LANSING – The Department of Treasury has issued a bulletin defining “active solicitation” of business that includes operating a website or sending emails to entice purchasers from Michigan to qualify to pay the Michigan Corporate Income Tax.
Those solicitations, which can include advertising and mailing coupons and catalogs, can count as establishing nexus within the state, making a company eligible for the 6 percent tax on revenues earned in excess of $350,000 in the state, the department said.
The definition comes through Revenue Administrative Bulletin 2013-9, issued last week by the Department of Treasury. The bulletin does not state directly the definition of nexus in the 2011 tax act means companies that do not have actual physical presence in Michigan, such as a sales office, and solicit sales simply through the Internet or mail would be subject to the income tax.
The 2011 tax sets up three criteria for creating nexus that makes a company eligible for the tax, the bulletin said:
The company has an actual physical presence in the state (such as a sales office) for at least one day during the taxing year;
It actively solicits business in the state; and
The taxpayer has an ownership interest in a flow-through business.
The bulletin specifically deals with the second component.
It concludes that, “speech, conduct, or activity that is purposefully directed at or intended to reach persons within this state and that explicitly or implicitly invites an order for a purchase or sale,” or such activity that is not directly aimed at a sale but is “entirely ancillary” to requests for a sale or order (such as a follow up call) creates nexus. Once there is a nexus, the company is eligible for the state tax, so long as the company has revenues from Michigan of at least $350,000.
In its analysis in terms of making the ruling, the department does state that the defining U.S. Supreme Court decision in the 1990’s Quill case held that a company had to have actual physical presence to be assessed the sales tax (and that issue is of course now being debated both in Congress and the Legislature in the so-called “Main Street Fairness” legislation).
But the Quill decision dealt only with sales and use taxes, the bulletin said, and “not to other types of state taxes, such as the Michigan CIT.”
A number of states have used the Quill ruling to affect business taxes other than sales taxes, the bulletin said, but Michigan now considers a West Virginia case, MBNA America Bank v. West Virginia, to “best (summarize) the status of Commerce Clause (in the U.S. Constitution) jurisprudence.”
In that case, the West Virginia Supreme Court held that previous rulings on how a company establishes nexus to gain business have no relevancy to contemporary business practices which rely more on communications technology.
And the Michigan bulletin said that because the state law would apply the tax to a company that has sales of at least $350,000 in revenues, that would ensure the company actually has a substantial presence in the state.
There is a federal 1986 law that would exempt a company from the tax if an order made in Michigan does not actually go to Michigan but to a location outside the state.
And in outlining the kinds of activities that would be considered active solicitation, the bulletin refers to a retailer located outside Michigan – the bulletin names no such companies, but they could include Amazon or L.L. Bean as examples – that maintains a website open to anyone, including Michigan residents, who could browse products and then place orders which would be shipped to the Michigan residents.
