Ammex, Inc. v. Dep't of Treasury

• Decision Date: 18 January 2007
• Docket Number: Docket No. 258901.
• Citation: 273 Mich. App. 623,732 N.W.2d 116
• Parties: AMMEX, INC., Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

732 N.W.2d 116

273 Mich. App. 623

AMMEX, INC., Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee.

Docket No. 258901.

Court of Appeals of Michigan.

Submitted September 12, 2006, at Detroit.

Decided January 18, 2007, at 9:00 a.m.

Released for Publication April 11, 2007.

Dykema Gossett PLLC (by Craig L. John and Thomas J. Murray) for the plaintiff. Bloomfield Hills.

Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and Roland Hwang, Assistant Attorney General, for the defendant.

Before: WHITBECK, C.J., and HOEKSTRA and WILDER, JJ.

PER CURIAM.

Plaintiff Ammex, Inc. (Ammex), appeals as of right the Court of Claims opinion and order granting summary disposition to defendant Michigan Department of Treasury. Ammex brought suit challenging the Department of Treasury's assessments under the Single Business Tax Act (SBTA), MCL 208.1 et seq.,¹ imposing a single business tax (SBT) on Ammex's business activities in tax years 1993, 1994, and 1995. We hold that imposition of the SBT on Ammex is constitutional, that Ammex's duty-free sales are Michigan sales subject to the SBT, and that on the record presented, Ammex is not entitled to apportion any of its sales, either tangible or intangible, to Canada. Therefore, we affirm.

I. Basic Facts and Procedural History

Ammex is a Michigan corporation with its principal office located in Warren, Michigan. Relevant to this appeal, Ammex owns and maintains two United States Customs Class 9 bonded warehouses,² also known as "duty-free stores"³ or "duty-free sales enterprises."⁴ One of the stores is located at 3400 West Lafayette Boulevard, immediately adjacent to the Ambassador Bridge; the other is located at 100 East Jefferson Drive, immediately adjacent to the Detroit-Windsor Tunnel. Ammex sells a variety of goods at its duty-free stores, including alcoholic beverages, tobacco products, perfume, watches, and other tangible personal property. Ammex also sells motor fuel from the Ambassador Bridge facility.

Both stores are situated on private property located in Detroit, Michigan, that Ammex leases from the Detroit International Bridge Company (DIBC).⁵ Further, both of these stores are located beyond "the point of no return," which is an area beyond the United States customs exit point⁶ and which links the United States and Canada.⁷ Once a customer exits one of these "sterile"⁸ Ammex facilities, that customer may not immediately return to the United States but must enter Canada, where the customer must pay any duties or taxes owed to Canadian Customs.⁹ If such goods are brought back to the United States, they must be declared to U.S. Customs and are at that time subject to federal duty and tax.¹⁰

Ammex also provides financial services to Ambassador Money Exchange, Ltd. (AME), an Ontario corporation. Ammex claims that it was subject to tax withholding in Canada on fees AME paid to Ammex.

In its tax returns for 1993, 1994, and 1995, Ammex took the position that its business activities were taxable both within and without Michigan and that, therefore, it was required to apportion its tax base according to MCL 208.41.¹¹ Accordingly, Ammex computed the sales factor of its apportionment formula to be zero, claiming that all its sales were non-Michigan sales. On review, the Department of Treasury disallowed that apportionment and determined final assessments. Ammex paid the assessments under protest and then brought this suit for a refund of the single business taxes paid, plus interest. The Court of Claims determined that Ammex's duty-free sales were in fact "Michigan sales" for purposes of calculating Ammex's adjusted tax base under the SBTA and granted summary disposition to the Department of Treasury. The Court of Claims characterized Ammex's argument as an attempt to extend the tax exemptions that run with the goods it sells to its sales activities, thereby exempting these activities from SBT liability. The Court of Claims denied Ammex's motion for reconsideration. Ammex now appeals.

II. Overview of the Single Business Tax

The SBT is a form of value-added tax, which is a tax imposed on "`economic activity itself and [which] can be described in two ways: as a tax on the economic actor's use of the scarce resources of society, or as a tax on the value the economic actor adds to the economy.'" Fluor Enterprises, Inc. v. Dep't of Treasury, 265 Mich.App. 711, 715, 697 N.W.2d 539 (2005), quoting Mobil Oil Corp. v. Dep't of Treasury, 422 Mich. 473, 493, 373 N.W.2d 730 (1985). The SBT is a tax imposed on the privilege of doing business in Michigan, and not on income. MCL 208.31(3); Guardian Photo, Inc. v. Dep't of Treasury, 243 Mich.App. 270, 277, 621 N.W.2d 233 (2000). "It taxes what a business has added to the economy, as distinguished from the income tax's taxation of what the business has derived from the economy." Guardian Photo, supra at 277, 621 N.W.2d 233. Stated differently, a value-added tax "`taxes the use of the resources of society; the income tax taxes the return received for supplying those resources to the economy.'" Fluor Enterprises, supra at 716, 697 N.W.2d 539, quoting Mobil Oil, supra at 494-495, 373 N.W.2d 730.

