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Doing
ANYTHING In Michigan? Be Aware of the Tax Implications
Mark
J. Richards
This article was published in the June 1998 issue of the Indiana Manufacturers Association's pulication IMANET.
Introduction
A state's ability to tax a nonresident is restricted by the Due Process Clause of the Fourteenth Amendment to the United States Constitution (the "Due Process Clause") and by Article I, § 8, cl. 3 of the Constitution (the "Commerce Clause"). The initial question is whether, under the Constitution, a nonresident has sufficient "nexus" with the taxing state to allow the state to impose tax on the nonresident. The United States Supreme Court has determined that the Due Process Clause requires "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." The Commerce Clause, on the other hand, authorizes Congress to regulate commerce among the states, and the United States Supreme Court has adopted a four-part test to determine whether a state tax presents an undue burden on interstate commerce. In 1959, the United
States Supreme Court upheld the imposition of a Minnesota net income
tax against an Iowa company in Northwestern States Portland Cement
Co. v. Minnesota, 358 U.S. 450 (1959). The Court held that the imposition
of the tax based on the company's regular and systematic solicitation
of orders did not violate the Due Process Clause or the Commerce Clause.
In response to that case, Congress determined that a higher nexus threshold
was appropriate for the imposition of a state net income tax and passed
Public Law 86-272, 15 U.S.C. § 381(a) (1959). Public Law 86-272
prohibited a state from imposing a net income tax on a taxpayer if the
taxpayer's activities within the state were limited to the "solicitation
of orders." Public Law 86-272, by its terms, is only applicable to net
income taxes. United
States Supreme Court Developments Two landmark cases
were decided by the United States Supreme Court in 1992. One addressed
the scope of Public Law 86-272 to the imposition of a net income tax,
and the other addressed the scope of the Due Process Clause and Commerce
Clause to the imposition of use tax. The scope of Public
Law 86-272 was addressed in Wisconsin Dept. of Revenue v. William
Wrigley, Jr., Co., 505 U.S. 214 (1992). In that case, the State
of Wisconsin attempted to impose its net income tax on William Wrigley,
Jr., Co., the chewing gum manufacturer, based on Wrigley's various sales
and other activities within Wisconsin. The Court held that activities
which were entirely ancillary to sales solicitations would not justify
the imposition of tax. The Court also recognizes a de minimis
exception from taxation for nonsolicitation activities so long as they
do not establish a "nontrivial additional connection with the taxing
state." Later that year,
the Court addressed a state's ability to impose use tax against an out-of-state
mail order house in Quill Corp. v. North Dokota, 504 U.S. 298
(1992). In that case, the Court held that the Due Process Clause did
not require a taxpayer's physical presence in the state in order for
the state to have the Constitutional ability to impose a duty to collect
use tax, so long as the taxpayer "purposefully directed" activity within
the state. However, the Court held that the Commerce Clause did require
a physical presence in the taxing state, applying the four-part test
set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274
(1977). The Court recognized that the taxpayer must have a "substantial
nexus" with the taxing state, not just a "slightest presence." The
Michigan Single Business Tax The Michigan Single Business Tax ("SBT") is imposed on "every person with business activity in this state [Michigan]." The Michigan courts have interpreted the SBT as a value added tax and not as an income tax. As such, the courts have determined that the State of Michigan's ability to impose the SBT on nonresident "persons" doing business in the State of Michigan is not limited by Public Law 86-272. See e.g., Gillette Co. v. Dept. of Treasury, 497 N.W.2d 595 (Mich. App. 1993), app. den'd, 519 N.W.2d 156 (Mich. 1994); Magnetek Controls, Inc. v. Dept. of Treasury, 562 N.W.2d 219 (Mich. App. 1997).
Revenue
Administrative Bulletin 1998-1 As a result of
the judicial developments in Quill, Gillette, Magnetek
and other cases, the State of Michigan issued Revenue Administrative
Bulletin 1998-1 ("RAB 1998-1") in February of this year. RAB 1998-1
reflects the State of Michigan's interpretation and application of Quill
to the SBT. In particular, RAB 1998-1 includes a discussion of the following
subject categories: 1. The jurisdictional
standard to determine whether a taxpayer is subject to the SBT. -- examples of
activities which are presumed to subject, and activities which are presumed
to not subject, a nonresident to the SBT are listed (some activities,
if conducted for only two days, are presumed to subject the nonresident
to the SBT). 2. The effective
date of RAB 1998-1. -- all open tax
periods ending on or after January 1, 1989. 3. The time periods
covered once nexus is established. -- at least the
entire tax year during which nexus is established. 4. SBT filing
requirements for taxpayers subject to the SBT. -- RAB 1998-1
lists adjusted apportioned or allocated gross receipts thresholds triggering
return filing obligations. RAB 1998-1 identifies
various minimal contacts with the State of Michigan which may subject
a taxpayer to the SBT, at least in the view of the State of Michigan
taxing authorities. RAB 1998-1 provides several specific examples of
the number and type of activities in the State of Michigan which may
give a nonresident nexus with the State of Michigan for SBT purposes.
A restatement of these thresholds is beyond the scope of this article,
and in fact RAB 1998-1 contains the following qualification: "this RAB is not
intended to be an all encompassing or all inclusive description of this Proceed
with Caution Given the dramatic
increase in multistate activity by Indiana businesses, a business may
easily surpass the nexus thresholds identified (and possibly not identified)
in RAB 1998-1. Whether these thresholds will withstand Constitutional
scrutiny remains to be seen and may be the subject of challenges in
the courts. The United States Supreme Court in Quill described
this area of law as a "quagmire", and the RAB itself repeatedly refers
to this subject as an "evolving area." Any Indiana resident business engaging in any activity in the State of Michigan should be familiar with the types of activities and frequency of those activities which may potentially trigger filing requirements and tax payment obligations to the State of Michigan. Whether or not a taxpayer is subject to the SBT can impact the taxpayer's tax obligations not only in Michigan, but in Indiana and other states as well. The peculiar facts and circumstances of a taxpayer's activities may give rise to planning opportunities. At a minimum, the taxpayer should be aware of the implications of engaging in any Michigan activities.
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