MIDWEST BUS CORPORATION V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
MIDWEST BUS CORPORATION, formerly
known as MIDWEST BUS REBUILDERS
CORPORATION,
UNPUBLISHED
March 16, 2010
APPROVED FOR
PUBLICATION
May 4, 2010
9:00 a.m.
Plaintiff-Appellant,
v
No. 288686
Court of Claims
LC No. 06-000095-MT
DEPARTMENT OF TREASURY and STATE
TREASURER,
Defendants-Appellees.
Before: FITZGERALD, P.J., and CAVANAGH and DAVIS, JJ.
CAVANAGH, J.
Plaintiff appeals as of right a Court of Claims’ order granting defendants’ motion for
summary disposition in this tax dispute involving the single business tax act (SBTA), MCL
208.1 et seq. We affirm.
Plaintiff filed its declaratory judgment action following an audit for single business tax
years 1999 through 2004, and the receipt of tax due bills. Plaintiff averred that it was in the
business of selling bus parts and remanufacturing buses.
Plaintiff alleged that its
remanufacturing contracts with various transit authorities involved primarily the sale of tangible
personal property—bus parts, regardless of the fact that plaintiff’s installation of those parts was
also included in the contracts. Accordingly, revenue from the sales at issue, which gave rise to
the disputed tax due bills, should have been sourced to the destinations where they were shipped
as sales of tangible personal property under MCL 208.52, and not sourced to Michigan, under
MCL 208.53, where the installation services were performed. Thus, plaintiff alleged, it was
entitled to a refund of the overpayment of taxes.
Subsequently, cross motions for summary disposition were filed and the parties agreed
that the matter was controlled by the holding in Catalina Marketing Sales Corp v Dep’t of
Treasury, 470 Mich 13; 678 NW2d 619 (2004). Plaintiff’s legal position remained the same.
Defendants, however, argued that plaintiff’s business of remanufacturing buses did not merely
involve the sale of bus parts. Rather, plaintiff “remanufactured” buses which meant that the
service of actually installing the bus parts was not merely incidental to the sale of the parts—the
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rehabilitation service was the predominant purpose of the business contracts. Accordingly,
revenue from the disputed sales is properly sourced to Michigan, under MCL 208.53, where the
services were performed and plaintiff was not entitled to any refund or other relief. After
consideration of the incidental to service six-part test set forth in Catalina Marketing Sales Corp,
the trial court agreed with defendants and granted their motion for summary disposition. This
appeal followed.
First, plaintiff argues that the revenue it received from remanufacturing contracts like the
one it had with Massachusetts Bay Transit Authority (MBTA) is predominantly for the sale of
tangible personal property and should be sourced, under MCL 208.52, to destinations outside of
Michigan. We disagree. This Court reviews de novo a decision by the Court of Claims on a
motion for summary disposition and issues requiring statutory interpretation. Herald Wholesale,
Inc v Dep’t of Treasury, 262 Mich App 688, 693; 687 NW2d 172 (2004).
The single business tax (SBT) was explained in Trinova Corp v Dep’t of Treasury, 433
Mich 141; 445 NW2d 428 (1989), as follows:
The single business tax is a form of value added tax, although it is not a pure
value added tax. “Value added is defined as the increase in the value of goods
and services brought about by whatever a business does to them between the time
of purchase and the time of sale.” In short, a value added tax is a tax upon
business activity. The act employs a value added measure of business activity,
but its intended effect is to impose a tax upon the privilege of conducting business
activity within Michigan. It is not a tax upon income. [Id. at 149 (citations
omitted).]
The “value added” concept has been described as “a means of consistently measuring the size of
business firms and other economic enterprises comprising the total economy.” Haughey, The
economic logic of the single business tax, 22 Wayne L R 1017 (1976). “[T]he measure of the tax
is the use of labor and capital.” Kasischke, Computation of the Michigan single business tax:
Theory and mechanics, 22 Wayne L R 1069, 1070 (1976).
