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BlogsPublications | November 21, 2016
3 minute read

COA holds that a custom-furnishings carpenter is liable for use tax as construction contractor

A company in the business of producing and installing custom office furnishings and interior finishes is a contractor liable for use tax, and not a retailer liable only for sales tax, said the Michigan Court of Appeals in Brunt Associates, Inc. v. Department of Treasury, No. 328253. Further, it is not an industrial processor entitled to an exemption under the Use Tax Act (UTA). Ultimately such a company affixes its product to real estate for its customers, no matter how unobtrusive the hardware used to attach its products is or how easily those products may be removed.

Brunt Associates, Inc. (“Brunt”) is a company that produces and installs custom cabinetry, decorative panels, freestanding furniture, and other custom furnishings, for commercial applications. Some of its products are attached to customers’ buildings with screws, bolts, clips, or fasteners, while others are freestanding furnishings that are transported in sections and reassembled on-site.

The Michigan Department of Treasury (“Treasury”) conducted a sales and use tax audit of Brunt’s books that covered the period November 1, 2005 through December 31, 2009. The auditor found that Brunt reported no use tax during the audit period, that Brunt remitted use tax as sales tax, and that Brunt was a real property contractor that did not make any sales at retail. Treasury concluded that Brunt owed $284,082 in use tax, plus $41,674 in interest, for a total of $325,756.

Brunt filed a petition with the Michigan Tax Tribunal alleging that it was a retailer of tangible personal property, not a construction contractor, and that it was an industrial processor entitled to an exemption. Treasury responded that Brunt was a real property contractor and was not entitled to an industrial processing exemption because it did not ultimately sell its products at retail. The Tax Tribunal sided with Treasury, holding that Brunt attached its products to the realty of its customers, thereby making Brunt a contractor liable for use tax on all of its products.

The Court of Appeals agreed. Under the UTA, a retailer is exempt from paying use tax on property it purchases as long as it does in fact resell the property, while a contractor is not exempt. Under the Michigan Administrative Code R 205.71(6), the definition of “contractor” includes a manufacturer who “affixes his product to real estate for others.” The court held that Brunt’s physical or constructive attachment of its products to its customers’ buildings made it a contractor. It was not dispositive, the court ruled, whether an item is removable without damage to the real estate. The determination of whether the product is a “fixture” after installation is separate from the question of whether a firm is a contractor.

The court likewise rejected Brunt’s argument that it was entitled to an exemption under MCL 205.94o, the UTA’s industrial-processing statute. Under that statutory provision, tangible personal property permanently affixed to real estate is not eligible for an industrial processing exemption.

Thus, the court affirmed the Tax Tribunal’s decision and held that a company that sells and installs finish carpentry is liable for use tax as a construction contractor.