Summary
In Payne Dolan of Wisconsin, Inc v Dep't of Treasury, 138 Mich. App. 418; 360 N.W.2d 208 (1984), the Treasury Department also contended that for corporate income tax purposes the separate accounting method more fairly represented the taxpayer's business activities in Michigan.
Summary of this case from Jones Laughlin v. TreasuryOpinion
Docket No. 72920.
Decided October 16, 1984. Leave to appeal applied for.
Van Til, Kasiborski Ronayne (by Lawrence R. Van Til and Nanci Wolf Freedman), for petitioner.
Frank J. Kelley, Attorney General, Louis J. Caruso, Solicitor General, and Richard R. Roesch and Terry P. Gomoll, Assistants Attorney General, for respondent.
Petitioner appeals as of right from a judgment issued by the Michigan Tax Tribunal upholding an assessment of corporate income tax by respondent against petitioner.
Petitioner is a Wisconsin corporation, with its principal offices in Wisconsin, engaged in the asphalt road paving business. It conducts business in both Wisconsin and Michigan. All bids and estimates for road work are prepared in Wisconsin. All corporate records are kept in Wisconsin. Financing for all projects was obtained through Wisconsin financial institutions. All permanent personnel are in Wisconsin, except for one superintendent. Of its total tonnage of asphalt laid, petitioner's Michigan projects accounted for 14 percent, 14 percent, and 19 percent in the years 1972, 1973, and 1974, respectively.
During the years 1972, 1973, and 1974, petitioner filed state income tax returns in both Wisconsin and Michigan. On its Wisconsin corporate income tax return, petitioner utilized the separate accounting method to ascertain its Wisconsin income tax liability. The separate accounting method required petitioner to isolate the portion of its income which was attributable to its business activities in Wisconsin. As to the years 1972, 1973, and 1974, petitioner's taxable income for Wisconsin was $495,835, $803,299, and $1,289,920, respectively.
A different method, the apportionment formula, was used by petitioner to compute its taxable income for Michigan during those same years. Using the apportionment formula, petitioner allocated $152,827, $260,929, and $285,560 of its total net income to Michigan in 1972, 1973, and 1974.
Respondent initiated an audit of petitioner in 1975. Pursuant to the audit, respondent recalculated petitioner's Michigan taxable income for the years 1972-1974 using the separate accounting method. Essentially, respondent computed the taxable income by examining petitioner's Wisconsin returns and determining those revenues and expenditures attributable to petitioner's business activities in Michigan. Respondent determined that, by using the separate accounting method, petitioner's income attributable to Michigan was $467,521, $704,539, and $349,615 for the years 1972, 1973, and 1974, respectively. Further, respondent discovered that petitioner, by virtue of the methods it had used to attribute income to Michigan and Wisconsin, had a combined tax base for the two states representing only 61 percent (1972), 73 percent (1973), and 93 percent (1974) of its federal taxable income.
On the basis of a determination by respondent that the separate accounting method more fairly represented petitioner's business activities in Michigan, respondent issued a final assessment and order of determination. The assessment was for an additional $68,404 in income taxes and $20,668.42 in statutory interest, for a total liability of $89,072.42. Respondent's order was affirmed by the Michigan Tax Tribunal.
The statutory provisions applicable to the instant case are as follows:
"Any taxpayer having income from business activity which is taxable both within and without this state, other than the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this act." MCL 206.103; MSA 7.577(1103).
The act sets forth the following apportionment formula, which was utilized by petitioner in filing its Michigan tax return:
"All business income, other than income from transportation services, domestic insurers and financial organizations, shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3." MCL 206.115; MSA 7.477(1115).
1975 PA 233 deleted the words "domestic insurers and financial organizations" following "transportation services".
An exception to use of the apportionment formula is provided in MCL 206.195; MSA 7.557(1195), which states in pertinent part as follows:
"If the allocation and apportionment provisions of this act do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the commissioner may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
"(a) Separate accounting."
Hence, the statutorily-mandated requirement which must be met before an alternative method such as separate accounting may be substituted for the apportionment formula is that the latter must be shown to "not fairly represent the extent of the taxpayer's business in this state"; the burden of making such a showing is on the party seeking to employ the alternative method, here, respondent. Donovan Construction Co v Dep't of Treasury, 126 Mich. App. 11, 21; 337 N.W.2d 297 (1983), lv den 419 Mich. 894 (1984).
Respondent on appeal argues that the tribunal correctly found that the apportionment formula failed to fairly represent petitioner's business activity in Michigan for two reasons: (1) petitioner's taxable income under the apportionment formula was much less than under the separate accounting method, i.e., a gross disparity existed, and (2) the combined Wisconsin taxable income and Michigan taxable income under the apportionment formula is less than petitioner's total federal taxable income, indicating that the income reported in Michigan was understated.
In Donovan, this Court held that the mere fact that the separate accounting results in greater tax liability, or in other words that a gross disparity in taxable income under the apportionment formula and separate accounting method exists, is not a sufficient showing by respondent that the apportionment formula is inadequate. Rather, the state must show that the apportionment formula does not fairly represent the taxpayer's business activities in Michigan by attacking each element of the formula's equation. Donovan, supra, pp 20-24. We agree with Donovan. In addition to the reasons articulated in the Donovan opinion, we note that the apportionment formula is the preferred method established by the Legislature for determining the extent of a taxpayer's business activity in Michigan. To permit respondent to meet its burden by merely pointing to a "gross disparity" between taxable income under the separate accounting method as compared with taxable income under the apportionment formula would necessarily involve a presumption that the separate accounting method is a more accurate means of determining a taxpayer's business activity in Michigan than is the apportionment formula. We concur with the Donovan panel that to meet its burden the state must show that the statutorily-preferred apportionment formula is itself inadequate as a means of fairly determining the particular taxpayer's extent of business activity in Michigan. Respondent failed to make such a showing in the instant case.
With respect to respondent's "full apportionment" or "full accountability" argument, we are not persuaded that the fact that petitioner's federal taxable income exceeds the sum of petitioner's Michigan taxable income under the apportionment formula and Wisconsin taxable income necessarily leads to the conclusion that the apportionment formula does not fairly represent the extent of petitioner's business activity in Michigan. The fact that there may be some portion of federal taxable income which has not been taxed as income in any state might just as well be due to differences in the tax laws of the various states and the federal government. Moreover, respondent cites us to no Michigan tax statute, nor do we know of any, requiring multi-state taxpayers to use some method other than the apportionment formula if it will result in a Michigan taxable income figure which more closely approximates that portion of federal taxable income which has not been taxed as income in any other state.
Reversed. Costs to petitioner-appellant.