Opinion
363984
01-04-2024
APEX LABORATORIES INTERNATIONAL, INC., Petitioner-Appellee, v. CITY OF DETROIT, Respondent-Appellant.
UNPUBLISHED
Tax Tribunal LC No. 16-000724-TT
Before: RIORDAN, P.J., and MURRAY and M. J. KELLY, JJ.
PER CURIAM.
In this income-tax dispute, respondent, the city of Detroit, appeals as of right the Tax Tribunal's order granting in part Detroit's motion for reconsideration, while also granting summary disposition in favor of petitioner, Apex Laboratories International, Inc. For the reasons provided below, we reverse and remand to the Tax Tribunal for further proceedings.
I. BACKGROUND
This case arises out of Detroit's attempt to assess and collect income tax from Apex for the period covering May 1, 2012, through April 30, 2013, and returns to this Court for a third time. The pertinent background is summarized in this Court's initial opinion, Apex Labs Int'l, Inc v Detroit, unpublished per curiam opinion of the Court of Appeals, issued May 17, 2018 (Docket No. 338218) (Apex I), pp 1-3, vacated 503 Mich. 1034 (2019):
A Detroit-based private equity firm, Huron Capital Partners LLC (Huron), solicited investors to acquire partnership interests in a limited partnership, The Huron Fund II, LP (the Fund), which in turn was to acquire shares in existing "lower middle-market" companies. The general partner of the Fund was an entity known as Huron Capital Partners GP II, LLC (the general partner); however, the business operations of the general partner and the Fund were carried out by Huron.
In 2006, Huron recommended that the Fund acquire shares in (as well as debt of) Labstat International, ULC (Labstat), a Canadian company, for eventual
sale. As part of the transaction, Apex was incorporated as a Delaware corporation for the sole purpose of holding the shares of Labstat to be acquired by the Fund- Apex never possessed or acquired any other assets. Although Apex possessed a Detroit mailing address, it did not have any employees, owned no real or personal property, provided no services, and sold no goods, either in Detroit or elsewhere. Various members and employees of Huron were appointed to Apex's board of directors. Apex never held a board meeting.
Apex earned dividend income from its shares of Labstat in 2010, and paid those dividends to the limited partners of the Fund. Apex paid 1% Detroit city income tax (approximately $70,000) in 2010. In 2012, Apex sold its Labstat shares to a Canadian corporation. According to the securities purchase agreement governing the sale, the closing was to be conducted in the city of Waterloo, in Ontario, Canada. Apex realized significant capital gains from the sale, in the amount of approximately $36 million (Canadian). Apex again paid 1% ($319,000 (U.S.)) in city income tax to Detroit in 2012.
In 2015, Apex received a proposed assessment from Detroit indicating that Detroit had conducted an audit and had determined that Apex had miscalculated the income tax it owed for the 2010 and 2012 tax years. Detroit assessed Apex an additional $3,280.48 in tax, interest, and penalties for the 2010 tax year, and an additional $401,165.51 for the 2012 tax year. Apex objected on the ground that it did not conduct business within the city of Detroit and lacked the required nexus necessary for the assessment of taxes by Detroit. Apex requested a refund of the taxes paid for the 2010 and 2012 tax years. Detroit denied the request. Apex appealed that decision to the Tribunal in 2016.
The parties filed cross-motions for summary disposition under MCR 2.116(C)(10); the dispositive issue was whether Apex possessed the requisite constitutional "nexus" with Detroit to render it subject to Detroit's taxing authority. Apex argued in the alternative that it was exempt from city income tax as a qualifying financial institution, and that if it was liable for taxation, its income should be subject to apportionment. Following a hearing on the parties' motions, the Tribunal issued a written opinion and order granting Apex's motion, denying Detroit's motion, and ordering that a refund of taxes, interest, and penalties paid by Apex be issued.
The Tribunal held that Apex did not "do business" in Detroit within the meaning of the city income tax act, MCL 141.501 et seq., because, although Apex was "doing business" under MCL 141.605, it was not doing business in Detroit; in other words, Apex lacked the constitutional "nexus" with Detroit to be subject to taxation. The Tribunal held that Detroit had not established that Apex (1) had a "commercial domicile" within the city or (2) had sufficient "physical presence" in the city to establish such a nexus. The Tribunal also rejected Detroit's "unitary business group" theory on the ground that it was an "apportionment concept and not a method to determine nexus." The Tribunal did not address Apex's alternative argument.