The SBTA imposes "a specific tax upon the adjusted tax base of every person with business activity in this state that is allocated or apportioned to this state . . . ." MCL 208.31(1).¹² "Business activity" includes the transfer of legal title to tangible personal property "made or engaged in, within this state, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others . . . ." MCL 208.3(2). "`Tax base' means business income, before apportionment or allocation . . ., even if zero or negative, subject to . . . adjustments. . . ." MCL 208.9(1). "`Business income' means federal taxable income . . . ." MCL 208.3(3).

The first step in calculating the SBT is to determine the taxpayer's tax base. Fluor Enterprises, supra at 716, 697 N.W.2d 539; Caterpillar, Inc. v. Dep't of Treasury, 440 Mich. 400, 409, 488 N.W.2d 182 (1992). But calculation of Ammex's tax base is not at issue here. The second step in calculating SBT liability is allocation or apportionment. Fluor Enterprises, supra at 716, 697 N.W.2d 539; Caterpillar, supra at 409, 488 N.W.2d 182. The SBTA provides a three-factor formula for apportioning the tax base between two or more jurisdictions whereby the total tax base is multiplied by the portion of business activity attributable to Michigan. Fluor Enterprises, supra at 717, 697 N.W.2d 539; Caterpillar, supra at 409 n. 12, 488 N.W.2d 182. The portion of business activity attributable to Michigan is the average of three ratios: "(1) Michigan payroll to total payroll, (2) Michigan property to total property, and (3) Michigan sales to total sales." Trinova Corp. v. Michigan Dep't of Treasury, 498 U.S. 358, 367-368, 111 S.Ct. 818, 112 L.Ed.2d 884 (1991), citing MCL 208.45, 208.46, 208.49, and 208.51. As will be discussed later, Ammex takes issue with the third factor, known as the sales factor. After apportionment, the tax base is subject to several additional adjustments, Caterpillar, supra at 409, 488 N.W.2d 182, but such adjustments are not at issue in this case.

III. Ammex's Connection With Michigan

Ammex argues that it should not be subject to the SBT because the sales at its duty-free facilities do not occur in Michigan, but rather in an indeterminate locale between the United States and Canada that is subject solely to regulation by the United States Customs Service. Ammex supports its argument by explaining that merchandise obtained for export resale is required by law to be stored in a United States Customs Class 9 bonded warehouse under bond to assure that it does not enter the United States. When the merchandise leaves the warehouse, it is irreversibly in the stream of export destined for Canada. Thus, Ammex contends, such merchandise never enters Michigan for use or distribution.

However, the focus of the SBTA is on taxing the economic activity itself rather than the goods. The SBT is a tax imposed for the privilege of doing business in Michigan and taxes the economic actor's use of the scarce resources of society. MCL 208.31(3); Fluor Enterprises, supra at 715, 697 N.W.2d 539; Guardian Photo, supra at 277, 621 N.W.2d 233. Thus, we find it irrelevant that the goods transported to Ammex's facilities are deemed, as part of an elaborate legal fiction, to be outside the reach of federal taxation and duties, despite the fact that they undoubtedly find actual and physical, albeit temporary, rest upon United States soil. Two things are relevant: (1) the locale of Ammex's facilities and (2) its enjoyment of the privilege of utilizing Michigan's resources.

As mentioned, Ammex is a registered Michigan corporation. Ammex's Ambassador Bridge store is located at 3400 West Lafayette Boulevard, and its Detroit-Windsor Tunnel store is located at 100 East Jefferson Drive. Both addresses are in Detroit, Michigan. Ammex also owns a Class 9 bonded warehouse at 2000 Howard Street in Detroit, Michigan. Further, the Detroit City Council, the Detroit Traffic Engineering Department, and the Detroit Department of Buildings and Safety Engineering have all had a role in approving construction projects inside the area located past the "point of no return." See Detroit Int'l Bridge Co. v. Detroit, unpublished opinion per curiam of the Court of Appeals, issued September 14, 2006 (Docket Nos. 257369 and 257415, 2006 WL 2639520).

Indeed, the recent decision in Detroit Int'l Bridge Co. v. Detroit is persuasive. In that case, this Court held that DIBC, the entity from which Ammex leases the property where its facilities are located, is not a federal instrumentality and that federal law does not preempt application of Detroit zoning ordinances to the subject property. Id., slip op. at 12. In doing so, this Court specifically...