Guardian Industries Corp. v. DEP'T OF TREASURY CARGILL, INC.

Citations: 499 N.W.2d 349; 198 Mich. App. 363Docket: Docket 119601, 120048

Court: Michigan Court of Appeals; March 1, 1993; Michigan; State Appellate Court

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The Michigan Court of Appeals addressed two consolidated cases involving tax refund challenges under the Single Business Tax Act (SBTA). In case No. 119601, the Department of Treasury appealed a Court of Claims ruling that granted summary disposition to Guardian Industries. The court found that Guardian's solicitation of business in specific states created a sufficient nexus to avoid Michigan's single business tax. Treasury claimed procedural errors and asserted that Guardian's activities went beyond mere solicitation. The appellate court reversed and remanded the decision.

In case No. 120048, Cargill and associated companies appealed a Court of Claims ruling regarding the Commissioner of Revenue's discretion to deny an amended consolidated single business tax return. Additionally, North Star contested the finding that its solicitation in target states did not establish tax liability there, while Treasury cross-appealed concerning tax allocation payments between Cargill entities. The appellate court affirmed some aspects of the lower court's decision while reversing others.

Key facts from case No. 119601 indicate that Guardian's principal operations were in Michigan, with sales activities in target states, which Guardian argued should exempt it from Michigan taxation. The Court of Claims ruled that solicitation alone was enough for the target states to impose a business privilege tax on Guardian.

Cargill owns the stock of Cargill Leasing Corporation, North Star Steel Company, and Magnimet Corporation, with Cargill Leasing generating intercorporate income primarily from tax benefit payments from Cargill. The Commissioner of Revenue denied Cargill's request for a retroactive consolidated tax return for 1982 and 1983, although the Court of Claims allowed consolidation for 1984-1985. North Star aims to exclude about $120 million in sales from Michigan taxation, claiming they are taxable in other states, where its activities were limited to soliciting sales of tangible personal property. A key issue is whether such solicitation alone establishes a sufficient nexus for taxation by those states. The Treasury contends it does not, arguing that taxing based solely on solicitation would violate PL 86-272 and the federal constitution. Michigan's single business tax is a value-added tax that taxes the value added at each production and distribution stage. A taxpayer's activities in Michigan only partially allow for taxation; any value earned outside Michigan cannot be taxed. The tax base includes the percentage of total sales made in Michigan, defined as sales not taxable in the purchaser's state. Additionally, a taxpayer is considered taxable in another state if subject to certain taxes or if that state has jurisdiction to impose such taxes. Consequently, Michigan cannot tax a sale of tangible personal property if the destination state taxes the transaction or has jurisdiction to impose relevant taxes.

Federal Public Law 86-272 does not establish the appropriate standard for determining whether states can tax plaintiffs for soliciting business. The law prohibits states from imposing a net income tax on income derived from interstate commerce if the only activities in the state are limited to the solicitation of orders for tangible personal property, which are sent outside the state for fulfillment. The legislative history reveals that Congress intended PL 86-272 to clarify the minimum nexus required for state taxation, particularly following the Supreme Court's decision in Northwestern States Portland Cement Co v Minnesota, which allowed taxation if there was adequate nexus. PL 86-272 was specifically designed to limit state power over net income taxes and was not meant to apply to other forms of taxation. The definition of "net income tax" includes taxes imposed on or measured by net income, but the determination of what constitutes a net income tax is not solely based on the label assigned by the state. The Supreme Court has ruled that states cannot impose net income taxes on foreign corporations engaged only in solicitation activities. However, PL 86-272 does not prevent states from levying other types of taxes, such as franchise taxes not measured by net income, thereby concluding that it does not provide the minimum nexus standard necessary to assess whether a state's taxation violates due process or interstate commerce clauses.

Mere solicitation of business by foreign states cannot be taxed in a manner that violates the due process or interstate commerce clauses of the U.S. Constitution. The U.S. Supreme Court's decision in Quill clarified the relationship between these clauses, emphasizing that while Congress can regulate interstate commerce, it cannot permit violations of due process. For a state tax to comply with due process, there must be a definite link or minimum connection between the state and the entity being taxed. Income attributed to a state must be rationally related to the values connected with that state.

In Quill, the Court found that Quill had established sufficient contacts with North Dakota through targeted activities, justifying the state's use tax despite Quill's lack of physical presence there. The ruling reinforced that mere solicitation can establish a due process nexus for tax purposes, extending beyond just use taxes. The Court determined that foreign corporations benefiting from a state's economic market may be subject to its jurisdiction, regardless of physical presence. In the cases discussed, the plaintiffs had significant solicitation activities in the target states, resulting in sufficient contacts to withstand a due process challenge to taxation by those states.

