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No. 338218
01-02-2020
APEX LABORATORIES INTERNATIONAL INC., Petitioner-Appellee, v. CITY OF DETROIT, Respondent-Appellant.
Honigman LLP, Detroit (by Lynn A. Gandhi ), for Apex Laboratories International Inc. Charles N. Raimi for the city of Detroit.
Honigman LLP, Detroit (by Lynn A. Gandhi ), for Apex Laboratories International Inc.
Charles N. Raimi for the city of Detroit.
Before: Servitto, P.J., and Ronayne Krause and Boonstra, JJ.
ON REMAND
Boonstra, J. In our previous opinion, this Court affirmed the order of the Michigan Tax Tribunal (the Tribunal) granting petitioner Apex Laboratories International Inc.’s motion for summary disposition and denying respondent city of Detroit's motion for summary disposition. Detroit applied in our Supreme Court for leave to appeal the May 17, 2018 decision of this Court. In lieu of granting leave to appeal, the Supreme Court vacated this Court's previous opinion and remanded the case to this Court for "reconsideration in light of [South ] Dakota v. Wayfair, Inc. , 585 U.S. ––––, 138 S. Ct. 2080, 2099, 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)." Apex Laboratories Int'l Inc. v. Detroit , 503 Mich. 1034, 927 N.W.2d 243 (2019). We permitted the parties to file supplemental briefs on remand. We now reconsider the instant case as our Supreme Court has directed, and we determine that a further remand to the Tribunal is required. We therefore vacate the decision of the Tribunal and remand for further proceedings.
Apex Laboratories Int'l Inc. v. Detroit , unpublished per curiam opinion of the Court of Appeals, issued May 17, 2018 (Docket No. 338218, 2018 WL 2269748). The facts of the case are provided in that opinion; for brevity's sake we will not repeat them here.
See Apex Laboratories Int'l Inc. v. Detroit , unpublished order of the Court of Appeals, entered June 28, 2019 (Docket No. 338218).
I. GENERAL LEGAL PRINCIPLES
The case before us involves the ability of a taxing entity to impose a tax on the person, property, or transaction it seeks to tax. More specifically, it concerns the ability of a taxing entity to impose an income tax on a nonresident corporation. Challenges such as Apex's implicate both the Due Process and Commerce Clauses of the United States Constitution. See U.S. Const. Am. V ; U.S. Const., art. I, § 8, cl. 3. To survive a due-process challenge, there must be " ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ " Wayfair , 585 U.S. at ––––, 138 S.Ct. at 2093 ; quoting Miller Bros. Co. v. Maryland , 347 U.S. 340, 344-345, 74 S. Ct. 535, 98 L. Ed. 744 (1954). A "closely related" parallel to this requirement for challenges under the Commerce Clause is that there must be a "substantial nexus" between the taxing entity and the person, property, or transaction being taxed. Wayfair , 585 U.S. at ––––, 138 S.Ct. at 2093 ; quoting Complete Auto Transit, Inc. v. Brady , 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L.Ed.2d 326 (1977).
A tax on a foreign corporation "that withstands a due process challenge will not necessarily withstand a Commerce Clause challenge." Gillette Co. v. Dep't of Treasury , 198 Mich. App. 303, 313, 497 N.W.2d 595 (1993), citing Quill , 504 U.S. at 312, 112 S.Ct. 1904. The Complete Auto test for whether a tax is permissible under the Commerce Clause provides that the tax is constitutionally permissible as 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. Complete Auto , 430 U.S. at 279, 97 S.Ct. 1076 ; see also Gillette , 198 Mich. App. at 313, 497 N.W.2d 595.
Before its decision in Quill , the United States Supreme Court had held that a foreign corporation that did not have a physical presence in the taxing state, but only sold products by mail order, "lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause." Wayfair , 585 U.S. at ––––, 138 S.Ct. at 2091 ; citing Nat'l Bellas Hess, Inc. v. Dep't of Revenue of Illinois , 386 U.S. 753, 758, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967), overruled by Wayfair , ––– U.S. at ––––, 138 S. Ct. at 2099. In other words, before Quill , the "physical presence rule" applied to both Due Process Clause and Commerce Clause challenges to taxes levied against a foreign corporation.
A. QUILL
In Quill , the United States Supreme Court reexamined the physical-presence rule in the context of a state attempting to require an out-of-state mail-order seller to collect and remit use tax on goods purchased for use within North Dakota. Quill , 504 U.S. at 301, 112 S.Ct. 1904. The Quill Court described the Due Process Clause and the Commerce Clause as "analytically distinct" despite the "closely related" language of Complete Auto , noting that the two clauses "reflect different constitutional concerns" and that although a state may, "consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause." Id. at 305, 112 S. Ct. 1904. The Quill Court therefore elected to treat the application of the physical-presence rule differently under each clause.
