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Apex Laboratories International Inc. v. City of Detroit

Court of Appeals of Michigan

January 2, 2020

CITY OF DETROIT, Respondent-Appellant.

          Tax Tribunal LC No. 16-000724-TT

          Before: Servitto, P.J., and Ronayne Krause and Boonstra, JJ.

         ON REMAND

          BOONSTRA, J.

         In our previous opinion, this Court affirmed the Michigan Tax Tribunal's (the Tribunal) order granting petitioner Apex Laboratories International, Inc's (Apex) motion for summary disposition and denying respondent City of Detroit's (Detroit) motion for summary disposition.[1]Detroit applied to our Supreme Court for leave to appeal the May 17, 2018 decision of this Court. In lieu of granting leave to appeal, the Supreme Court vacated this Court's previous opinion and remanded the case back to this Court for "reconsideration in light of S Dakota v Wayfair, Inc, ____ U.S. ____; 138 S.Ct. 2080, 2099; 201 L.Ed.2d 403 (2018), which overruled Quill Corp v North Dakota ex rel Heitkamp, 504 U.S. 298; 112 S.Ct. 1904; 119 L.Ed.2d 91 (1992)." Apex Laboratories Int'l, Inc v Detroit, 503 Mich. 1034; 927 N.W.2d 243 (2019). We permitted the parties to file supplemental briefs on remand.[2] We now reconsider the instant case as our Supreme Court has directed, and determine that a further remand to the Tribunal is required. We therefore vacate the decision of the Tribunal and remand for further proceedings.


         The case before us involves the ability of a taxing entity to impose a tax on the person, property, or transaction it seeks to tax. More specifically, it concerns the ability of a taxing entity to impose an income tax on a non-resident corporation. Challenges such as Apex's implicate both the Due Process and Commerce Clauses of the United States Constitution. See U.S. Const Am V; Const, art I, § 8, cl 3. To survive a due process challenge, there must be "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." Wayfair, ____ U.S. at ____; quoting Miller Brothers Co v Maryland, 347 U.S. 340, 344-345; 74 S.Ct. 535; 98 L.Ed. 744 (1954). A "closely related" parallel to this requirement for challenges under the Commerce Clause is that there must be a "substantial nexus" between the taxing entity and the person, property or transaction being taxed. Wayfair, ____ U.S. at ____; quoting Complete Auto Transit, Inc v Brady, 430 U.S. 274, 279; 97 S.Ct. 1076; 51 L.Ed.2d (1977).

         A tax on a foreign corporation "that withstands a due process challenge will not necessarily withstand a Commerce Clause challenge." Gillette Co v Dep't of Treasury, 198 Mich.App. 303, 312; 597 N.W.2d 595 (1993), quoting Quill, 504 U.S. at 306. The Complete Auto test for whether a tax is permissible under the Commerce Clause provides that the tax is constitutionally permissible as long as it (1) applies to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides. Complete Auto, 430 U.S. at 279; see also Gillette, 198 Mich.App. at 313-314.

         Before its decision in Quill, the United States Supreme Court had held that a foreign corporation that lacked a physical presence in the taxing state, but only sold products by mail order, "lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause." Wayfair, ____ U.S. at ____; citing National Bellas Hess, Inc v Dep't of Revenue of Illinois, 386 U.S. 753, 754-755; 87 S.Ct. 1389; 18 L.Ed.2d 505 (1967), overruled by Wayfair, _____ U.S. at ____; 138 S.Ct. 2099. In other words, before Quill, the "physical presence rule" applied to both Due Process and Commerce Clauses challenges to taxes levied against a foreign corporation.

         A. QUILL

         In Quill, the United States Supreme Court reexamined the physical presence rule in the context of a state attempting to require an out-of-state mail-order seller to collect and remit use tax on goods purchased for use within North Dakota. Quill, 504 U.S. at 301. The Quill Court described the Due Process Clause and the Commerce Clause as "analytically distinct" despite the "closely related" language of Complete Auto, noting that the two Clauses "reflect different constitutional concerns" and that a state may, "consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause." Id. at 305. The Quill Court therefore elected to treat the application of the physical presence rule differently under each Clause.

         With regard to the Due Process Clause, the Quill Court concluded that the "definite link" and "minimum connection" between a state and a foreign corporation could be satisfied without the foreign corporation having a physical presence in the state, noting that a foreign corporation may be subject to a state's in personam jurisdiction without the requirement of a physical presence in the state if it "purposefully avails itself of the benefits of an economic market in the forum State." Id. at 307, citing Burger King Corp v Rudzewicz, 471 U.S. 462; 105 S.Ct. 2174; 85 L.Ed.2d 528 (1985). The Quill Court therefore concluded that

[t]he requirements of due process are met irrespective of a corporation's lack of physical presence in the taxing State. Thus, to the extent that our decisions have indicated that the Due Process Clause requires physical presence in a State for the imposition of duty to collect a use tax, we overrule those holdings as superseded by developments in the law of due process. [Id. at 308.]

         However, with regard to challenges brought under the Commerce Clause, the Quill Court opted to retain the physical presence requirement for a finding of a "substantial nexus," rejecting North Dakota's contention that if "a mail-order house that lacks a physical presence in the taxing State nonetheless satisfies the due process 'minimum contacts' test, then that corporation also meets the Commerce Clause 'substantial nexus' test." Id. at 312. The Quill Court reasoned that, in contrast to the Due Process Clause's concern with "fairness for the individual defendant," the Commerce Clause and the substantial nexus requirement were informed by "structural concerns about the effects of state regulation on the national economy." Id. at 313. The Quill Court found that the bright-line physical presence rule of Bellas Hess furthered the goal of avoiding undue burdens on interstate commerce by creating a "discrete realms of commercial activity that is free from interstate taxation." Id. at 315. While the Quill Court noted that the Bellas Hess rule "appears artificial at its edges" it concluded that "[t]his artificiality is more than offset by the benefits of a clear rule" such as clearly establishing the "boundaries of legitimate state authority" to impose taxes, encouraging "settle expectations" and ...

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