Gillette Co. v. Department of Treasury

• Decision Date: 01 March 1993
• Docket Number: Docket No. 118660
• Citation: 497 N.W.2d 595,198 Mich.App. 303
• Parties: The GILLETTE COMPANY, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 595

497 N.W.2d 595

198 Mich.App. 303

The GILLETTE COMPANY, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 118660.

Court of Appeals of Michigan.

Submitted May 7, 1992, at Lansing.

Decided March 1, 1993, at 9:00 a.m.

Released for Publication April 12, 1993.

Miller, Canfield, Paddock & Stone by Samuel J. McKim, III, Robert F. Rhoades, and Joanne B. Faycurry, Detroit, for petitioner.

Frank J. Kelley, Atty. Gen., Thomas L. Casey, Sol. Gen., and Russell E. Prins and Terry P. Gomoll, Asst. Attys. Gen., for respondent.

Before WAHLS, P.J., and MARILYN J. KELLY and REILLY, JJ.

REILLY, Judge.

Petitioner appeals as of right from an opinion and judgment of the Michigan Tax Tribunal affirming tax assessments against petitioner for the years 1976 through 1981 pursuant to the Single Business Tax Act, M.C.L. § 208.1 et seq.; M.S.A. § 7.558(1) et seq. We affirm.

Petitioner, a Delaware corporation, with its base of operations in Boston, Massachusetts, is a manufacturer and wholesaler of personal care products, razors, and ball-point pens. During the period in question, petitioner maintained a sales staff that called on customers in Michigan. The sales representatives took orders from customers and submitted them to the main office, reviewed customers' displays and shelving arrangements of Gillette merchandise, informed customers of promotions offered by petitioner, and replaced defective merchandise.

Petitioner filed three separate petitions with the Michigan Tax Tribunal contesting respondent's single business tax assessments against petitioner for the years 1976 through 1981. Petitioner challenged, on the basis of 15 U.S.C. § 381 and M.C.L. § 208.3(2); M.S.A. § 7.558(3)(2), respondent's jurisdiction to make the assessments. Additionally, petitioner challenged the apportionment of its Michigan business activities and asserted procedural errors on the part of respondent. After a lengthy hearing, the tribunal rejected all of petitioner's arguments and affirmed the taxes and interest assessed by respondent.

Our review of Tax Tribunal decisions, in the absence of fraud, is limited to whether the tribunal made an error of law or adopted a wrong legal principle. Dow Chemical Co. v. Dep't of Treasury, 185 Mich.App. 458, 462-463, 462 N.W.2d 765 (1990). We accept the factual findings of the tribunal as final, provided they are supported by competent, material, and substantial evidence on the whole record. Const.1963, art. 6, § 28; Dow, supra.

I

Application of 15 U.S.C. § 381

(P.L. 86-272)

Petitioner argues, as it did before the tribunal, that respondent is prohibited from assessing single business taxes on petitioner for mere solicitation of orders in Michigan by 15 U.S.C. § 381 (P.L. 86-272), which provides, in pertinent part:

(a) No State ... shall have power to impose ... a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:

(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and

(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1). [Emphasis added.]

The term "net income tax" is defined as "any tax imposed on, or measured by, net income." 15 U.S.C. § 383.

Although not raised as an issue by the parties, we must determine whether P.L. 86-272 applies in the instant case. ¹ Respondent asserts in its brief on appeal that the single business tax is not an income tax. However, respondent acknowledges that it used P.L. 86-272 as a guide for determining whether there was a sufficient nexus between the activities of petitioner and the State of Michigan to permit the assessment of the single business tax. ²

The single business tax is a consumption-type value added tax. Caterpillar, Inc. v. Dep't of Treasury, 440 Mich. 400, 408, 488 N.W.2d 182 (1992). "Value added is defined as the increase in the value of goods and services brought about by whatever a business does to them between the time of purchase and the time of sale." Haughey, The economic logic of the single business tax, 22 Wayne L.R. 1017, 1018 (1976). The value added tax is imposed upon the value added by the production of the final goods. Mobil Oil Corp. v. Dep't of Treasury, 422 Mich. 473, 493, 373 N.W.2d 730 (1985).