Plaintiffs' solicitation activities must meet the commerce clause nexus standard for taxation. While due process allows states to tax plaintiffs, a tax may still violate the commerce clause if it does not establish a substantial nexus with the taxing state. The commerce clause requires a higher nexus standard than due process; specifically, a tax must (1) apply to an activity with a substantial nexus to the state, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be related to services provided by the state. 

The substantial nexus standard limits state taxing authority to prevent undue burdens on interstate commerce. The Supreme Court's rulings in National Bellas Hess and Quill establish that mere solicitation, without physical presence, does not create a substantial nexus. Specifically, a taxpayer must have a physical presence, such as a sales force or office, in the taxing state. The trial court ruled in case No. 119601 that Guardian's mere solicitation could withstand constitutional challenges, but this contradicts Quill, which necessitates proof of physical presence for a substantial nexus. Guardian must demonstrate that any target state tax complies with the commerce clause to challenge Michigan's single business tax effectively. Summary disposition motions assess whether sufficient factual support exists for a claim, requiring consideration of various forms of evidence.

The court must favor the nonmoving party by considering whether there is potential for reasonable disagreement on the facts. The moving party bears the initial burden of presenting evidence, such as affidavits or depositions, to support its position. In this case, Guardian claimed its business activities in target states were limited to soliciting sales. The defendant countered that it lacked sufficient knowledge regarding Guardian's activities but also suggested that some of Guardian's actions went beyond mere solicitation. Guardian's summary disposition motion relied solely on the defendant's admission of limited activities but lacked supporting affidavits. The defendant submitted a late affidavit stating that audit reports did not clarify Guardian's state-specific activities. Guardian later submitted untimely affidavits from sales managers outlining the nature of solicitation. The court concluded that a genuine factual dispute existed regarding the extent of Guardian's solicitation, particularly concerning the presence of its employees in the target states. If a target state taxed Guardian's activities without the presence of its employees, it would violate the commerce clause. Thus, the court found the summary disposition was improperly granted due to insufficient evidence and reversed the decision, allowing for further factual development. Additionally, a related case established that solicitation of orders, defined by the U.S. Supreme Court, involves activities that are ancillary to the request to purchase, not independent business functions.

In Case No. 120048, the Court of Claims ruled that mere solicitation by the plaintiffs did not establish the required nexus for taxation under PL 86-272. The court determined that the appropriate standard for assessing taxation is whether the plaintiffs’ activities comply with the constitutional due process and commerce clauses. The plaintiffs' solicitation activities amounted to minimum contacts, making it difficult for them to challenge taxation on due process grounds. However, the court noted that whether these activities established a substantial nexus for commerce clause purposes was more complex. The plaintiffs confirmed that their activities were solely sales solicitation; thus, they could not contest Michigan's single business tax based solely on this. The burden was on the plaintiffs to show they were taxable in the target states, and without evidence of physical presence or activities beyond solicitation, taxation could not be justified. Consequently, the court affirmed the judgment for the defendant.

In Case No. 119601, the Treasury argued that procedural errors in the Court of Claims warranted reversal, but this issue was deemed moot following the summary disposition ruling. 

Regarding the authority of the Commissioner of Revenue in Case No. 120048, the plaintiffs claimed the commissioner lacked the power to impose a prospective-only limitation on consolidated tax returns. The court referenced Section 77 of the SBTA, which allows the commissioner discretion to permit such filings. The court found the legislative language clear and upheld the commissioner's decision against retroactive consolidation, as long as there was a rational basis for it, rejecting the plaintiffs' argument that a different standard applied under the SBTA compared to the income tax act.

Consolidated filings under the Single Business Tax Act (SBTA) aim to reduce administrative costs for taxpayers and promote the active participation of multi-state corporations in Michigan. Denying retroactive consolidation aligns with this goal, as it prevents unnecessary complications for corporations that must evaluate their filing status beforehand. The Commissioner of Revenue is authorized to limit consolidation to prospective applications only. 

In a cross-appeal, the Treasury contends that the trial court mistakenly allowed Cargill Leasing and Cargill to file consolidated tax returns for 1984-1985. SBTA Section 77 permits consolidation based on substantial intercorporate transactions, which should not hinge solely on control, ownership, or financing. The trial court found Cargill's tax benefit acquisition and leasing arrangements with Cargill Leasing to be substantial, but these transactions were closely tied to Cargill's ownership and control, as they were facilitated by their parent-subsidiary relationship.

Specific tax benefit payments from Cargill to Cargill Leasing were assessed alongside rental payments. However, the trial court failed to distinguish these payments adequately, and no evidence demonstrated that the rental payments constituted a substantial portion of the overall transactions. Cargill's rental payments appeared minor compared to total intercorporate transfers, undermining their claim for consolidation eligibility under SBTA Section 77.

In conclusion, the Court of Claims erred in permitting the consolidation of tax returns for 1984-1985, affirming part of Case No. 120048 while reversing and remanding Case No. 119601. The court refrained from ruling on whether a single business tax is based on net income or the taxation of foreign entities based solely on solicitation.