Detroit appealed, and this Court affirmed the tribunal's decision. Apex I, unpub op at 1, 6. Although the issues before this Court involved the tribunal's decisions on competing motions for summary disposition, this Court employed the "multifaceted" standard of review for appeals from the Tax Tribunal, stating:
"If fraud is not claimed, this Court reviews the Tax Tribunal's decision for misapplication of the law or adoption of a wrong principle. We deem the Tax Tribunal's factual findings conclusive if they are supported by competent, material, and substantial evidence on the whole record. But when statutory interpretation is involved, this Court reviews the Tax Tribunal's decision de novo." [Id. at 3, quoting Briggs Tax Serv, LLC v Detroit Pub Schs, 485 Mich. 69, 75; 780 N.W.2d 753 (2010).
This Court also did cite a de novo standard for reviewing motions for summary disposition, but as described below, this Court nonetheless seemed to rely on the more deferential standard.
While affirming, this Court repeatedly relied on this general, highly deferential standard of review, where reversal is only warranted when the tribunal misapplied the law, adopted a wrong legal principle, or made factual findings that were not supported by competent, material, and substantial evidence. See Apex I, unpub op at 4-6.
After this Court issued its decision in Apex I, the United States Supreme Court decided South Dakota v Wayfair, Inc, 585 U.S. ___; 138 S.Ct. 2080; 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), and Nat'l Bellas Hess, Inc v Dep't of Revenue of Illinois, 386 U.S. 753; 87 S.Ct. 1389; 18 L.Ed.2d 505 (1967). The day after Wayfair was decided, Detroit filed its application for leave to appeal in our Supreme Court. In Apex Labs Int'l Inc v Detroit, 504 Mich. 1034 (2019) (Apex II), our Supreme Court, in lieu of granting leave to appeal, vacated Apex I and remanded to this Court for reconsideration in light of Wayfair.
On remand, this Court determined that "under the circumstances of this case, remand is required for the Tribunal to address the impact of Wayfair and the overruling of Quill and Bellas Hess, and if necessary, to address Apex's alternative arguments." Apex Labs Int'l, Inc v Detroit (On Remand), 331 Mich.App. 1, 9; 951 N.W.2d 45 (2020) (Apex III). This Court therefore vacated the tribunal's judgment granting summary disposition in favor of Apex and remanded to that agency "to allow the parties to focus their arguments concerning Wayfair, Quill, and the Due Process and Commerce Clauses, and to allow the Tribunal to make a ruling in the first instance." Id. at 10.
On remand to the Tax Tribunal, both parties filed supplemental briefs addressing Wayfair and Apex's potential nexus with Detroit, and both parties filed competing motions for partial summary disposition.
After holding a hearing on the competing motions, the Tax Tribunal, in a final opinion and judgment, granted Apex's motion for summary disposition and denied Detroit's motion for summary disposition. Detroit moved for reconsideration, and although the tribunal partially agreed with Detroit, it again granted summary disposition in favor of Apex because Apex's physical presence in the city was de minimis and did not meet the "substantial nexus" requirement of Wayfair. Furthermore, even assuming that Apex had a nexus with Detroit, the tribunal ruled that no tax was assessable because Apex had no "in-city" business in Detroit. The Tax Tribunal therefore ruled that Apex was not subject to income taxation by Detroit. This appeal followed.
II. SUMMARY DISPOSITION
"The standard of review of Tax Tribunal cases is multifaceted." Briggs, 485 Mich. at 75. "If fraud is not claimed, this Court reviews the Tax Tribunal's decision for misapplication of the law or adoption of a wrong principle. We deem the Tax Tribunal's factual findings conclusive if they are supported by competent, material, and substantive evidence on the whole record." Id. (quotation marks and citations omitted). However, issues of law, such as statutory interpretation and rulings on motions for summary disposition, are reviewed de novo. Id. Thus, because the issues before the tribunal in this case involved the parties' competing motions for summary disposition, the standard of review is de novo. A court deciding a motion for summary disposition is prohibited from making any factual findings. In re Handelsman, 266 Mich.App. 433, 437; 702 N.W.2d 641 (2005).
While Detroit argues that the Tax Tribunal erred when it granted Apex's motion for summary disposition, there are two components to the tribunal's ruling that must be considered. The first is its ruling that Apex did not have a substantial nexus with Detroit. The second is how, if taxation is proper, Apex's income should be apportioned. This latter aspect is discussed later in Part II-B of this opinion.
Detroit mischaracterizes the tribunal's ruling as concluding that Apex had a nexus. While the tribunal's opinion did mention at one point that there was a nexus, it later ruled that Apex's activities did not meet the "substantial nexus" requirement of Wayfair.
