Acorn Iron Works v. State Board
294 N.W. 126 (Mich. 1940)
Michigan Supreme Court
Filed: October 7th, 1940
Precedential Status: Precedential
Citations: 294 N.W. 126, 295 Mich.
143
Docket Number: Docket No. 70,
Calendar No. 40,731.
Author: Walter H. North
Plaintiff, a Michigan corporation,
petitioned for a declaration of rights which involves a construction, as
applied to the business carried on by it between July, 1933, and July, 1936, of
Act No. 167, Pub. Acts 1933, as amended by Act No. 77, Pub. Acts 1935 (Comp.
Laws Supp. 1940, § 3663-1 et seq., Stat. Ann. § 7.521 et seq.),
commonly denominated as the general sales tax law. Plaintiff's business
involved both the sale and the use of structural steel which it obtained from
sources outside of Michigan in the regular course of interstate commerce.
Plaintiff also engaged in an activity designated as processing structural
steel, such as drilling and fitting the steel for its setting in structures in
which it was used; but it is agreed that plaintiff's activities in processing
were merely matters of work and labor, and that they did not involve the sale
of "tangible personal property," and that therefore they were not
subject to a sales tax. Plaintiff's business also involved sales of structural steel
over the counter to others for use; but in so far as such sales did not
contemplate resale but instead were made to the consumer, plaintiff in its
brief concedes they were subject to the sales tax.
Aside from the above, plaintiff's
transactions involved in this suit arose from steel construction contracts.
These contracts in some instances were with the property owners and in others
they were with the general building contractor, plaintiff being a
subcontractor. These contracts were of two types. *Page 146 In some plaintiff
contracted to furnish for a lump sum the labor and material and in others the
consideration was on a time-and-material basis. In each case plaintiff's
undertaking was to furnish the labor and structural steel requisite to the
performance of its contract in erecting, repairing or altering a structure in
accordance with designated plans and specifications. The question presented for
determination is whether such transactions either with the owners of the
property or with the building contractor (including subcontractors) were of
such a character that they imposed upon plaintiff the obligation to pay a sales
tax on the structural steel used.
Transactions of the character here
involved might seem at first blush to have been retail sales of tangible personal
property to the ultimate consumer and therefore subject to the sales tax. But
careful consideration of the character of the property sold, the manner of its
use incident to the sale, and the time and conditions under which title passed
to the purchaser bring the conclusion that these transactions were not subject
to the sales tax, and such is the quite uniform holding in courts of last
resort.
At the time of the transactions
involved in this litigation as to what constituted a sale, the statute*
provided and still provides:
"The term 'sale at retail'
means any transaction by which is transferred for consideration the ownership
of tangible personal property, when such transfer is made in the ordinary
course of the transferor's business and is made to the transferee for
consumption or use other than for consumption or use in industrial processing
or agricultural producing, or for any other purpose than for resale in the form
of tangible personal property." *Page 147
In passing it should be noted that
by amendment (Act No. 313, Pub. Acts 1939) there has been added to the
above-quoted provision the following:
"Provided, however, That
tangible personal property permanently affixed and becoming a structural part
of real estate shall not be considered as consumed or used in industrial
processing or agricultural producing."*
The lump sum contract transactions
here involved, regardless of whether plaintiff's undertaking was with a
construction contractor or with an owner, were for a stipulated sum covering
both time and material and in consideration of which plaintiff contracted to
erect a designated steel structure according to plans and specifications. In
plaintiff's process of performance the materials used
ceased to be personal property and became a part of the realty in which form
plaintiff obligated itself to deliver the completed contract product to the
party with whom it had contracted. Before title to the structural steel passed
and before plaintiff's contract was completed the subject matter of the
contract had ceased to be "tangible personal property." Plaintiff's
lump sum construction contract required it to perfect and deliver a structure
which conclusively was realty, not personalty. Such a
transaction is not subject to the Michigan sales tax imposed on sales of
tangible personal property. This conclusion is sustained by the following
authorities. Herlihy Mid-Continent Co. v. Nudelman,
367
Ill. 600 (12 N.E. [2d] 638, 115 A.L.R. 485); State v. Christhilf,170 Md.
586 (185 A.
456); City of St. Louis v. Smith,342
Mo. 317 (114 S.W. [2d] 1017); State v. J. Watts Kearny Sons, 181
La. 554 (160
So. 77); Atlas Supply Co. v. Maxwell,212
N.C. 624 (194
S.E. 117); Albuquerque *Page 148 Lumber Co. v. Bureau of
Revenue, 42
N.M. 58 (75 Pac. [2d] 334); and Lone Star Cement Corp. v. State
Tax Commission, 234
Ala. 465 (175
So. 399).
A contrary result was reached in the
following cases.Bradley Supply Co. v. Ames,
359
Ill. 162 (194
N.E. 272); Blome v. Ames, 365 Ill. 456
(6 N.E. [2d] 841, 111 A.L.R. 940);Moore v. Pleasant Hasler
Construction Co., 50 Ariz. 317 (72 Pac. [2d] 573); Wiseman v. Gillioz, 192
Ark. 950 (96 S.W. [2d] 459). The force of these decisions is minimized by
the following facts. The Blome Case and
the Bradley Supply CompanyCase, decisions by
the supreme court of Illinois, are distinguished or overruled by the later
decision of that court in Herlihy Mid-Continent Co. v. Nudelman, supra; and at least to some extent the
decision of the Arizona court in the MooreCase
is based upon the early decision of the Illinois supreme court in the
subsequently overruled Blome Case; and
seemingly decision of the Arkansas court in the Wiseman Case turned largely
upon a construction of the words used in the statute which differs somewhat
materially from the Michigan statute. The Arkansas statute defines a sale at
retail as follows:
"Any transaction, transfer,
exchange, or barter by which is transferred for a consideration the ownership
of any personal property, * * * made in the ordinary course of the transferor's
business and is made to the transferee for the consumption or use or for any
other purpose than for resale." Act No. 233, § 3, subd.
