Vectren Infrastructure Serv. Corp. v. Dep't of Treasury

999 N.W.2d 748

512 Mich. 594

VECTREN INFRASTRUCTURE SERVICES CORP., successor in interest to Minnesota Limited, Inc., Plaintiff-Appellee,

v.DEPARTMENT OF TREASURY, Defendant-Appellant.

No. 163742

Supreme Court of Michigan.

Argued on application for leave to appeal April 5, 2023

Decided July 31, 2023

Colleen A. O’Brien, J.

Foley & Lardner LLP, Detroit (by Lynn A. Gandhi) for Vectren Infrastructure Services Corp.

Dana Nessel, Attorney General, Fadwa A. Hammoud, Solicitor General, and David W. Thompson and Justin R. Call, Assistant Attorneys General, for the Department of Treasury.

BEFORE THE ENTIRE BENCH

OPINION

Welch, J.

₆₀₁As Benjamin Franklin famously noted, nothing is certain in life but death and taxes. The wisdom of this statement is demonstrated through long-established caselaw affirming the government’s broad power of taxation. In this matter involving highly unique circumstances, extensive United States Supreme Court precedent mandates that we hold that the Michigan Department of Treasury (Treasury) may assess Vectren Infrastructure Services Corporation (Vectren) the disputed business tax amount.

This case requires us to examine the ability of the state of Michigan to tax the income generated by the sale of Minnesota Limited, Inc. (ML), a Minnesota-headquartered company, to Vectren under the now-repealed Michigan Business Tax Act (the MBTA)¹ given ML’s extensive operations in Michigan at the time of the sale. Specifically, this case involves a challenge to the constitutionality of Michigan’s business tax apportionment formula under the MBTA and the resulting $2,262,994 tax assessment, along with interest and penalties after the company was sold.

Having considered the arguments and the record presented, we hold that (1) the income from the asset sale is properly attributable under the MBTA and (2) the MBTA formula, as applied, did not impermissibly tax income outside the scope of Michigan’s taxing powers and thus did not violate the Due Process or ₆₀₂Commerce Clauses of the United States Constitution. We therefore reverse the judgment of the Court of Appeals and remand this case to the Court of Claims for further proceedings that are consistent with this opinion.

I. INTRODUCTION

State business income tax laws vary widely across the nation and are complex when multistate corporations are at issue. Michigan’s business income tax system has changed many times over the years in an effort to balance ease of administration with fairness for those conducting business in the state. The MBTA was implemented as part of an effort to cut and simplify corporate taxation in Michigan.² To understand the MBTA, it is helpful to first understand the formula used to calculate tax liability under the MBTA, so we first explain that formula. We then discuss the history of this case and the history of apportionment tax jurisprudence, including numerous decisions of the United States Supreme Court. Finally, we set forth how we are bound to apply that precedent and uphold Treasury’s imposition of the MBTA tax.

₆₀₃A. THE MBTA FORMULA

The MBTA imposed "a business income tax on every taxpayer with business activity within this state …." MCL 208.1201(1). Specifically, "[t]he business income tax is imposed on the business income tax base, after allocation or apportionment to this state, at the rate of 4.95%." Id. For companies operating in multiple jurisdictions, the MBTA included a formula to "apportion" the income based on the estimated percentage of business done in Michigan as compared to other states. MCL 208.1201(2). A company’s total taxable income—or the amount examined to determine tax liability—was calculated by multiplying the "tax base" by a "sales factor." The "sales factor" compares Michigan sales to all company sales to determine the proper proportionality of the overall tax.³ The basic formula was as follows:

999 N.W.2d 752.bmp

The MBTA defined the "tax base" as "a taxpayer’s business income" subject to certain adjustments that are not relevant here. MCL 208.1201(2) (emphasis added). In turn, "business income" was defined as "that part of federal taxable income derived from business activity." MCL 208.1105(2). Additionally, "[f]or a partnership or S corporation, business income include[d] ₆₀₄payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders." Id. (emphasis added). "Business activity" was also a statutorily defined term that included

transfer of legal or equitable title to … property, whether real, personal, ormixed, tangible or intangible, … with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others …. Although an activity of a taxpayer may be incidental to another or to other of his or her business activities, each activity shall be considered to be business engaged in within the meaning of this act. [MCL 208.1105(1).]