With regard to the Due Process Clause, the Quill Court concluded that the "definite link" and "minimum connection" between a state and a foreign corporation could be satisfied without the foreign corporation's having a physical presence in the state, noting that a foreign corporation may be subject to a state's in personam jurisdiction without the requirement of a physical presence in the state if it "purposefully avails itself of the benefits of an economic market in the forum State." Id. at 307, 112 S. Ct. 1904, citing Burger King Corp. v. Rudzewicz , 471 U.S. 462, 476, 105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985). The Quill Court therefore concluded that
[t]he requirements of due process are met irrespective of a corporation's lack of physical presence in the taxing State. Thus, to the extent that our decisions have indicated that the Due Process
Clause requires physical presence in a State for the imposition of duty to collect a use tax, we overrule those holdings as superseded by developments in the law of due process. [ Quill, 504 U.S. at 308, 112 S. Ct. 1904.]
However, with regard to challenges brought under the Commerce Clause, the Quill Court opted to retain the physical-presence requirement when determining whether there was a "substantial nexus," rejecting North Dakota's contention that if "a mail-order house that lacks a physical presence in the taxing State nonetheless satisfies the due process ‘minimum contacts’ test, then that corporation also meets the Commerce Clause ‘substantial nexus’ test." Id. at 312, 112 S. Ct. 1904. The Quill Court reasoned that in contrast to the Due Process Clause's concern with "fairness for the individual defendant," the Commerce Clause and the substantial-nexus requirement were informed by "structural concerns about the effects of state regulation on the national economy." Id. . The Quill Court found that the bright-line physical-presence rule of Bellas Hess furthered the goal of avoiding undue burdens on interstate commerce by creating a "discrete realm of commercial activity that is free from interstate taxation." Id. at 315, 112 S. Ct. 1904. While the Quill Court noted that the Bellas Hess rule "appears artificial at its edges," it concluded that "[t]his artificiality ... is more than offset by the benefits of a clear rule," such as clearly establishing "the boundaries of legitimate state authority" to impose taxes, encouraging "settled expectations," and "foster[ing] investment by businesses and individuals." Id. at 315-316, 112 S. Ct. 1904. The Quill Court therefore declined to overrule the physical-presence rule of Bellas Hess in the context of challenges to taxation of foreign corporations brought under the Commerce Clause. Id. at 317-318, 112 S. Ct. 1904.
B. WAYFAIR
In Wayfair , the United States Supreme Court considered the constitutionality of a South Dakota law providing for the collection of sales taxes from certain remote sellers who lacked a physical presence in South Dakota. Wayfair , 585 U.S. ––––, 138 S. Ct. at 2088-2089. Justice Kennedy, writing for the majority, and joined by Justices Thomas, Ginsburg, Alito, and Gorsuch, reviewed the development of Commerce Clause jurisprudence through Quill and found that the physical-presence rule did not reflect the "economic reality" of twenty-first-century Internet sellers and resulted in "significant revenue losses to the States." Id. at ––––, 138 S. Ct. at 2092. The Court in Wayfair concluded that
Although Chief Justice Roberts authored a dissenting opinion joined by Justices Breyer, Sotomayor, and Kagan, the dissent agreed that "Bellas Hess was wrongly decided, for many of the reasons given by the Court." Wayfair , 585 U.S. at ––––, 138 S. Ct. at 2101 (Roberts, C.J., dissenting). The dissenting justices would have adhered to the doctrine of stare decisis and left it to Congress to decide the "important question of current economic policy" implicated by the case. Id. at ––––, 138 S. Ct. at 2101.
Quill is flawed on its own terms. First, 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." Complete Auto , 430 U.S. at 279[;] 97 S. Ct. 1076. Second, Quill creates rather than resolves market distortions. And third, Quill imposes the sort of arbitrary, formalistic distinction that the Court's modern Commerce Clause precedents disavow. [ Id. at ––––, 138 S. Ct. at 2092.]
