JW HOBBS CORPORATION v. DEPARTMENT OF TREASURY, 268 Mich. App. 38

SCHUETTE, J. In this tax case, defendant Department of Treasury appeals by delayed leave granted the January 14, 2004, order granting in part plaintiffs motion for

summary disposition under MCR 2.116(C)(10). Plaintiff cross-appeals. We reverse in part and affirm in part and remand. i. FACTS Plaintiff J.W Hobbs Corporation is a Springfield, Illinois, based company. Defendant contends that from January 1, 1989, to March 31, 2000, plaintiff was subject to the Michigan single business tax (SBT). During this period, plaintiff contracted with the Brook-field, Wisconsin, firm of Ziegenbein & Associates to act as an independent contractor to sell plaintiffs products in multiple states, including Michigan.

Ziegenbein employed George Piper, who resided in Bloomfield Hills, Michigan, as a salesman. In addition to plaintiffs products, Piper also sold the products of two other businesses completely unrelated to plaintiff. Piper sold inventory from a catalog and did not keep any of plaintiffs property in Michigan. The present case arose when defendant conducted a single business tax field audit of plaintiff for the period of January 1, 1990, to March 31, 2000. During this period, plaintiff had not filed Michigan SBT returns nor had it paid Michigan SBT pursuant to MCL 208.1 et seq.

Defendant determined that plaintiff was subject to the SBT and assessed plaintiff $207,120 in tax liability, $115,491.37 in interest, and $23,334 in penalties, for a total tax liability of $345,945.37. Plaintiff paid under protest and filed suit in the Court of Claims seeking refund of the amount paid, plus statutory interest, costs, and attorney fees. Plaintiff asserted that defendant unlawfully assessed liability for the SBT because plaintiff did not have a sufficient nexus with Michigan.

Plaintiff argued that it had no resident employees in the state and that its only contact was a nonexclusive independent contractor who solicited sales in Michigan, aided by plaintiffs employees during fewer than ten yearly visits to the state. Plaintiff stated that it did not pay the SBT in reliance on two different bulletins disseminated by defendant: Revenue Administrative Bulletin (RAB) 1989-46 and SBT Bulletin 1980-1. These two bulletins provided

interpretation of MCL 208.3(2), which defines “business activity” as a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, or the performance of services, or a combination thereof, made or engaged in, or caused to be made or engaged in, within this state, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others, but shall not include the services rendered by an employee to an employer, services as a director of a corporation, or a casual transaction.

SBT Bulletin 1980-1, issued on May 1, 1980, attempted to clarify the extent to which business activity would qualify as a nexus and, thus, be taxed by defendant. It stated: The fact that a taxpayer is represented in Michigan by an employee exploring the Michigan market and taking orders to be approved and shipped from outside Michigan will not subject the taxpayer to the SBT.

When the employee representing the taxpayer goes beyond the solicitation of sales and provides services for the customer, including but not limited to technical assistance, inventory, stock rotation, or services for the employer, including but not limited to collection of delinquent accounts, warranty work, exchange of damaged merchandise or negotiate [sic] settlement of a claim, sufficient nexus is established. On May 31, 1989, defendant replaced SBT Bulletin 1980-1 with RAB 1989-46.

RAB 1989-46 contained language nearly identical to that in the paragraph quoted from SBT Bulletin 1980-1 and noted that certain in-state activities would not cause the loss of immunity for otherwise immune sales. In 1993, this Court issued decisions in Gillette Co v Dep’t of Treasury, 198 Mich App 303; 497 NW2d 595 (1993), and in Guardian Industries Corp v Dep’t of Treasury, 198 Mich App 363; 499 NW2d 349 (1993), that resolved the question of which federal standard set the “minimum contacts” a taxpayer must have with Michigan for this state to subject the taxpayer to the SBT.

Following these decisions, defendant announced that it would consider the standard for SBT business activity to be whether there was a resident employee in the state. Defendant announced this position publicly in publications and at tax seminars. Then, on February 24, 1998, defendant issued RAB 1998-1, entitled SBT Nexus Standards.