A VAT [value added tax] differs in important respects from a corporate income tax. A corporate income tax is based on the philosophy of ability to pay, as it consists of some portion of the profit remaining after a company has provided for its workers, suppliers, and other creditors. A VAT, on the other hand, is a much broader measure of a firm's total business activity. Even if a business entity is unprofitable, under normal circumstances it adds value to its products and, as a consequence, will owe some VAT. Because value added is a measure of actual business activity, a VAT correlates more closely to the volume of governmental services received by the taxpayer than does an income tax. Further, because value added does not fluctuate as widely as net income, a VAT provides a more stable source of revenue than the corporate income tax. [Trinova Corp. v. Michigan Dep't of Treasury, 498 U.S. 358, ----, 111 S.Ct. 818, 824, 112 L.Ed.2d 884, 898 (1991).]

Section 31 of the Single Business Tax Act provides that the tax levied and imposed under the act is imposed upon "the privilege of doing business and not upon income." M.C.L. § 208.31(3); M.S.A. § 7.558(31)(3). The appellate courts of this state have rejected the theory that the single business tax is a tax upon income. Trinova Corp. v. Dep't of Treasury, 433 Mich. 141, 149, 445 N.W.2d 428 (1989), aff'd 498 U.S. 358, 111 S.Ct. 818, 112 L.Ed.2d 884 (1991); Mobil Oil, supra, 422 Mich. at 493-495, 373 N.W.2d 730; Town & Country Dodge, Inc. v. Dep't of Treasury, 152 Mich.App. 748, 755, 394 N.W.2d 472 (1986); Wismer & Becker Contracting Engineers v. Dep't of Treasury, 146 Mich.App. 690, 696, 382 N.W.2d 505 (1985). ³ We conclude, therefore, that the single business tax is not a tax "imposed on" net income.

Next, we consider whether the single business tax is a tax "measured by" net income. The computation of the single business tax begins with the calculation of the taxpayer's tax base. "Tax base" is defined as business income (or loss) before apportionment subject to certain adjustments. M.C.L. § 208.9; M.S.A. § 7.558(9); Trinova, supra, 433 Mich. at 150, 445 N.W.2d 428. "Business income" is essentially federal taxable income. M.C.L. § 208.3(3); M.S.A. § 7.558(3)(3). Adjustments to business income include additions to reflect business consumption of labor and capital. Additions to business income include adding back compensation, depreciation, dividends, and interest paid by the taxpayer to the extent deducted from federal taxable income. Common deductions from business income include dividends, interest, and royalties received by the taxpayer to the extent included in federal taxable income. This income is deducted for the purpose of value added computation because it does not result from capital expenditure by the taxpayer. M.C.L. § 208.9; M.S.A. § 7.558(9); Trinova, supra, 433 Mich. at 150-151, 445 N.W.2d 428. ⁴ Once the tax base is calculated, the portion of the value added that is attributable to Michigan must be determined. M.C.L. § 208.45; M.S.A. § 7.558(45). ⁵ After the tax base has been apportioned and subjected to certain adjustments, it is multiplied by 2.35 percent to determine the taxpayer's tax liability. M.C.L. § 208.31(1); M.S.A. § 7.558(31)(1).

It is clear from the theory underlying the single business tax and the methods used to calculate the tax base and the apportionment formula, that the single business tax is not a tax "measured by net income." Although business income or federal taxable income is a starting point for and a component of the tax base, because of the extensive adjustments required to compute the single business tax, we cannot say that the tax is "measured by" net income. ⁶ Accordingly, we conclude that the restriction imposed by P.L. 86-272 does not apply to taxes imposed under the Single Business Tax Act. ⁷

II

Because P.L. 86-272 does not apply in this case, we must determine whether the imposition of the single business tax on petitioner is permissible under the Due Process and Commerce Clauses, U.S. Const., Am. XIV and Art. I, § 8, cl. 3. Although the trial court did not resolve these issues, our review is nevertheless proper because these issues involve the determination of a question of law and the facts necessary for their resolution have been presented. Spruytte v. Owens, 190 Mich.App. 127, 132, 475 N.W.2d 382 (1991).

A. Due Process Analysis

In order to meet the requirements of the Due Process Clause there must be "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." Quill Corp. v. North Dakota, 504 U.S. 298, ----, 112 S.Ct. 1904, 1909, 119 L.Ed.2d 91, 102 (1992), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-345, 74 S.Ct. 535, 538, 98 L.Ed. 744 (1954). Additionally, the income attributed for tax purposes must be rationally related to "values connected with the taxing State." Id., quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273, 98 S.Ct. 2340, 2344, 57 L.Ed.2d 197 (1978).

In Quill, the petitioner challenged the authority of the State of North Dakota to compel it to...