The computation of the SBT involves several steps, but begins with calculation of the
taxpayer’s tax base. “The tax base computation is designed to calculate the contribution each
business makes to the total economy; in economic terms, this contribution is the economic size
of the business.” Id. “Each business will pay a tax proportionate to its economic size.” Id. If
the taxpayer’s business activities are confined to Michigan, the entire tax base is allocated to
Michigan and subject to taxation under the SBTA. See MCL 208.40. If the taxpayer’s business
activities are taxable both in Michigan and another state, only a certain part of its tax base is
allocated to Michigan because a state may not tax value earned outside of its borders. See MCL
208.41; Trinova Corp, supra at 151 (citation omitted).
The SBTA provides a formula for apportioning a tax base between two or more taxing
states and the formula takes into consideration three factors: property, payroll, and sales. Id. at
151-152; see, also, MCL 208.45a. At issue in this case is the sales factor. Under MCL
208.51(1), the sales factor is a fraction that has as its numerator the taxpayer’s total sales in this
state, and as its denominator “the total sales of the taxpayer everywhere during the tax year.”
The SBTA distinguishes between two types of sales: sales of personal tangible property and
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sales “other than sales of tangible personal property.” For purposes of the sales factor, under
MCL 208.52(b), sales of tangible personal property are considered “in this state,” if “the
property is shipped or delivered to any purchaser within this state.” And, under MCL 208.53,
sales, “other than sales of tangible personal property,” are considered “in this state” if either the
business activity is performed in Michigan or if performed in Michigan and elsewhere, “based on
the cost of performance of the various activities, the greater proportion of the activity is
performed in Michigan.” Sales “in this state” are placed in the numerator of the sales factor,
while sales not considered “in this state” are placed in the denominator.
On appeal the parties agree that the transactions at issue in this case are “mixed
transactions” in that they involve elements of both sales of tangible personal property and sales
other than sales of tangible personal property. That is, bus parts were sold, but so was the
service of installing the bus parts. However, plaintiff claims that the sale of bus parts was the
primary purpose of the transaction and that the bus parts were “sold,” for purposes of the sales
factor, when each completely rehabilitated bus was delivered back to its out-of-state owner.
Thus, the “sale” of personal tangible property was not “in this state” and belongs in the
denominator of the sales factor. Defendant disagrees and claims that plaintiff’s complete
rehabilitation of each bus was the primary purpose of the transaction and, because this business
activity was performed in Michigan, the “sale” was “in this state” and belongs in the numerator
of the sales factor. The SBTA is silent with regard to these types of transactions. But the parties
agree that the incidental to service six-part test set forth in Catalina Marketing Sales Corp,
supra, is applicable to determine whether a transaction should be considered a sale of tangible
personal property or a sale of a service, i.e., a sale other than a sale of tangible personal property.
In Catalina Marketing Sales Corp, the issue was whether, under MCL 205.52 of the
general sales tax act, a retail sales tax should be imposed in a transaction that involved both the
provision of services and the transfer of tangible personal property because sales tax does not
apply to sales of services. The Catalina Court, citing Univ of Michigan Bd of Regents v Dep’t of
Treasury, 217 Mich App 665; 553 NW2d 349 (1996), adopted “the ‘incidental to service’ test for
categorizing a business relationship that involves both the provision of services and the transfer
of tangible personal property as either a service or a tangible property transaction.” Catalina
Marketing Sales Corp, supra at 24. The Catalina Court explained that the test “looks objectively
at the entire transaction to determine whether the transaction is principally a transfer of tangible
personal property or a provision of a service.” Id. at 24-25. And “[i]n determining whether the
transfer of tangible property was incidental to the rendering of personal or professional services,
a court should examine what the buyer sought as the object of the transaction, what the seller or
service provider is in the business of doing, whether the goods were provided as a retail
enterprise with a profit-making motive, whether the tangible goods were available for sale
without the service, the extent to which intangible services have contributed to the value of the
physical item that is transferred, and any other factors relevant to the particular transaction.” Id.
at 26. In our case, the parties agree that the Catalina factors are applicable, but their analysis of
each factor significantly differs. We first turn to plaintiff’s argument.
