The Michigan Court of Appeals recently ruled that in-state presence of sales staff need not be substantial to create sufficient nexus between a taxpayer and Michigan for purposes of the Single Business Tax (SBT).

Rayovac Corporation, a Wisconsin seller of batteries in Michigan, had three salespersons and one mid-western manager with a presence in Michigan. These employees solicited, but did not accept or approve orders. Both parties agreed that the taxpayer had a minimum connection with Michigan, therefore satisfying the requirements of Due Process.

The remaining issue was whether the taxpayer was protected from the imposition of the SBT under the Commerce Clause. The trial court ruled the Commerce Clause prohibited the Department from collecting SBT from the taxpayer because the Michigan sales staff was too small to create “substantial nexus” with Michigan. The Department argued the sales staff of the taxpayer does not need to be substantial to create sufficient nexus with Michigan. In Rayovac Corporation v. Department of Treasury, Nov. 23, 2004, the Court of Appeals found in favor of the Department.

The Court of Appeals referred to a Quill Corp v North Dakota for guidance. Quill provided that substantial nexus under the Commerce Clause does not exist when an out-of-state sellers’ only contacts within a taxing state are via mail or other common carrier.

Although Quill established a “bright-line rule” to determine when substantial nexus does not exist, it did not address the size of the physical presence necessary to satisfy the Commerce Clause.

For further guidance, the Court looked to its analysis in MagneTek Controls, Inc. v Department of Treasury, where the Court determined that Quill should be interpreted to preserve the “bright-line rule” it intended to create by not giving consideration to the size of the sales force present and instead finding that the presence of any sales force at all creates more than a slightest presence in a state, and thus creates substantial nexus.

The taxpayer argued that MagneTek was irrelevant as it addressed whether a company is immune from SBT on its sales outside the state. The Court ruled that MagneTek addressed the same constitutional question as this case, that being whether an out-of-state seller has a physical presence in another state that is sufficient to satisfy the “substantial nexus” requirement of the Commerce Clause, permitting the other state to tax the out-of-state seller.

Furthermore, the Court of Appeals rejected the taxpayer’s argument that the statutory definition of “business activity” created an additional jurisdictional limit to imposing the SBT. The taxpayer reasoned that since the SBT is imposed on the tax base of every person with business activity in the state, and the definition of business activity excludes the services rendered by an employee to his employer, it did not have business activity in the state since its only in-state presence was its employees.

The Court disagreed, ruling that the taxpayer’s Michigan sales representatives were engaged in the transfer of legal or equitable title of property “with the object of gain, benefit, or advantage” to the taxpayer. Pursuant to MCL 208.3(2), the taxpayer conducted “business activity” in Michigan, and therefore created substantial nexus for the imposition of the SBT.

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