Unlike in Quill , the Court in Wayfair did not believe that the different standards of the Due Process and Commerce Clauses compelled a different result when analyzing the physical-presence rule: "The reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller's liability to remit sales taxes. Physical presence is not necessary to create a substantial nexus." Id. at ––––, 138 S. Ct. at 2093. The Court in Wayfair noted that its Commerce Clause jurisprudence had generally "eschewed formalism" and moved toward a "case-by-case analysis of purposes and effects," while the physical-presence rule of Quill treated "economically identical actors differently, and for arbitrary reasons." Id. at ––––, 138 S. Ct. at 2093 (quotation marks and citation omitted). The Court in Wayfair reasoned that the artificial nature of the physical-presence rule had only grown more apparent since Quill was decided in light of the dramatic growth of "modern e-commerce" that can utilize "targeted advertising," "instant access to most consumers via any internet-enabled device," and "[a] virtual showroom ... with greater opportunities for consumer and seller interaction than might be possible for local stores." Id. at ––––, 138 S. Ct. at 2095. In the face of these economic realities, the Wayfair Court concluded that it "should not maintain a rule that ignores these substantial virtual connections to the State.[ ]" Id. at ––––, 138 S.Ct. at 2095.
The Court in Wayfair further concluded that stare decisis did not bar reconsideration of Quill and Bellas Hess . See Wayfair , 585 U.S. at –––– – ––––, 138 S. Ct. at 2096-2099.
The Wayfair Court overruled Quill and Bellas Hess . Id. at ––––, 138 S. Ct. at 2099. In the absence of the physical-presence rule, the Court in Wayfair stated that "the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State." Id. at ––––, 138 S. Ct. at 2099, citing Complete Auto , 430 U.S. at 279, 97 S.Ct. 1076. "A substantial nexus is established when a foreign seller ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction." Id. , quoting Polar Tankers, Inc. v. City of Valdez , 557 U.S. 1, 11, 129 S. Ct. 2277, 174 L.Ed.2d 1 (2009).
II. ANALYSIS
We conclude 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. As we noted in our previous opinion, the parties and the Tribunal "did not specifically address the application of the Due Process or Commerce Clauses to Detroit's assessment of income tax to Apex; nonetheless, the majority of the parties’ arguments, and the Tribunal's decision, centered on whether Apex had a ‘nexus’ with Detroit such that the assessment of income tax against it was constitutionally valid." The Tribunal, in reaching its decision, repeatedly stated that it based its holding on Apex's lack of physical presence in Detroit, stating, for example: "Plainly, there must be some physical presence established in order for [Apex] to be subjected to tax"; "[Detroit] must show ‘some minimum connection’ or physical presence"; and "[b]oth parties agree that physical presence is a key component in establishing nexus[.]" The parties and the Tribunal relied on as persuasive the definition of "physical presence" found at MCL 206.621(2)(b) of the Income Tax Act, MCL 206.1 et. seq. ; however, the Tribunal's analysis of Apex's physical presence was based on the applicability of the physical-presence rule in Quill to the question before it. And the Tribunal's ultimate conclusion that Apex lacked a "nexus" with Detroit at least suggests that the conclusion was based on a Commerce Clause analysis.
See Apex , unpub. op. at 4.
We believe that the most prudent course of action is to vacate the Tribunal's decision and to remand for further proceedings 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. We are an error-correcting Court, see W.A. Foote Mem. Hosp. v. Mich. Assigned Claims Plan , 321 Mich. App. 159, 181, 909 N.W.2d 38 (2017), vacated in part on other grounds 504 Mich. 985, 934 N.W.2d 44 (2019), and our review of Tribunal decisions is constitutionally and precedentially limited in many respects, see Briggs Tax Serv., L.L.C. v. Detroit Pub. Sch. , 485 Mich. 69, 75, 780 N.W.2d 753 (2010). Therefore, while we can determine from the existing record that the Tribunal's previous decision was based on the "adoption of a wrong principle" in light of the United States Supreme Court's repudiation of Quill , Bellas Hess , and the physical-presence rule, see Briggs Tax Serv. , 485 Mich. at 75, 780 N.W.2d 753, we conclude that we are not compelled by Wayfair or our Supreme Court's order to reverse the Tribunal so as to hold that Apex does owe the challenged taxes, nor do we believe that it would be appropriate for us to do so. This is especially true because the Tribunal declined to consider several alternative arguments from Apex in the event that the Tribunal were to resolve the constitutional question in Detroit's favor. Although the parties did discuss these arguments in their supplemental briefs, we do not believe we are the appropriate forum for these arguments to be initially decided. See Autodie LLC v. Grand Rapids , 305 Mich. App. 423, 430-431, 852 N.W.2d 650 (2014) (declining to reach issues on appeal that the Tribunal did not address below and noting that this Court had "neither the benefit of a decision by the ... Tax Tribunal nor sufficient briefing by the parties").
We therefore vacate the Tribunal's decision and remand for further proceedings consistent with this opinion. We do not retain jurisdiction.
Servitto, P.J., and Ronayne Krause, J., concurred with Boonstra, J.