Ruling Outside the Lines
The Michigan Court of Appeals recently issued its third decision in Apex Laboratories International, Inc. v. Detroit, No. 363984 (Jan. 4, 2024)—a case involving whether the company has the requisite nexus with the City. While the Michigan Supreme Court issued a clear directive on remand, the Court of Appeals opted to expand its review.
In round one of this case, the Michigan Tax Tribunal and the Court of Appeals both held that the company did not have the necessary nexus for Detroit to impose tax. Nevertheless, the Michigan Supreme Court remanded for consideration in light of Wayfair. Apex, 503 Mich. 1034 (2019).
However, the case was never an economic nexus case. Instead, the issue revolved around whether the company was doing business in the city, despite having no employees and no property—in Detroit or anywhere else. The officers and directors of the company were employees of another entity and worked in Detroit. Initially, the Court of Appeals upheld the Tribunal’s finding that the company lacked a physical presence in Detroit and that the officers and directors did not act for the benefit of the company. Apex, 2018 Mich. App. LEXIS 2486 (2018).
Nevertheless, on review, the Court of Appeals reversed course. Reviewing the same evidence and the same legal standard, the Court of Appeals found that the officers’ testimony was “self-serving” and those officers were “legally acting on behalf of” the company. Apex, No. 363984. Thus, in the court’s view, those officers’ and directors’ activities in Detroit were sufficient to show nexus between the company and the City (i.e., a physical presence).
However, the Michigan Supreme Court remanded for review in light of the eradication of the physical presence standard. A finding of nexus based on physical presence is certainly outside of the Supreme Court’s directive.
Moreover, the Court of Appeals provided little analysis as to why it reversed course and harshly criticized the testimony of the officers. Thus, taxpayers in Michigan are left with an unsettled standard as to what evidence is necessary to show that the officers did not act for the benefit of an entity. If the officers’ own testimony will be brushed aside as “self-serving,” then what other evidence could a company provide? Hopefully, the Michigan Supreme Court will answer that question for us.
In Michigan, the saga continues…
This update is one in a series of updates written for the March 2024 edition of The BR State + Local Tax Spotlight.