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Taxpayer's Solicitation Activities Could Establish Michigan SBT Nexus

The Michigan Court of Appeals ruled that two in-state visits per year by representatives of an out-of-state taxpayer could create nexus sufficient to impose the Single Business Tax (SBT).

The Michigan Court of Appeals ruled that two in-state visits per year by representatives of an out-of-state taxpayer could create nexus sufficient to impose the Single Business Tax (SBT). Barr Labs., Inc. v. Dep’t of Treasury, 2010 Mich. App. LEXIS 2033 (Oct. 21, 2010).  At trial, the taxpayer offered an affidavit by its vice president of taxation stating that its employees did not solicit sales during their infrequent trips to Michigan, but rather visited to “gather information.” The Department of Treasury, however, introduced the nexus questionnaires completed by Barr Labs indicating that its employees entered Michigan between two and nine times a year to solicit sales. The trial court found the affidavit to be the most credible evidence and held that Barr Labs’ contacts with Michigan were insufficient to establish the requisite substantial nexus under the Commerce Clause and granted summary judgment in favor of the taxpayer.

The Michigan Court of Appeals ruled that two in-state visits per year by representatives of an out-of-state taxpayer could create nexus sufficient to impose the Single Business Tax (SBT). Barr Labs., Inc. v. Dep’t of Treasury, 2010 Mich. App. LEXIS 2033 (Oct. 21, 2010).  At trial, the taxpayer offered an affidavit by its vice president of taxation stating that its employees did not solicit sales during their infrequent trips to Michigan, but rather visited to “gather information.” The Department of Treasury, however, introduced the nexus questionnaires completed by Barr Labs indicating that its employees entered Michigan between two and nine times a year to solicit sales. The trial court found the affidavit to be the most credible evidence and held that Barr Labs’ contacts with Michigan were insufficient to establish the requisite substantial nexus under the Commerce Clause and granted summary judgment in favor of the taxpayer.

The appellate court reversed and remanded the case, finding a true question of fact between the affidavit and the nexus questionnaires. The appellate court noted at the outset of its analysis that constitutional “substantial nexus” is met when a taxpayer’s in-state physical presence is more than a “slightest presence.” According to a 1998 Revenue Administration Bulletin, the in-state solicitation of sales for two or more days in a year creates a rebuttable presumption that an out-of-state company is regularly and systematically conducting in-state business activity and, thus, is subject to the SBT. The court indicated that this nexus standard could apply retroactively, but that the issue of whether the statutory penalty applied depended on the outcome of the case on remand. 

This case should be a reminder to taxpayers to give extra consideration to the potential tax consequences of their responses to nexus questionnaires, regardless of how routine they may seem, because they very well may be used as evidence by taxing authorities in future litigation. And, taxpayers should consider responding to a state’s request to complete a nexus questionnaire with a narrative description of its activities (rather than checking yes/no boxes).

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