The "sales factor" in the MBTA apportionment formula was "a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax year and the denominator of which is the total sales of the taxpayer everywhere during the tax year." MCL 208.1303(1). "Sales" were defined as "the amounts received by the taxpayer as consideration from … [t]he transfer of title to, or possession of, property that is stock in trade or other property of a kind that would properly be included in the inventory of the taxpayer …." MCL 208.1115(1)(a) (emphasis added). For service-based companies, like ML, "sales" also included the "performance of services that constitute business activities." MCL 208.1115(1)(b). In short, to determine the sales factor for a unitary business, sales of goods and services in Michigan were compared to total companywide sales of goods and services for the tax year. MCL 208.1301(1); MCL 208.1303(1).

The formula was "rebuttably presumed to fairly represent the business activity attributed to the taxpayer in this state …." MCL 208.1309(3). However, if a taxpayer could demonstrate "that the business activity₆₀₅ attributed to the taxpayer in this state [was] out of all appropriate proportion to the actual business activity transacted in this state and [led] to a grossly distorted result or would operate unconstitutionally to tax the extraterritorial activity of the taxpayer," an alternative apportionment was mandated. MCL 208.1309(3). An alternative method could only be used "if it [was] approved by the department." MCL 208.1309(2).

The dispute in this case concerns whether the MBTA’s statutory tax liability formula controlled or whether the taxpayer has shown by clear and cogent evidence that an alternative apportionment formula, as allowed by MCL 208.1309, should have been used. Vectren asserts that the statutory tax apportionment formula resulted in a tax liability that was disproportionate to the business done in Michigan, leading to a grossly distorted result.

B. FACTS AND PROCEEDINGS

The facts leading to this case are complex and unlikely to repeat. Justice Zahra’s dissent decries our decision today as opening the door to the state engaging in highway robbery against taxpayers as soon as their toe crosses our borders. A more reasonable view is that our decision today deals with a complex asset sale of a unitary business operation, a tax return filed by that business using a self-created formula directly contrary to the relevant statute, an audit which caught the use of the self-created formula, and the one-off ramifications when that asset sale coincided with large Michigan sales under a now-replaced business tax.

Vectren is the successor in interest to ML. ML was an S corporation headquartered in Big Lake, Minnesota. It engaged in the business of constructing, maintaining,₆₀₆ and repairing gas pipelines and providing hazardous material cleanup response to leaks. Founded in 1966, ML grew to employ more than 600 employees and engaged in work in 24 states, including Michigan. By the mid-1990s, ML was wholly owned by two of the founder’s children. In 2010, ML’s owners decided to sell the business.

In July 2010, a break in Enbridge Inc.’s Line 6B pipeline resulted in a catastrophic spill of more than 1.1 million gallons of oil into the Kalamazoo River, Talmadge Creek, and surrounding wetlands.⁴ ML was hired to do the environmental cleanup work, which was massive in scope and still ongoing when ML sold all its tangible and intangible assets to Vectren for roughly $89 million in 2011.⁵ The sale price included $83.4 million in cash and $5.2 million in assumption of debt. The assets purchased included $14.8 million of working capital; $34.4 million of property, plant, and equipment; $19.1 million of identifiable intangibles;⁶ and $20.3 million of implied goodwill. ₆₀₇Given its operations in Michigan, ML filed a Michigan tax return for the period between January 1, 2011 and March 31, 2011, which is known as a "short-year" return. In its tax return, ML included the sale of business assets in the "tax base." It also included the asset sale in the denominator of the sales-factor apportionment formula. As a result, ML claimed a sales factor of 14.99%, which resulted in a Michigan-apportioned tax base of $8,186,266 and a tax assessment of a $405,220.17.

In December 2014, Treasury initiated an audit for ML’s 2010 calendar year and the 2011 short-year tax returns. Treasury determined that ML’s 2011 short-year return was calculated incorrectly. Specifically, Treasury found that ML’s inclusion of the ML-to-Vectren asset-sale value in the sales-factor denominator was improper under MCL 208.1115 because the assets were not sold as part of the "stock in trade" of the company nor were the sold assets "property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s trade or business."⁷

₆₀₈In other words, the sale of ML to Vectren was not the same thing as selling a product or service (such...