"A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint." Maiden v Rozwood, 461 Mich. 109, 119; 597 N.W.2d 817 (1999). "In evaluating such a motion, a court considers the entire record in the light most favorable to the party opposing the motion, including affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties." Corley v Detroit Bd of Ed, 470 Mich. 274, 278; 681 N.W.2d 342 (2004). The motion should be granted if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Kisiel v Holz, 272 Mich.App. 168, 170; 725 N.W.2d 67 (2006). As already mentioned, a court is precluded from making any factual findings when ruling on a motion for summary disposition. In re Handelsman, 266 Mich.App. at 437.
A. NEXUS
As of 2012, Detroit imposed a 2% income tax "on the taxable net profits of a corporation doing business in the city, being levied on such part of the taxable net profits as is earned by the corporation as a result of work done, services rendered and other business activities conducted in the city." Detroit City Code § 44-2-8(a)(3); Detroit City Code § 44-2-9(c). "Doing business" is in turn defined as "the conduct of any activity with the object of gain or benefit." Detroit City Code § 44-2-3.
The city code provides for a safe harbor for companies by excluding the following conduct as "doing business," of which none is implicated in this case:
(1) The solicitation of orders by a person or such person's representative in the City, for sales of tangible personal property, which orders are sent outside the City, for approval or rejection and which, if approved, are filled by shipment or delivery from a point outside the City; or
(2) The solicitation of orders by a person or such person's representative in the City, in the name of, or for the benefit of, a prospective customer where such orders are to enable the customer to fill orders resulting from the solicitation of orders as described in Subsection (1) of this definition; or
(3) The mere storage of personal property in the City in a warehouse which is neither owned nor leaved by the taxpayer. [Detroit City Code § 44-2-3.]
Apex is a Delaware corporation. The Commerce Clause of the United States Constitution prohibits states from discriminating against interstate commerce and prohibits states from imposing undue burdens on interstate commerce. Wayfair, 138 S.Ct. at 2091. A tax is permissible on a foreign company so 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." Id., citing Complete Auto Transit, Inc v Brady, 430 U.S. 274, 279; 97 S.Ct. 1076; 51 L.Ed.2d 326 (1977); see also Gillette Co v Dep't of Treasury, 198 Mich.App. 303, 313; 497 N.W.2d 595 (1993). Before the Supreme Court's decision in Wayfair, a substantial nexus could only exist if a company had a physical presence in the state. Wayfair, 138 S.Ct. at 2091-2092; Quill, 504 U.S. at 317-318.
The Due Process Clause also prevents a state from taxing foreign companies under certain circumstances, but our focus in this case is on the Commerce Clause.
The Supreme Court in Wayfair overruled Quill, noting that "the physical presence rule is not a necessary interpretation of the requirement that a state tax must be 'applied to an activity with a substantial nexus with the taxing State.'" Wayfair, 138 S.Ct. at 2092, quoting Complete Auto, 430 U.S. at 279. The Court also noted that Quill, because it provided an advantage to businesses with no physical presence, created, rather than resolved, market distortions. Wayfair, 138 S.Ct. at 2092, 2094; see also id. at 2094 ("In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence ...."). Finally, the Court stated that the rule from Quill imposed the type of "arbitrary, formalistic distinction that the Court's modern Commerce Clause precedents disavow." Id. at 2092. As such, the Court overruled the portion of Quill pertaining to the Commerce Clause and nexus. Id. at 2099.
In deciding whether a tax on a foreign company is permissible because the tax applies to an activity with a substantial nexus with the taxing state, "[s]uch a nexus is established when the taxpayer . . . avails itself of the substantial privilege of carrying on business in that jurisdiction." Id. at 2099 (quotation marks and citations omitted). But, although having a physical presence is no longer required to establish a nexus, when physical presence exists, it still can establish a nexus. See id. at 2093 ("Physical presence is not necessary to create a substantial nexus.") (emphasis added). That is because physical presence in a jurisdiction is a company's express availing of the substantial privilege of carrying on business in that jurisdiction. See id.
In this instance, because the issue is whether the Tax Tribunal properly granted Apex's motion for summary disposition, the submitted evidence must be viewed in a light most favorable to Detroit. See Corley, 470 Mich. at 278.
