Michigan Tribunal Rules Wayfair Does Not Create Nexus for Local Tax Based on Resident Agent (Apex Laboratories v. City of Detroit)
The 2018 Supreme Court decision in South Dakota v. Wayfair overturned the 1992 decision Quill Corp. v. North Dakota, which was a decision that strictly prohibited states from imposing sales taxes on vendors through mail order or internet businesses unless the vendor had a “physical presence” in the state. That decision, which came in the early days of the internet, represented a strikingly different world of internet sales. For example, Amazon was still two years away from its launch and Jeff Bezos had yet to even sell a book online.
The Michigan Tax Tribunal recently issued a decision in Apex Laboratories International, Inc. v. City of Detroit. This matter was brought forward after years of continued litigation, as the case was remanded to the Tribunal from the Court of Appeals over the question of whether the the Supreme Court’s Wayfair decision changed the ruling as to whether Apex could be found liable for local taxes instituted by the City of Detroit.
In its recent decision, the Michigan Tax Tribunal found that its prior decision is unaffected by the Supreme Court’s Wayfair decision. The Michigan Tax Tribunal had previously found that the company’s explanation that “Detroit was listed for administrative convenience convincing.” While the City of Detroit argued that because the company listed Detroit on its tax returns, based on its registered agent, it should be subject to the city’s corporate tax.
Upon remand, the case was sent back to the Michigan Tax Tribunal in order to focus their arguments on “Wayfair, Quill, and the Due Process and Commerce Clauses, and to allow the Tribunal to make a ruling in the first instance.”
The forty-four page decision provided an expansive explanation of the procedural history, the Supreme Court’s decisions, and other similar issues involved. However, its actual decision was fairly short and to the point. The Tribunal’s decision found that the Corporation did not have nexus with the City of Detroit, and therefore was not subject to the City of Detroit Income Tax (“CDIT”) in the disputed years.
The Tribunal noted specifically that while there was a Detroit address listed on the holding company, its ties to the area were, by design, minimal. The Corporation did not have a single employee, office, or employee in the City of Detroit. Likewise, the Corporation did not have any sales or market in the City of Detroit. Rather, the clear purpose of the Detroit company was exclusively to hold company stock.
Next, the phrase “commercial domicile” was evaluated, to determine whether the Corporation had nexus with the City of Detroit. However, the Tribunal found that the City of Detroit did not use this language itself, and there was no reason to apply it here.
Notably, the Corporation’s setup was in Detroit because it did have officers and directors located in Detroit. These individuals were involved with preparing and executive closing documents as it pertained to the sale of stock, which would be finalized in Canada. So while there were no employees or sales in Detroit, Executives and Directors were physically located in Detroit. This type of structure is notable as other entities determine how to structure their entity to avoid establishing nexus in an unfavorable manner.
The Tribunal’s decision is an interesting one. While it is surely not binding for agencies or decision makers across the country, it does provide an important analysis of some of the questions that will be continued to be weighed in establishing nexus after the Supreme Court’s decision in Wayfair.