Plaintiff argues that its remanufacturing business involves principally a transfer of
tangible personal property. Plaintiff claims that its contract with MBTA proves its contention.
The contract required plaintiff to replace 427 parts on each of MBTA’s 125 transit buses, and
also set forth a list of 164 parts that plaintiff should replace on those same buses if needed. Thus,
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plaintiff argues, “[c]learly, these 552 items of tangible personal property are the focus of the
contract and any labor involved in their installation is incidental to the tangible personal
property.” And, “the cost of tangible personal property in performing the contractual obligations
was 5.086 times the cost of labor.” This evidence “all supports a ruling that tangible personal
property is the ‘substance of the transaction’ . . . [t]herefore, the revenue should be sourced out
of Michigan.”
With regard to the specific factors, plaintiff appears to argue that (1) what MBTA sought
as the object of the transaction was brand new bus parts, (2) plaintiff is in the bus parts business,
(3) plaintiff’s “profits are dependent upon bus parts sales,” (4) “while the [bus] parts are
available without the services, capital grant funding is available for a rehabilitation project of a
fleet of buses and is not available if the transit authority simply buys the parts and replaces
them,” (5) it has not been established that any services, other than the installation of parts,
increase the value of the buses beyond the value of the replaced parts, themselves,” and (6) “Buy
America requirements,” as well as the fact that bus remanufacturing is a capital project eligible
for capital grants, support the conclusion that such transactions should be treated as the transfer
of tangible property—bus parts.
To the contrary, defendants argue, the MBTA contract “conclusively establishes that the
transfer of parts is incidental to the provision of [plaintiff’s] rehabilitation service.” The title of
the contract itself—“Technical Specification for Nova Bus Rehabilitation”—proves that
contention. The object of the transaction, as far as MBTA was concerned, was for its buses to be
“rehabilitated.” The contract defines “rehabilitation” to include (1) “the restoration of items to
new, as new, or reconditioned functionally, as the case may be, to the original manufacturer’s
recommendations,” (2) “the complete disassembly of an assembly or sub-assembly into its
component parts, or, to the degree defined in the individual sections of the Specifications,” (3)
“[t]he cleaning, inspection and qualification for repair or replacement of the component parts,”
and (4) “[t]he reassembly of the component parts into complete assemblies.” Thus, contrary to
plaintiff’s claims, the contract required that plaintiff perform extensive servicing of the buses.
With regard to the specific factors, defendants appear to argue that (1) what MBTA
sought as the object of the transaction was the service of having their buses rehabilitated, i.e.,
overhauled, (2) plaintiff is in the business of remanufacturing or rehabilitating buses, as well as
supplying bus parts in that parts can be ordered and sent to a customer instead of having plaintiff
perform the installation service, (3) defendants contend that this factor is not applicable because
it “is clearly intended to help determine whether a retail sale that is taxable under the General
Sales Tax Act took place,” (4) bus parts are available for sale by plaintiff without the service but
that is not “remanufacturing,” (5) the rehabilitation service necessarily contributes significantly
to the value of the bus parts because MBTA contracted to have its buses rehabilitated thus,
absent their installation, the parts would have been worthless to MBTA, and (6) no other factors
were relevant to the particular transaction.
After objectively considering the entire transaction, Catalina Marketing Sales Corp,
supra at 24-25, we agree with the trial court and conclude that the remanufacturing contract at
issue, as well as other remanufacturing contracts like it, are predominantly for the provision of a
service—a rehabilitation service. Thus, for purposes of the sales factor, these are sales “other
than sales of tangible personal property” and, because the services were provided in Michigan,
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the sales were “in this state” under MCL 208.53. This conclusion was reached in light of the
following considerations.
First, we reviewed the MBTA remanufacturing contract. The contract clearly states that
it is for a “midlife overhaul, (i.e., Rehabilitation)” of transit buses. In that regard, the contract
provides:
This overhaul project shall include repairs or replacement of the components
utilized in the following systems and/or assemblies: wheelchair lift, underbody
structure, front and rear axle assemblies, interior and exterior body, wiring and
piping, steering, suspension, signage, brakes, fuel system, kneeling system, and
air system. The project also includes painting the bus and making any other
miscellaneous repairs needed to correct broken or worn components.