Although Apex is a Delaware corporation, it listed in its Delaware filings that Detroit was its principal place of business. It is undisputed that Apex had no employees and owned no property in the city. Apex's officers and directors engaged in activities to sell an asset that Apex owned, which was its interest in Labstat. Further, those officers and directors undertook their efforts in Detroit. The officers and directors of Apex were Brian Demkowicz, Michael Beauregard, Christopher Sheeren, and Nicholas Barker. All of them, in addition to being directors or officers of Apex, were employees of Huron Capital Partners and had their offices in Huron Capital's headquarters in Detroit, which is where they were physically present when they went to work. No evidence was introduced showing that the work associated with the Labstat sale was performed exclusively outside of Detroit. On the contrary, it was established that those individuals held meetings in Detroit regarding the sale of Labstat and performed other work in Detroit related to Labstat. Moreover, those individuals used equipment, such as phones and computers, in Detroit in furtherance of the growing and selling of Labstat.
Apex's reliance on the self-serving testimony of its officers that they never acted for the benefit of Apex and instead were acting on behalf of Huron Capital is misplaced. Regardless of what the officers' subjective motivations purportedly were, they legally were acting on behalf of Apex. See Mossman v Millenbach Motor Sales, 284 Mich. 562, 568; 280 N.W. 50 (1938) (stating that a corporation can only act through its agents). In addition, there is no legal basis for allowing Apex's officers and agents, when performing duties for Apex, to be under the control of Huron Capital because Huron Capital did not own Apex. Apex instead was owned by Huron Fund II, which is a separate entity from Huron Capital, and is in turn owned by a collection of limited partners. Indeed, as part of the consideration to sell its ownership of the Labstat stock, Apex agreed to receive, in addition to $32 million in Canadian currency, a contingent promissory note for $5 million. That promissory note named Apex as the sole payee and did not mention Huron Capital or any other payee.
In sum, Apex's officers and agents, located in the city of Detroit, took many actions on behalf of Apex in conjunction with the sale of the Labstat stock. These actions are sufficient to show that there was a nexus between Apex and Detroit, and the Tax Tribunal erred when it ruled otherwise and granted Apex's motion for summary disposition on this issue. Furthermore, viewing the evidence in a light most favorable to Apex, to determine whether summary disposition should be granted in favor of Detroit, results in the same conclusion-the work was primarily done in Detroit. While there may have been some exceptions, such as reading some documents at home or while traveling, no evidence demonstrated that Apex's principal place of business was anywhere but Detroit. Consequently, Apex established a nexus with Detroit because it "avail[ed] itself of the substantial privilege of carrying on business in [Detroit]." Wayfair, 138 S.Ct. at 2099 (quotation marks and citations omitted).
We are aware that this Court in Apex I reached a different conclusion. First, the familiar law-of-the-case doctrine is not implicated because Apex I ultimately was vacated by our Supreme Court and therefore did not decide any issues. Apex II, 504 Mich. 1034. Second, this Court in Apex I seemed to apply the incorrect legal standard when ruling on motions for summary disposition. Instead of truly conducting a de novo review of a decision on a motion for summary disposition where factual findings are not permissible, this Court framed some of the Tribunal's rulings as "findings" and deferred to those rulings because there was "substantial, competent, and material evidence" on the record. Apex I, unpub op at 4-6. Not only is this the incorrect standard of review for reviewing decisions on motions for summary disposition, see Briggs, 485 Mich. at 75, it also mischaracterizes a court's function when deciding motions for summary disposition by suggesting that factual findings are permissible.
Under the law-of-the-case doctrine, an appellate court's decision on a particular issue binds both the trial courts and other appellate panels in subsequent appeals of the case. Grievance Administrator v Lopatin, 462 Mich. 235, 259-260; 612 N.W.2d 120 (2000). The law of the case applies to issues actually decided in the prior appeal. Id.
B. ALLOCATION
Detroit next argues that the Tax Tribunal erroneously allocated none of Apex's income to Detroit. We conclude that the tribunal erred by granting summary disposition in favor of Apex, but we disagree that Detroit was entitled to summary disposition because neither party was entitled to summary disposition.
Even though a company has a nexus with Detroit, it does not mean that Detroit can necessarily tax the entirety of the company's income. The relevant ordinance provides, in pertinent part:
The tax under this article shall apply on the taxable net profits of a corporation doing business in the City, being levied on such part of the taxable net profits as is earned by the corporation as a result of work done, services rendered and other business activities conducted in the city, as determined in accordance with this article. [Detroit City Code, § 44-2-9(c) (emphasis added).]
Further,
[w]hen the entire net profit of a business subject to the tax is not derived from business activities exclusively within the city, the portion of the entire net profit, earned as a result of work done, services rendered or other business activity conducted in the city, shall be determined under either [MCL 141.619], [MCL 141.620 to MCL 141.624], or [MCL 141.625]. [MCL 141.618.]
