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Michigan Court of Appeals Finds Drop-Shipped Sales Are Sourced for SBT Purposes Based on Delivery Location

The Michigan Court of Appeals recently affirmed a Court of Claims summary judgment finding that sales to a related party are sourced to the location of the related party’s customers.

The Michigan Court of Appeals recently affirmed a Court of Claims summary judgment finding that sales to a related party are sourced to the location of the related party’s customers. Uniloy Milacron USA, Inc. v. Dep’t of Treasury, No. 300749 (Mich. Ct. App. Jan. 26, 2012).

Uniloy Milacron USA, Inc. (Uniloy), a manufacturer of molds used in blow-molding machines, entered into a distributor agreement with an affiliated corporation to purchase for resale and market Uniloy’s products. The affiliate did not obtain physical possession of the products. Instead, Uniloy packaged, loaded, and shipped the products directly to the affiliate’s customers.

The Michigan Department of Treasury (Department) argued that all of Uniloy’s sales should be sourced to Michigan for purposes of the Single Business Tax (SBT) sales apportionment factor because Uniloy’s products were “delivered” to the affiliate in Michigan before ultimately being sold/shipped to the affiliate’s customers.

Under Michigan’s repealed SBT regime, a sale of tangible personal property is sourced to Michigan if the product is shipped or delivered to a customer within Michigan. The Court disagreed with the Department and reasoned that just because Uniloy sold its products to its affiliate does not necessarily mean that Uniloy “delivered” the products to the affiliate corporation. Rather, the products were packaged by Uniloy and shipped by Uniloy directly to the affiliate’s customers, the vast majority of whom were located outside of Michigan, and there was no documentary evidence to demonstrate otherwise. The terms “shipped” and “delivered” were not defined for SBT purposes, but the Court had no trouble concluding that they referred to the location to which the products were “carried and turned over,” “handed over,” “surrendered,” “sent away,” or “transported” to a customer within Michigan.

Other state courts have taken a view contrary to that of the Michigan Court of Appeals with regard to the sourcing of “dock sales” receipts (sourcing sales of tangible personal property). For example, in Stryker Corp. v. Director, Division of Taxation, 168 N.J. 138 (June 14, 2001), the New Jersey Supreme Court held that a Michigan-based corporation’s receipts from sales of manufactured products at its New Jersey facility, sold to its wholly owned New Jersey subsidiary at the same facility, and drop-shipped directly to the subsidiary’s out-of-state customers constituted New Jersey receipts includable in the New Jersey sales factor numerator because the receipts were earned in New Jersey.

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