The contract defines several terms, but three are especially relevant in this case:
Rehabilitation:
a. Shall mean the restoration of items to new, as new, or reconditioned
functionally, as the case may be, to the original manufacturer’s recommendations.
b. Shall mean the complete disassembly of an assembly or sub-assembly
into its component parts, or, to the degree defined in the individual sections of the
Specifications.
c. The cleaning, inspection and qualification for repair or replacement of
the component parts.
d. The reassembly of the component parts into complete assemblies.
Remanufacture: To recondition to O.E.M. Specifications. The component or
system in question does not necessarily need to be replaced with an all new
component, but may be replaced with a rebuilt component that meets “as new”
OEM specifications, or, the used/old component may be removed and
reconditioned itself to meet “as new” OEM specifications.
Repair or Replacement – As Required or As Necessary:
Repair or Replacement of components or subsystems “as required” or “as
necessary” requires the contractor bring the part, component or subsystem back to
new OEM functional specifications. If the part cannot be repaired and brought
back up to OEM specifications it must be replaced. The part may be replaced
with either a remanufactured or a new part.
Turning to the section of the contract labeled “Detailed Scope of Work,” we note the
following examples1 of the types of work plaintiff was to perform: (1) remove
1
The “Detailed Scope of Work” section is several pages in length and we have only selected
some examples of the types of work plaintiff was expected to perform in satisfaction of the
contract.
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engine/transmission cradle assembly, and inspect and clean the engine cradle; (2) thoroughly
clean air intake system and replace particular parts with new parts; (3) thoroughly steam clean
engine compartment and replace particular parts with new parts; (4) inspect and service OEM
fire alarm, checking all hard tubing for cracks, dents, and poor solder connections, and replacing
sensors; (5) inspect and repair the driveshaft assembly to bring to new OEM condition, including
rebuilding the propeller shaft with new universal joints, dust cap, and grease fittings; (6) air tanks
were to be removed, inspected, and cleaned; (7) the air dryer was to be “completely rebuilt to
O.E.M. specifications or replaced with a new unit;” (8) clean, inspect, and pressure test the
radiator and charge air cooler assemblies; (9) the front and rear axle assemblies were to be
“removed, cleaned and magnafluxed or other Authority approved non-destructive structural
testing,” and (a) “all front axle components shall be returned to new O.E.M. specifications,”
while (b) “the differential carrier is to be completely rebuilt to new O.E.M. specifications;” and
(10) the steering column was to be rebuilt using new U-joints, horn ring, contacts, tilt steering
gears and all levers, pins and bearings, but if rebuilding could not be to OEM specifications, the
steering column was to be replaced with a new one.
Clearly, the contract is not a contract merely for the purchase of bus parts. Rather, the
contract provisions make several references, for example, to plaintiff disassembling, removing,
repairing, inspecting, reconditioning, rebuilding, replacing, restoring, painting, servicing,
cleaning, testing, and reassembling various components and parts of the buses. Although
replacement of certain bus parts was included in the remanufacturing contract, the purchase of
bus parts was not an end in and of itself but a means, albeit a partial means, by which to fulfill
the contractual objective of plaintiff’s customer to have its buses completely rehabilitated. That
is, the sale of the bus parts was incidental to the service of actually performing the rehabilitation
of the buses.
Second, we reviewed the SBTA, including the meaning of “business activity” because the
SBT is a tax upon business activity. See Trinova, supra at 149. Under MCL 208.3(2), “business
activity” “means a transfer of legal or equitable title to or rental of property, whether real,
personal, or mixed, tangible or intangible, or the performance of services, or a combination
thereof, made or engaged in, or caused to be made or engaged in, within this state, whether in
intrastate, interstate, or foreign commerce, 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, services as a director of a corporation, or a casual transaction.”
