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.
I.
GENERAL LEGAL PRINCIPLES
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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