fringe benefit programs for its employees." We find no basis for determining that the
companies' intent, as expressed in their agreement, was other than for the purposes expressed.
"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." StrattonCheeseman, supra at 725.
Contractual arrangements for the management of personnel matters such as health
benefits, worker's compensation claims, payroll, payroll tax compliance, and unemployment
insurance claims are well-recognized and were the impetus for the enactment of legislation
amending the SBTA as discussed above. 2002 PA 603; House Legislative Analysis, supra at 1.
"'Businesses today need help managing increasingly complex employee related matters . . . .'"
Id. (citation deleted.) The agreement in this case is supported by tax independent
considerations. The companies' agreement provided that Amstaff would be the employer of the
personnel it provided to plaintiff and would be responsible for specific administrative
employment matters. The agreement also provided that Amstaff would control employment
decisions.
Defendant has not rebutted the presumption that the Katzes were employees of Amstaff,
rather than plaintiff. Plaintiff therefore was not required to include the Katzes' compensation in
its SBT tax base for the tax years at issue. The Court of Claims erred in upholding the tax
assessment.
Reversed.
Donofrio, J., concurred.
/s/ Janet T. Neff
/s/ Pat M. Donofrio
-8-
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