Vectren Infrastructure Servs. Corp. v. Dep't of Treasury
| Docket Number | SC 163742 |
| Decision Date | 31 July 2023 |
| Parties | VECTREN INFRASTRUCTURE SERVICES CORP., successor in interest to MINNESOTA LIMITED, INC., Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant. |
| Court | Supreme Court of Michigan |
Argued on application for leave to appeal April 5, 2023.
Vectren Infrastructure Services Corporation, the successor in interest to Minnesota Limited, Inc. (ML), sued the Department of Treasury (the Department) in the Court of Claims, alleging that the Department had improperly assessed a tax deficiency against ML after auditing ML's Michigan Business Tax returns for 2010 and part of 2011. In 2010, Enbridge Inc. retained ML, a Minnesota-based company, to assist in the cleanup of a severe oil spill in Kalamazoo. In March 2011 while the Kalamazoo project was ongoing, ML sold all its assets to Vectren for $80 million. ML treated the sale for tax purposes as a sale of its assets under the federal tax code. ML timely filed its Michigan tax returns for 2010 and for the period in 2011 before the sale, January 1, 2011 to March 31, 2011 (the short year).
To tax only Michigan business activity, the Michigan Business Tax Act (the MBTA), MCL 208.1101 et seq., employs an apportionment formula. For a taxpayer whose business activities are subject to tax within and outside Michigan its tax base is apportioned to Michigan by multiplying its tax base by the sales factor calculated under MCL 208.1303. The sales factor is a fraction, in which the numerator is total sales in the state during the tax year and the denominator is total sales of the taxpayer everywhere during the tax year. In its Michigan tax return for the short year ML included the sale of its assets in the denominator of its sales factor. Following the audit, the Department determined that ML had improperly included its gain from the sale of its assets in the sales-factor denominator, resulting in an overstatement of its total sales and the reduction of its Michigan tax liability. The auditor excluded ML's sale of assets from the sales factor and included it in ML's preapportioned tax base, which increased ML's sales factor from 14.9860% to 69.9761% and consequently increased its tax liability. ML asked the Department for an alternative apportionment for the short year, but the Department denied ML's request and determined that ML had not overcome the presumption that the statutory apportionment fairly represented ML's business activity in Michigan for the short year.
Vectren filed suit in the Court of Claims, arguing, in part, that the Department's formulation of the sales factor for the short year resulted in a grossly distortive tax that violated the Equal Protection, Due Process, and Commerce Clauses of the Constitution. Both parties moved for summary disposition and the court, Colleen A. O'Brien, J., granted summary disposition for the Department. According to the court, the Department had properly included ML's gain from the sale of its assets in ML's tax base because the sale qualified as "business income" within the meaning of the MBTA. The court further concluded that ML was not entitled to an alternative apportionment. Vectren appealed, and the Court of Appeals, Tukel, P.J., and Sawyer and Riordan, JJ., reversed the Court of Claims opinion and held that an alternative formula was required. 331 Mich.App. 568 (2020). The Department sought leave to appeal in the Supreme Court, and the Supreme Court vacated the Court of Appeals opinion and remanded the case to the Court of Appeals for the limited purpose of addressing whether the Department properly calculated and applied the apportionment formula. 506 Mich. 964 (2020). The Court of Appeals in turn remanded the case to the Court of Claims for it to address whether Vectren's inclusion of the sale of the business's tangible and intangible assets in the denominator of the sales factor was proper, and the Court of Claims held that it was improper. Vectren again appealed, and the Court of Appeals, Sawyer and Riordan, JJ. (Tukel, P.J., not participating), held that the Court of Claims had correctly analyzed the relevant statutes and applied the apportionment formula; however, the Court of Appeals adopted its original analysis regarding the constitutional defect present in applying the formula and concluded that Vectren was entitled to an alternative apportionment because applying the formula extended Michigan's taxing powers beyond their acceptable scope. 339 Mich.App. 117 (2021). Finally, the Court of Appeals ordered that the parties work together to determine an alternative method of apportionment. The Department again sought leave to appeal in the Supreme Court, and the Supreme Court ordered and heard oral argument on the application. 509 Mich. 882 (2022).
In an opinion by Justice Welch, joined by Justices Bernstein, Cavanagh, and Bolden, the Supreme Court, in lieu of granting leave to appeal, held:
The Department properly included the income from the ML-to-Vectren asset sale in the tax base apportionment formula under the MBTA, and 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 Commerce Clauses of the United States Constitution.
1. The Due Process Clause of the Fourteenth Amendment imposes two requirements on state taxation: a minimal connection or "nexus" between the interstate activities and the taxing state, and a rational relationship between the income attributed to the state and the intrastate values of the enterprise. The major requirement for taxing multistate corporations using an apportionment formula is that it must, under both the Due Process and Commerce Clauses, be fair. A multistate business's income from the sale of assets is apportionable for business tax purposes so long as the tax is assessed in a proportionate manner. A party challenging a business tax on the basis that it is disproportionate has a heavy burden of showing by clear and cogent evidence that the apportionment formula attributed income out of all appropriate proportion to the business activity in Michigan or that it led to a grossly distorted result.
2. The asset-sale income was statutorily apportionable and did not offend the Constitution. Under the MBTA, the tax liability owed by a unitary business was calculated by multiplying the tax base and the sales factor. Under MCL 208.1201(2), business income had to be included in the tax base of the apportionment formula, and under MCL 208.1303(10), ML's total sales in Michigan during the tax year had to be compared to ML's total sales everywhere during the tax year. MCL 208.1115(1) defined sales as property that can be inventoried and services sold; it did not include the sale of a company. In this case, ML chose to treat the sale of its business to Vectren as a sale of assets. Accordingly, while the asset-sale income generated from the sale of ML to Vectren was business income and includable in the tax base, it was inappropriate to include the asset sale in either the sales-factor numerator or denominator. Because Vectren failed to show that the formula either was improperly calculated or unreasonably reflected the business transacted in the taxing year at issue, it had to be upheld.
3. There were no special constitutional protections that prohibited including business-sale income in ML's net income. United States Supreme Court caselaw outlined the proper legal test as not where the assets are physically located or where the company is domiciled for intangible assets but rather whether those assets play a part in the unitary business operations that subject the corporation to taxation in the taxing state in the first place.
4. ML's intangible assets were taxable. The method for measuring the value of intangible assets uses a forward-looking analysis. Where a company operated or whether it was reliable years before its sale does not matter as much as the company's scope and reliability immediately preceding the sale. The record in this case showed connections between Michigan and ML both before the sale and as a potential future growth market. ML had a business presence in Michigan for many years before the sale to Vectren, and Michigan remained a target for ML given ML's existing customers and planned market growth at the time of the sale. Accordingly, the fact that ML's net income during the short year was much greater than in previous years did not support the conclusion that the sales factor itself did not fairly represent the extent of ML's business activity in Michigan.
5. The apportionment formula did not violate the Due Process Clause. Under MCL 208.1309(3) and United States Supreme Court caselaw, the formula is rebuttably presumed to fairly represent the business activity attributed to the taxpayer in Michigan unless it can be demonstrated that the business activity attributed to the taxpayer in Michigan is out of all appropriate proportion to the actual business activity transacted in Michigan and leads to a grossly distorted result or would operate unconstitutionally to tax the extraterritorial activity of the taxpayer. A tax satisfies the Due Process Clause when the tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state. Fairness has two components: internal and external consistency. Internal consistency requires that if the formula was applied by every jurisdiction, it would result in no more than all the unitary business income being taxed. External consistency means that the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is...
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