United States: Michigan Court of Appeals Finds That the Presence of any Sales Force in Michigan Establishes Substantial Nexus for Purposes of Single Business tax

The Michigan Court of Appeals recently rejected a taxpayer’s claim that the size of a company’s sales force in Michigan must be considered when determining whether a company has substantial nexus with Michigan. Rayovac Corporation v. Dep’t of Treasury, Case No. 02-000062-MT (Nov. 23, 2004), 2004 Mich. App. LEXIS 3190. Instead, the Court found that the presence of any sales force in Michigan establishes substantial nexus for purposes of Michigan Single Business Tax ("SBT").

Rayovac Corporation ("Rayovac") had three sales persons and one sales manager in Michigan who solicited, but did not accept or approve orders. The Court of Claims determined that this presence was insufficient to establish substantial nexus with Michigan under the limitations imposed by the Commerce Clause and found that Rayovac was not liable for SBT.

The Court of Appeals agreed with the Court of Claims that Michigan could impose SBT only if Rayovac had substantial nexus with Michigan under the standard established by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Although Rayovac urged the Court to consider the size of a taxpayer’s sales force in Michigan in determining substantial nexus, the Court declined to do so. Rather, the Court found that Quill’s "bright line rule" as interpreted by its decision in MagneTek Controls, Inc. v. Dep’t of Treasury, 562 N.W.2d 219 (1997) could only be preserved by finding that the presence of any sales force in Michigan establishes substantial nexus. To do otherwise, the Court of Appeals stated would "invite chaos from lack of certainty as to what size or character of the sales force would meet the standard." Therefore, the Court of Appeals reversed the Court of Claims’ decision and found that Rayovac had substantial nexus with Michigan and was liable for SBT.

Not surprisingly, the Court reaffirmed, in a summary paragraph, its earlier determinations that found that the retroactive application of the Department’s nexus standard for SBT did not violate the Commerce Clause¹. Further, the Court found that Rayovac had no vested right in the continued application of a particular taxing standard and could not claim that imposing the SBT was unfair and unjust treatment.

This case reinforces the Department’s power to subject unwary taxpayers to a ten-year look back period for SBT.

The Michigan Department of Treasury has a voluntary disclosure program for companies that voluntarily come forward to register for SBT. This program has a four-year look back period and is available to companies that have not been contacted or audited by the Department. Participation in this program can be requested on an anonymous basis. If you’d like more information on this program, give me a call.

1 Prior to 1993 the Department used the standards in P.L. 86-272 to determine whether a a company had substantial nexus with Michigan for purposes of SBT. P.L. 86-272 prohibits a state from imposing a tax based upon net income if the only business activities in the state are the solicitation of orders by a company representative and the orders are approved and shipped from outside the state. After this standard was rejected by the Court of appeals in Gillette Company v. Dep’t of Treasury, 497 N.W.2d 595 (Mich. Ct. App. 1993), the Department promulgated, in Revenue Administrative Bulletin 1998-1 ("RAB 1998-1"), new nexus standards based on the due process and commerce clause analysis in Quill. The Department applied the nexus standard in RAB 1998-1 retroactively with a ten-year look back period. The retroactive application of this standard was approved in Syntex Laboratories v. Dep’t of Treasury, 590 N.W.2d 612 (Mich. Ct. App. 1998); Guardian Industries Corp. v. Dep’t of Treasury, 499 N.W.2d 349 (Mich. Ct. App. 1993); Cosmair v. Dep’t of Treasury, Mich. Ct. App. No. 198240, unreported, 1998 Mich. App. LEXIS 2575 and MagneTek Controls, Inc. V. Dep’t of Treasury, 562 N.W.2d 219 (Mich. Ct. App. 1997).

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