In this case, it is arguable that even if the sale was a sale of tangible personal property—
bus parts—there was “a transfer of legal or equitable title” to the bus parts when they were
incorporated into the purchaser’s bus, i.e., as each part was installed into the bus, each part was
delivered to the purchaser and became an integrated component of the bus. See MCL 208.3(2),
208.52(b). And because each installation occurred in Michigan, each sale was “in this state.”
See id. That the completely rehabilitated buses were then delivered to out-of-state owners, in
compliance with the remanufacturing contract, does not change the analysis. Thus, for purposes
of the sales factor, the sale would be placed in the numerator whether it was a sale of tangible
personal property or the sale of a service. MCL 208.51(1). The scenario at issue here—
remanufacturing—is not analogous to manufacturing a product as plaintiff had argued in the trial
court. For example, when an automobile manufacturer installs a component part during the
manufacture of a vehicle, it is installing the component into its own vehicle. Until it is sold, the
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automobile, as well as all of its component parts, are owned by the manufacturer. Here, plaintiff
is installing its bus parts into used buses that plaintiff does not own. In any case, we conclude
that the sale of the bus parts was merely incidental to the service of actually performing the
rehabilitation of the buses and that service was provided in Michigan.
Third, we considered the six-factor incidental to service factors set forth in Catalina
Marketing Sales Corp. With regard to the first factor—what the buyer sought as the object of the
transaction—we conclude that the buyer sought the service of having its buses rehabilitated.
Plaintiff was to disassemble, remove, repair, inspect, recondition, rebuild, replace, restore, paint,
service, clean, test, and reassemble various components and parts of the buses so they were, as
the trial court described, “almost like new,” or made to meet the standards of a newly
manufactured bus. The object of the transaction was not merely to purchase “brand new bus
parts” as plaintiff has argued.
With regard to the second factor—what the seller or service provider is in the business of
doing—we note that plaintiff is both in the retail business of selling bus parts and
remanufacturing buses. However, with regard to the contract at issue, as well as similar types of
contracts, plaintiff was not acting as a retailer of bus parts but was actually selling the service of
rehabilitating buses, i.e., disassembling, removing, repairing, inspecting, reconditioning,
rebuilding, replacing, restoring, painting, servicing, cleaning, testing, and reassembling various
components and parts of the buses.
The third factor—whether the goods were provided as a retail enterprise with a profitmaking motive—may be more applicable in the context of whether a retail sale is taxable under
the general sales tax act. But to the extent it is applicable here, we agree with the trial court’s
conclusion that, although the bus parts were available for purchase alone, in the context of a
rehabilitation contract, the provision of the bus parts was merely a means to accomplish the
contractual objective of rehabilitating the buses. In a sense, plaintiff was acting as a consumer of
bus parts, not a retailer of bus parts. The same is true with regard to the fourth factor—whether
the tangible goods were available for sale without the service. Plaintiff is in the business of
selling bus parts, but it also sells rehabilitation services which requires the installation of bus
parts as well as the provision of other services to meet its contractual obligations.
Similarly, with regard to the fifth factor—the extent to which intangible services have
contributed to the value of the physical item that is transferred—again, we agree with the trial
court’s conclusion, “there would be no remanufacturing but for the service.” The value sought
by plaintiff’s remanufacturing customer includes all aspects of rehabilitation services, not just
bus parts. As plaintiff admits, “capital grant funding is available for a rehabilitation project of a
fleet of buses and is not available if the transit authority simple buys the parts and replaces
them.” And, we agree with the trial court with regard to the sixth factor, no other factors are
relevant to the particular transaction. Thus, the trial court properly held that the remanufacturing
contract at issue, as well as other remanufacturing contracts like it, are predominantly for the
provision of a service and are sourced to Michigan under MCL 208.53 where the service was
performed. Accordingly, we affirm the grant of summary disposition in defendants’ favor.