This bulletin provides that a sufficient nexus for application of the SBT is presumed when a nonresident employee or independent contractor is temporarily present in Michigan for two or more days in any year performing solicitations of sales regardless of whether the company has inventory in the state. Defendant also directed that this nexus standard should apply retroactively to 1989 on the basis of this Court’s decision in Syntex Laboratories v Dep’t of Treasury, 233 Mich App 286; 590 NW2d 612 (1998). After a hearing in this case, the court issued a written opinion and order granting plaintiffs motion for

summary disposition for the years 1989 through 1997, finding that defendant had admitted that under the SBT nexus standards issued before 1998, the presence of a nonexclusive independent contractor who was a resident of the state of Michigan and who solicited sales on behalf of a corporation did not create a business activity nexus in Michigan. The court concluded that this Court’s decision in Magnetek Controls, Inc v Dep’t of Treasury, 221 Mich App 400; 562 NW2d 219 (1997), was inapplicable to this case because Magnetek dealt only with “throwback” revenue under MCL 208.42.

In contrast, the court held that plaintiffs business activities in this case involve MCL 208.3. The court held that defendant was bound by RAB 1989-46; the more expansive nexus standard announced in Gillette was not incorporated into an RAB until the issuance of RAB 1998-1. Accordingly, the court held that plaintiff was entitled to a refund of the SBT paid for 1989 through 1997, along with interest. However, plaintiff was not entitled to a refund for single business taxes for the years 1998 through 2000. Defendant appeals, and plaintiff cross-appeals. II.

STANDARD OF REVIEW This Court reviews de novo a trial court’s decision on a motion for

summary disposition. Smith v Globe Life Ins Co, 460 Mich 446, 454; 597 NW2d 28 (1999). MCR 2.116(0(10) provides that

summary disposition is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. In addition, statutory

interpretation is a question of law that is reviewed de novo. Inter Coop Council v Dep’t of Treasury, 257 Mich App 219, 222; 668 NW2d 181 (2003). “Although tax laws are construed against the government, tax-exemption statutes are strictly construed in favor of the taxing unit.” Id. III. ANALYSIS A. RETROACTIVE APPLICATION OF NEXUS STANDARD Before 1993, when this Court decided Guardian and Gillette, the question of the threshold for application of Michigan’s SBT remained unresolved.

Applying a broader Due Process/Commerce Clause nexus standard found in federal case law, a taxpayer’s solicitation of business in foreign states alone would create a sufficient nexus with the states that they may tax the sales. However, applying the federal statute, PL 86-272, to the SBT, a taxpayer’s mere solicitation of business would not be a sufficient nexus to impose taxation. In Gillette, supra at 311, this Court found that PL 86-272 was inapplicable to the imposition of the SBT and that such taxation would instead depend on an analysis under the Due Process Clause and the Commerce Clause.

In Magnetek, supra at 408, this Court noted that, under Quill Corp v North Dakota, 504 U S 298, 315; 112 S Ct 1904; 119 L Ed 2d 91 (1992), the substantial nexus requirement would be satisfied by “the presence in the taxing State of a small sales force, plant, or office[.]’ ” Alternatively, the conduct of economic activities in the taxing state, performed by either the taxpayer’s personnel or others on its behalf, can satisfy the test for a substantial nexus.

Magnetek, supra at 411-412, citing In re Orvis Co, Inc v Tax Appeals Tribunal of New York, 86 NY2d 165, 178; 654 NE2d 954; 630 NYS2d 680 (1995); see also Kaiser Optical Systems, Inc v Dep’t of Treasury, 254 Mich App 517, 526-527; 657 NW2d 813 (2002). In Syntex, this Court noted that the Due Process/Commerce Clause test is the proper test to determine the applicability of the SBT. Syntex, supra at 288. This decision was not, as plaintiff argues, limited to the determination of “throwback” taxes under MCL 208.42.

Syntex unequivocally held that the decision in Gillette, in which this Court adopted the Due Process/Commerce Clause test, may be applied retroactively, and stated: The general rule is that judicial decisions are to be given complete retroactive effect. Complete prospective application is generally limited to decisions that overrule clear and uncontradicted case law. Hyde v Univ of Michigan Bd of Regents, 426 Mich 223, 240; 393 NW2d 847 (1986). Retroactive application of a judicial decision will only violate due process when it acts as an ex post facto law. People v Doyle, 451 Mich 93, 100; 545 NW2d 627 (1996).