MCL 141.619 relates to "the separate accounting method" and is not relevant to this case. MCL 141.620 to MCL 141.624 "set forth the three-factor formula, known as the 'business allocation percentage method,' for calculating the taxable 'net profit of a business.'" Honigman Miller Schwartz &Cohn, LLP v Detroit, 505 Mich. 284, 296; 952 N.W.2d 358 (2020). MCL 141.620 introduces the three-factor formula:
The business allocation percentage method shall be used if such taxpayer is not granted approval to use the separate accounting method of allocation. The entire net profits of such taxpayer earned as a result of work done, services rendered or other business activity conducted in the city shall be ascertained by determining the total "in-city" percentages of property, payroll and sales. "In-city" percentages of property, payrolls and sales, separately computed, shall be determined in accordance with [MCL 141.621 to MCL 141.624]. [MCL 141.620.]
MCL 141.621 pertains to the first factor, the property factor:
First, the taxpayer shall ascertain the percentage which the average net book value, of the tangible personal property owned and the real property . . . owned or used by it in the business and situated within the city during the taxable period, is of the average net book value of all such property . . . owned or used by the taxpayer in the business during the same period wherever situated....
For the payroll factor, MCL 141.622 states:
Second, the taxpayer shall ascertain the percentage which the total compensation paid to employees for work done or for services performed within the city is of the total compensation paid to all the taxpayer's employees within and without the city during the period covered by the return. For allocation purposes, compensation shall be computed on the cash or accrual basis in accordance with the method used in computing the entire net income of the taxpayer....
For the final factor, the revenue factor, MCL 141.623 provides:
Third, the taxpayer shall ascertain the percentage which the gross revenue of the taxpayer derived from sales made and services rendered in the city is of the total gross revenue from sales and services wherever made or rendered during the period covered by the return.
(1) For the purposes of this section, "sales made in the city" means all sales where the goods, merchandise or property is received in the city by the purchaser, or a person or firm designated by him....
* * *
(3) In case the business of the taxpayer involves substantial business activities other than sales of goods and services such other method or methods of allocation shall be employed as shall reasonably measure the proportion of gross revenue obtained in the city by such business.
Under MCL 141.624, the average of those three percentages is the "business allocation percentage." However, if a factor does not exist anywhere for a business, then that factor is omitted completely. MCL 141.624. In other words, if only two factors are present, then the average is taken from those two factors, and if only one factor is present, then that percentage is used for the "business allocation percentage."
The Tax Tribunal ruled that no income should be apportioned to Detroit because Apex
(1) had no personal or real property in the City of Detroit within the meaning of MCL 141.621, (2) had no employees to which it paid compensation for work done or services performed in the City of Detroit within the meaning of MCL 141.622, and (3) had no gross revenue derived from sales made and services rendered in the City [of] Detroit within the meaning of MCL 141.623.
Put another way, the numerators for each of the three factors was zero.
Detroit argues that the alternative method described in MCL 141.625 should have been utilized because none of the three factors was present in this case, which yields a fraction of zero divided by zero, which is mathematically undefined. In other words, Detroit contends that because none of the three factors is present, the three-factor system is inapplicable and the alternative mentioned in MCL 141.625, as authorized by MCL 141.623(3), should be utilized. Again, MCL 141.623(3) provides:
In case the business of the taxpayer involves substantial business activities other than sales of goods and services such other method or methods of allocation shall be employed as shall reasonably measure the proportion of gross revenue obtained in the city by such business.
This provision is applicable here. The business of Apex involved "substantial business activities other than the sales of goods and services." Apex's sole business activities instead involved the retention and sale of Labstat stock, and stock is not a "good." See MCL 440.2105 (Michigan's UCC defining "goods" as all things that are movable at the time of identification and omitting "investment securities" from that definition). Thus, the Tax Tribunal made an error of law when it implicitly ruled that MCL 141.623(3) was inapplicable.
The Tribunal did not expressly address MCL 141.623(3) in its final order.
That error, however, appears to be harmless because the Tax Tribunal, albeit briefly, considered allocation under MCL 141.625. The tribunal rejected Detroit's earlier argument that liability should be determined under that provision. That section provides, "An alternative method of accounting shall be used if the taxpayer or the administrator demonstrates that the net profits of the taxpayer allocable to the city cannot be justly and equitably determined under the separate accounting method or the business allocation percentage method ...." MCL 141.625.