Next, plaintiff argues that defendants did not meet their burden of proof that revenue
from remanufacturing projects was predominantly from services for projects completed in
plaintiff’s fiscal years ending in January of 2002 through January of 2005. But it appears that the
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trial court, as well as the parties for at least some time, were operating under the understanding
that the MBTA contract was representative of other remanufacturing contracts plaintiff was a
party to in those years. However, in response to defendants’ motion for summary disposition,
plaintiff argued that some of the terms of those other contracts were not similar to the MBTA
contract. At oral argument, the trial court indicated that it would consider a motion for
reconsideration with regard to fiscal years ending in January of 2002 through January of 2005 if
plaintiff provided contracts that were significantly different from the MBTA contract. The trial
court also included that proviso in its order, granting plaintiff 21 days to file such a motion.
Plaintiff did not file a motion for reconsideration. Accordingly, this issue was not properly
preserved for our review. See Walters v Nadell, 481 Mich 377, 387; 751 NW2d 431 (2008).
Next, plaintiff argues that it is entitled to an award of sanctions under MCR 2.313(C)
because defendants failed to admit that plaintiff was entitled to a refund of SBT for fiscal years
ending in January of 2000 and 2001. A trial court’s decision on a motion for sanctions based on
the failure to admit is reviewed for an abuse of discretion. See Phinisee v Rogers, 229 Mich App
547, 561-562; 582 NW2d 852 (1998).
Pursuant to MCR 2.312(A), a party in a civil case may request certain admissions from
the other party before trial. And MCR 2.313(C) provides that “[i]f a party denies . . . the truth of
a matter as requested under MCR 2.312, and if the party requesting the admission later proves . .
. the truth of the matter, the requesting party may move for an order requiring the other party to
pay the expenses incurred in making that proof, including attorney fees.” Here, plaintiff
requested such sanctions on the ground that defendants failed to admit that plaintiff’s SBT
returns filed for fiscal years ending in January of 2000 and 2001 were from the sale of bus parts
entitling plaintiff to a refund. This was an allegation set forth in plaintiff’s amended complaint.
However, the parties voluntarily settled this matter before the hearing on the cross motions for
summary disposition and, obviously, before this case was summarily dismissed. Therefore, an
award of sanctions under MCR 2.313(C) was not warranted.
In Radtke v Miller, Canfield, Paddock & Stone, 453 Mich 413; 551 NW2d 698 (1996),
our Supreme Court explained that admissions under MCR 2.312 are more a matter of civil
procedure because an admission conclusively establishes the admitted facts “and the opposing
side need not introduce evidence to prove the facts.” Id. at 420, quoting 2 Jones, Evidence (6th
ed), § 13C:14, p 310 (Nov 1995 supp.). “A request for admission is not a typical discovery
device, however, because the purpose ‘is not to discover facts but rather to establish some of the
material facts in a case without the necessity of formal proof at trial . . . so that issues which are
disputed might be clearly and succinctly presented to the trier of facts.’” Id. at 420 n 6, quoting
23 Am Jur 2d, Depositions and Discovery, § 314, p 613. The Radtke Court further explained
that these judicial admissions are formal concessions “that have the effect of withdrawing a fact
from issue and dispensing wholly with the need for proof of the fact.” Radtke, supra at 420,
quoting 2 McCormick, Evidence (4th ed), § 254, p 142. In this case, because the disputed issue
was settled before final judicial disposition, plaintiff was not required to prove the allegation by
further litigation and, therefore, was not entitled to “expenses incurred in making that proof”
within the contemplation of MCR 2.313(C). Thus, the trial court did not abuse its discretion
when it denied plaintiff’s request for sanctions under MCR 2.313(C).
Finally, plaintiff argues that “the United States’ Constitution prohibits ruling upholding
the department’s assessments.” Although unclear, it appears that plaintiff is claiming (1) a due
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process violation on the ground that it “has been forced to pay almost $80,000 in taxes and
penalties pursuant to irrational and arbitrary assessments,” and (2) a violation of the commerce
clause apparently on the ground that defendants’ interpretation of the relevant statutes created an
internal and external inconsistency. These claims were not raised before, addressed, or decided
by the trial court; therefore, they are not properly preserved for appellate review and we decline
to address them. See Walters, supra at 387.
Affirmed.
/s/ Mark J. Cavanagh
/s/ E. Thomas Fitzgerald
/s/ Alton T. Davis
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