(b)1, Ark. Acts of 1935.*
The materials involved in the
Arkansas case were used by a contractor in building a dam for the city of Fort
Smith for a lump sum. In its decision the *Page 149 court said: "It seems
to us that the only question is whether there was a transfer to the city for a
consideration. If so, it comes within the terms of section 3 of the sales tax
law. If there was a transfer of ownership, as mentioned in section 3 of the
act, there was a sale to the city upon which the tax must be paid, unless the
appellees were entitled to exemption." Seemingly the Arkansas court
construed the language of its statute as being broader than other courts have
construed somewhat similar statutory provisions in the decisions first above
cited.
In so far as some of plaintiff's
contractual engagements have been on the basis of "time and material"
rather than for a lump sum, we quote the following comment from appellants'
brief:
"Under 'time-and-material
contracts' plaintiff has a written order to proceed with a job on a cost-plus
basis, but the method and manner of doing the work is practically the same. In
arriving at its figures when computing the charge to be made on a
time-and-material contract, plaintiff keeps a record of all materials that go
into the job, of all engineering or drafting labor, of all labor entering into
the job, and then of the erection labor; and when the job is completed, it adds
the sums up, and adds its profit, and considers that the price to the
contractor or owner, 'whichever happens to be the case for the job.' * * *
"Plaintiff, when engaging in
such a contract (lump sum contract) does not segregate its figures for material
and labor, and the owner of the building would not know the amount paid for
each item, but plaintiff's private records would show a break
down of the items of labor and material. Plaintiff would have to figure
how much the material was going to cost the company, and how much the labor
would cost, before it could give a lump-sum estimate to the owner. * * * From
plaintiff's records on lump-sum contracts, the company would know how much
material it had put into the job." *Page 150
As bearing upon plaintiff's
liability for payment of a sales tax, there appears to be no material
difference whether plaintiff's construction contract with an owner or a
contract builder was for a lump sum or on a time-and-material basis. In either
case the amount plaintiff charged for performance of its contract must have
been based upon the cost or value of materials used as one item and the cost of
labor as the other, and in each instance the profit essential to successful
conduct of business probably was added. We know of no reason for holding that
plaintiff is liable for the sales tax when doing business under either the one
form of contract or the other.
Defendants' contention that
plaintiff's use of structural steel in performance of its construction contracts
"is merely incidental to * * * a transfer of ownership (of 'tangible
personal property' and) the transaction is a proper basis of the
computation" of the statutory sales tax, is not tenable. This quite
conclusively appears from a phase of the factual situation in this case which
defendants state in their brief as follows:
"In either case (lump sum
contracts or time-and-material contracts), after 'fabrication' of the material
for the particular purpose contemplated by the plans and specifications, the
steel beams or girders cannot be sold as a separate and distinct product, but
(if not used as contemplated) must be scrapped, melted, and remoulded."
To some extent defendants stress the
fact that, "The plaintiff at bar engages in the retail sales business, and
has applied for and accepted a license under the general sales tax act; it
maintains on hand in its shop a stock-in-trade, consisting of from 100 to 200
tons of structural steel material." But it does not follow from the
circumstances just above noted *Page 151 that merely because some of
plaintiff's transactions are subject to the sales tax therefore all of its
business is likewise subject to the tax. One may be both a retailer and a
wholesaler of merchandise, but clearly by the very terms of the statute
(section 2) the sales tax law applies only to his "sales at retail."
And likewise one may be both a retailer of merchandise
and a dealer in real estate, but even so the sales tax would not be applicable
to his real estate dealings.
The State board of tax
administration from time to time has changed its construction and method of
enforcing the sales tax law as it affects building trade transactions; but in
this connection it is sufficient to note that liability for payment of the
sales tax is controlled by statute. It cannot be imposed by rulings or
regulations of the board.
"Tax exactions, property or
excise, must rest upon legislative enactment and collectors can act only within
express authority conferred thereby, the scope of such laws cannot be extended
by implication or forced construction, and language, if dubious, is not
resolved against the taxpayer."J. B.
Simpson, Inc., v. O'Hara (syllabus), 277
Mich. 55.
As applied to plaintiff's building
contracts, we affirm the conclusion reached by the circuit judge which he
summarizes as follows:
"That plaintiff is engaged in a
business which not subject to the sales tax except insofar as sales made over
the counter are concerned, which, of course, are taxable. That insofar as the
application of this act is concerned, building subcontractors should be placed
in the same category as building contractors and that the exemption from that
tax granted building contractors should be given to plaintiff, and that the
assessments heretofore made by the defendant on plaintiff's transactions
falling *Page 152 within the category of erection contracts, fabrication in
conjunction with erection when pursuant to specific building contracts, should
be cancelled."
A public question being involved, no
costs are awarded.
BUSHNELL, C.J., and SHAPE, CHANDLER,
McALLISTER, WIEST, and BUTZEL, JJ., concurred. The
late Justice POTTER took no part in this decision.
* Comp. Laws Supp. 1940, § 3663-1, Stat. Ann. § 7.521. —
REPORTER.
* Comp. Laws Supp. 1940, § 3663-1, Stat. Ann. 1940 Cum. Supp.
§ 7.521. — REPORTER.
* Pope's Statutes of Arkansas (1937), § 14069. — REPORTER.