Apex avers that the issue is not preserved. However, as the Tax Tribunal recognized, Detroit raised the argument that MCL 141.625 applies earlier in the proceedings. Thus, the issue is preserved. See Glasker-Davis v Auvenshine, 333 Mich.App. 222, 227; 964 N.W.2d 809 (2020). Further, "[n]o exception need be taken to a finding or decision." MCR 2.517(A)(7). In this instance, no preservation steps needed to be taken because the Tax Tribunal addressed and decided the matter, granting summary disposition in favor of Apex on the basis of allocating all of Apex's income to outside of Detroit.
The tribunal ruled that this alternative method is not applicable because of "the very minimal presence and activities conducted by [Apex's] agents in the City of Detroit." The Tribunal also rejected Detroit's contention that 100% of Apex's business activities were conducted in Detroit, relying on the fact that the closing of the Labstat sale occurred in Canada.
We are inclined to disagree with the tribunal's ruling. It is not clear how Apex, who had no presence anywhere other than in the offices of Capital Partners in Detroit, had "very minimal presence" in Detroit. In essence, as discussed earlier, all of Apex's business was conducted in the city. Its directors, officers, and agents all performed duties related to the sale of Labstat on behalf of Apex in Detroit. Thus, even assuming that those activities were somehow "minimal" in terms of the number of hours spent on the activities, the evidence nonetheless shows that these activities constituted 100% of Apex's activities. As such, we disagree that Apex's presence in Detroit or its activities can be deemed "minimal."
The tribunal also relied on the fact that the sale ultimately occurred in Canada, reasoning that this fact shows that Apex did not conduct 100% of its business in Detroit. There is no dispute that the closing was done remotely. But while the closing was done remotely in Canada, there was no evidence that any agent of Apex was present in Canada for the closing. Instead, the evidence shows that Apex's agents, while in Detroit, performed all of their work related to the sale. The fact that the documents were collected in Canada and the transaction was finalized in Canada does not alter the salient point that the evidence shows that Apex performed its work to effectuate the sale wholly in Detroit. On this basis, we reverse and remand for the Tax Tribunal to determine what alternate method of accounting under MCL 141.625 should be used to determine the net profits of the taxpayer allocable to Detroit. Put another way, due to the nebulous "alternative method of accounting" to be employed, no party was entitled to summary disposition on the issue of allocation, and further proceedings are warranted. See Borman's, Inc v Detroit, 386 Mich. 250, 257; 191 N.W.2d 367 (1971) (explaining that because the taxpayer's proposed method of allocation clearly did not justly and equitably allocate its profits, remand was necessary to have the trial court determine which alternative method should be implemented).
In sum, the Tax Tribunal erred when, while granting Apex's motion for summary disposition, it ruled that the three-factor accounting method applied. Because Apex's business "involves substantial business activities other than sales of goods and services," another method of allocation must be used. MCL 141.623(3). The only other applicable method resides in MCL 141.625, which permits "[a]n alternative method of accounting" to be used. Ultimately, what type of method to use necessarily involves the exercise of discretion and is not properly considered on summary disposition. Therefore, we reverse and remand for further non-summary-disposition proceedings.
III. CONCLUSION
We reverse and remand to the Tax Tribunal for further proceedings consistent with this opinion. We do not retain jurisdiction.
MURRAY, J. (dissenting)
I respectfully dissent. As discussed below, the record before the Tax Tribunal established a factual question regarding whether Apex Laboratories had a substantial nexus with Detroit such that its net profits could be lawfully taxed. I would therefore vacate that decision and remand for an evidentiary hearing to finally factually resolve this matter.
In this Court's first opinion involving this dispute, Apex Laboratories Int'l, Inc v Detroit, unpublished per curiam opinion of the Court of Appeals, issued May 17, 2018 (Docket No. 338218) (Apex I), p 1-3, vacated by 503 Mich. 1034 (2019), we recounted the facts about Apex's creation and activities:
A Detroit-based private equity firm, Huron Capital Partners LLC (Huron), solicited investors to acquire partnership interests in a limited partnership, The Huron Fund II, LP (the Fund), which in turn was to acquire shares in existing "lower middlemarket" companies. The general partner of the Fund was an entity known as Huron Capital Partners GP II, LLC (the general partner); however, the business operations of the general partner and the Fund were carried out by Huron.
In 2006, Huron recommended that the Fund acquire shares in (as well as debt of) Labstat International, ULC (Labstat), a Canadian company, for eventual sale. As part of the transaction, Apex was incorporated as a Delaware corporation for the sole purpose of holding the shares of Labstat to be acquired by the Fund- Apex never possessed or acquired any other assets. Although Apex possessed a
Detroit mailing address, it did not have any employees, owned no real or personal property, provided no services, and sold no goods, either in Detroit or elsewhere. Various members and employees of Huron were appointed to Apex's board of directors. Apex never held a board meeting.