However, the ex post facto rule applies only to criminal cases, not to civil cases. Ludka v Dep’t of Treasury, 155 Mich App 250, 260; 399 NW2d 490 (1986). Nevertheless, retroactive application of a judicial decision can be “problematic” to due process requirements if it is unexpected and indefensible in light of the law existing at the time of the conduct. Doyle, supra at 104. Due process principles prevent retrospective laws from divesting rights to property or vested rights or from impairing contracts. Detroit v Walker, 445 Mich 682, 698; 520 NW2d 135 (1994).

While petitioner may not have expected this Court to reject the PL 86-272 test, the Court’s decision is not unexpected and indefensible because the appellate courts of this state had never resolved whether the PL 86-272 test was appropriate for determining single business tax liability, Gillette, supra at 307, n 1, and petitioner knew that the Gillette decision could affect its pending matter. In any event, petitioner did not have a vested right in the continuation of any tax law. Walker, supra at 703; Ludka, supra.

Therefore, proper application of the law cannot be considered a due process violation in this case. [Syntex, supra at 292-293.] Plaintiff argues that despite this case law, defendant is bound by its published

interpretations in its RABs. Plaintiff notes that defendant has admitted that before issuing its new standard in 1998, it repeatedly and publicly stated that in order to be subject to the SBT, a business needed to have physical presence in the state consisting of an office or a resident employee in the state. The trial court determined that the RABs were “guidelines” adopted under § 24 of the Administrative Procedures Act (APA), MCL 24.224, and defined under § 3 of the APA as “an agency statement or declaration of policy which the agency intends to follow....” MCL 24.203(6).

The trial court mistakenly concluded that as guidelines adopted pursuant to the APA, the RABs were binding and could only be applied prospectively. RABs are actually issued under MCL 205.3(f), which allows defendant to “issue bulletins that index and explain current department

interpretations of current state tax laws.” Our Supreme Court has held that RABs are only

interpretations of the applicable statutes and do not have the force of law. See, e.g., Catalina Marketing Sales Corp v Dep’t of Treasury, 470 Mich 13, 21; 678 NW2d 619 (2004). In Rayovac Corp v Dep’t of Treasury, 264 Mich App 441, 448-449; 691 NW2d 57 (2004), this Court stated, “Moreover, defendant is not estopped from retroactively applying the new rule created by case law simply because it had issued revenue administrative bulletins advising taxpayers of what the then-applicable rule was.” Thus, defendant is not legally bound to adhere to its stated

interpretation of tax law in its RABs. Finally, the argument that new state taxing standards may not be imposed retroactively has been rejected by the United States Supreme Court in Harper v Virginia Dep’t of Taxation, 509 US 86; 113 S Ct 2510; 125 L Ed 2d 74 (1993). We note that defendant was correct in asserting that this Court allowed for a retroactive application of the taxing standards in Gillette. However, this Court did not conclude that this retroactive application was required. Thus, while defendant had the authority to retroactively apply the new taxing standard, such application was not mandatory.

Though we are bound to uphold defendant’s retroactive application of the SBT, we note that it is unfortunate that plaintiff and other similarly situated businesses are not able to trust the published bulletins of defendant. Defendant’s decision to retroactively apply the new standard has blindsided plaintiff, which had correctly complied with the previous taxing standards and planned its business accordingly. In Guardian, this Court noted that the Due Process Clause and the Commerce Clause are closely related, but they differ fundamentally in several respects.

Each poses distinct limitations on a taxing power of the state and each addresses different constitutional concerns. Guardian, supra at 373. The imposition of a tax may pass muster under the Due Process Clause but not the Commerce Clause. The nexus test derived from the Due Process Clause and the Commerce Clause requires a far less stringent nexus than the one found in the federal statute, PL 86-272. Codified at 15 USC 381 et seq. A throwback tax is assessed when a Michigan taxpayer generates income in another state but does not pay the other state a tax on the income.

The untaxed income is then “thrown back” to Michigan, where it is subject to the SBT. Defendant published its position in its departmental newsletter, the Tax Advisor and announced its position at seminars for tax professionals, and defendant’s staff taught this

interpretation in text it created to educate tax professionals at Michigan State University and University of Michigan tax school programs. Furthermore, out-of-state taxpayers lacking employees who were residents of Michigan that attempted to voluntarily pay the SBT were told they had no filing responsibility.