Apex earned dividend income from its shares of Labstat in 2010, and paid those dividends to the limited partners of the Fund. Apex paid 1% Detroit city income tax (approximately $70,000) in 2010. In 2012, Apex sold its Labstat shares to a Canadian corporation. According to the securities purchase agreement governing the sale, the closing was to be conducted in the city of Waterloo, in Ontario, Canada. Apex realized significant capital gains from the sale, in the amount of approximately $36 million (Canadian). Apex again paid 1% ($319,000 (U.S.)) in city income tax to Detroit in 2012.
After a remand from the Michigan Supreme Court to this Court, and then from this Court to the Tribunal, the Tribunal addressed the parties' motions for summary disposition, and in doing so considered the recent United States Supreme Court decision in South Dakota v Wayfair, Inc, 585 U.S. ___; 138 S.Ct. 2080; 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), and Nat'l Bellas Hess, Inc v Dep't of Revenue of Illinois, 386 U.S. 753; 87 S.Ct. 1389; 18 L.Ed.2d 505 (1967). The Tax Tribunal granted Apex's motion for summary disposition and denied Detroit's motion for summary disposition, holding that it would violate the Commerce Clause for Detroit to tax Apex's net profits.
As the majority notes, Detroit imposed a 2% income tax on the "taxable net profits" of Apex on the basis that Apex earned the net profits "as a result of work done, services rendered and other business activities conducted in the city." Detroit City Code § 44-2-8(a)(3); Detroit City Code § 44-2-9(c). "Doing business" is defined as "the conduct of any activity with the object of gain or benefit." Detroit City Code § 44-2-3.
"A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint." Maiden v Rozwood, 461 Mich. 109, 120; 597 N.W.2d 817 (1999). "In evaluating such a motion, a court considers the entire record in the light most favorable to the party opposing the motion, including affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties." Corley v Detroit Bd of Ed, 470 Mich. 274, 278; 681 N.W.2d 342 (2004).
Specifically, the Tax Tribunal distinguished Wayfair (which it was not certain could even be applied retroactively) because Apex, unlike the companies in Wayfair, did not have continuous activities and exposure to the taxing locale, and ruled that Apex's activities were, by design, minimal. The tribunal found that Apex lacked nexus with Detroit under the Commerce Clause because it was neither physically nor virtually present in Detroit, and thus Detroit could not impose the taxes.
Detroit moved for reconsideration, and although the tribunal partially agreed with Detroit, it again granted summary disposition in favor of Apex because Apex's physical presence in the city was de minimis and did not meet the "substantial nexus" requirement of Wayfair.
This conclusion is similar to that made by the Apex I panel, which held:
The Tribunal rejected Detroit's argument that, although Apex had no employees, the activities of Apex's officers and directors were conducted on Apex's behalf for its benefit, finding that the evidence showed that Apex's officers and directors acted on behalf of Huron or Labstat, not Apex. That conclusion is supported by the substantial, competent, and material evidence. Briggs Tax Svc [, LLC v Detroit Pub Sch], 485 Mich. [69,] 75 [; 780 N.W.2d 753 (2010)]. Various officers and directors of Apex, through deposition testimony and affidavits, attested that they were employed by Huron and worked for the benefit of Huron. Essentially, these officers and directors worked to increase the value of Labstat and negotiate the sale of Labstat shares for the benefit of Huron; these activities were not conducted "on behalf" of Apex any more than a business transaction is conducted "on behalf" of the bank account into which the proceeds will be deposited. Moreover, the Tribunal noted that to the extent Apex employed professional consultants, this fell under the exclusion found in MCL 206.621(2)(b). We agree, as the record shows that the use of professional consultants, such as law firms and marketing consultants, was done to facilitate the sale of a Canadian company to a Canadian purchaser in order to benefit the Fund's investors, not to establish or maintain a market in Detroit. Additionally, the Tribunal noted the uncontested fact that Apex was not engaged in the sale of any goods or services in Detroit (or indeed, anywhere), and declined to find that a physical presence or substantial nexus existed between Apex and Detroit based on the use of a Detroit mailing address. [Apex I, unpub op at 5-6.]
The majority is correct in that the Apex I panel seems to have applied the incorrect standard of review to the tribunal's summary disposition ruling.
My disagreement with the majority opinion comes down to its conclusion that as a matter of law there is a substantial nexus between Apex's net profit and Detroit. Despite my reluctance to articulate a position that would further prolong what has otherwise been an extraordinarily long case, any desire for efficiencies are overcome by the need to factually resolve who was doing what on behalf of whom during the relevant time. To do so, the Tribunal should hold an evidentiary hearing.
An important issue raised by Apex is whether Wayfair can be applied retroactively. Although not cited by Apex, at least one court has recently held that it cannot be, US Auto Parts Network, Inc v Comm'r of Revenue, 491 Mass. 122, 138; 199 NE3d 840 (2022), and as noted, the Tribunal determined it likely should not be retroactively applied. At oral argument before this Court, however, the parties seemed to concede that it would not matter, because if Wayfair was not applied retroactively, the "physical presence" test from Quill would apply and cover Apex. I am not as certain. Many courts across the nation held prior to Wayfair that the Quill test was limited to sales and use taxes, and not to income taxes. See, e.g., Bridges v Geoffrey, Inc, 984 So.2d 115, 128; 2007-1063 (La App 1 Cir 2/8/08); Tax Comm'r v MBNA America Bank, NA, 220 W VA 163, 169; 640 S.E.2d 226 (2006); Geoffrey, Inc v Comm'r of Revenue, 453 Mass. 17, 26-27; 899 N.E.2d 87 (2009). These courts resolved the income tax/Commerce Clause issue by utilizing the "substantial nexus" test without regard to physical location. Thus, even if Wayfair was not retroactively applied, the same substantial nexus test would apply.
A nexus is substantial with the taxing state "when the taxpayer . . . avails itself of the substantial privilege of carrying on business in that jurisdiction." Wayfair, 138 S.Ct. at 2099 (quotation marks and citation omitted). Here, in light of the controlling law and myriad factual questions, it is impossible to determine on appeal whether Apex had a substantial nexus with Detroit. With respect to the law, no one disputes that corporations are treated as separate entities. See Wells v Firestone Tire & Rubber Co, 421 Mich. 641, 650; 364 N.W.2d 670 (1984) ("We recognize the general principle that in Michigan separate entities will be respected."); Rymal v Baergen, 262 Mich.App. 274, 293; 686 N.W.2d 241 (2004) ("The law treats a corporation as an entirely separate entity from its shareholders, even where one individual owns all the corporation's stock."). So, Apex and Huron Capital are valid, separate entities. One employs people and owns property in Detroit (Huron), while the other does not (Apex). It is in fact undisputed that Apex owns no property, employs no one, makes no sales of goods or services, produces no materials, and has the sole purpose of holding the stock shares from the original purchase of Labstat. However, corporations act only through their officers and employees, Altobelli v Hartmann, 499 Mich. 284, 296-297; 884 N.W.2d 537 (2016), and Apex and Huron shared common officers-Brian Demkowicz, Michael Beauregard, Christopher Sheeren, and Nicholas Barker. Each of them were active officers or employees of Huron, while also serving as directors of Apex.
The majority concludes that the activities of Demkowicz, Beauregard, Sheeren and Barker, relative to the sale of Labstat, were done in their roles as directors or officers of Apex. The majority cites facts purporting to show that the Apex and Huron officers did all their work out of Huron's Detroit offices, but I fail to see the definitive proof that they were working on behalf of Apex when doing so, such that summary disposition on this issue was appropriate. After all, each was also employed by Huron, which was active in not only overseeing Labstat's initial purchase and subsequent growth, but was also hired by Apex to manage much of the details in closing the Labstat sale in 2012. So perhaps, if seeing these gentlemen testify in person, their testimony that they were acting on behalf of Huron when conducting the transactions would be believed by the tribunal. Or not. But with all the moving parts between Apex, Huron, and Labstat, it is difficult to determine as a matter of law that Apex had a substantial nexus to Detroit through these individuals. And again, no dispute exists but that Apex was validly created to hold Labstat stock shares while Huron oversaw the "build-up" of Labstat and ultimately assisted in its sale. It was a Delaware corporation with no ownership of any real or personal property in Detroit, no employees in Detroit, no sales or services offered in Detroit, and when the sale was completed, the money was wired to an account outside of Detroit.
Contrary to what Apex's counsel stated at oral argument, the contract with Huron was between Apex and Huron, not Labstat and Huron. Demkowicz signed the contract on behalf of both entities, again making the record unclear as to who was doing what for whom. And though the contract exhibits some business activity on the part of Apex, it does not reflect any business activity related to income, just an expenditure.
For these reasons, I would hold that there was a genuine issue of material fact whether Apex established a nexus with Detroit by "avail[ing] itself of the substantial privilege of carrying on business in [Detroit]." Wayfair, 138 S.Ct. at 2099 (quotation marks and citation omitted).