Opinion ID: 843023
Heading Depth: 1
Heading Rank: 10

Heading: analyzing the commerce clause

Text: The decision that the statute allows the revenues at issue to be taxed is not the end of the inquiry. It is also necessary to decide whether the tax violates the Commerce Clause of the United State Constitution. [7] The Commerce Clause provides that Congress shall have Power . . . [t]o Regulate Commerce . . . among the several States. . . . U.S. Const., art. I, § 8, cls. 1 and 3. Though phrased as a grant of regulatory power to Congress, the Clause has long been understood to have a `negative' aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce. Oregon Waste Systems, Inc. v. Oregon Dep't of Environmental Quality, 511 U.S. 93, 98, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). The United States Supreme Court has held that a state tax will survive a Commerce Clause challenge when the tax (1) is applied to an activity having a substantial nexus to the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Plaintiff claims that the tax at issue violates the first two prongs of this test. [8] Several principles should be kept in mind when analyzing the constitutionality of a tax. States have great latitude when enacting tax provisions. See Trinova Corp., 498 U.S. at 386, 111 S.Ct. 818. Also, a statute is presumed constitutional absent a clear showing to the contrary. Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 364, 93 S.Ct. 1001, 35 L.Ed.2d 351 (1973). This presumption of constitutionality is especially strong with respect to taxing statutes. Washtenaw Co. v. State Tax Comm., 422 Mich. 346, 371, 373 N.W.2d 697 (1985), citing Thoman v. City of Lansing, 315 Mich. 566, 576, 24 N.W.2d 213 (1946). Plaintiff argues that the construction defendant gives to this statutory provision permits the imposition of a tax on activities that do not have a substantial nexus with Michigan. It claims that no substantial nexus exists in this case because plaintiff's activities occurred outside Michigan, and a state cannot tax activities that occur outside that state. I find that plaintiff misconstrues the connection necessary for a state to have a substantial nexus with the taxpayer and the activity being taxed. [I]n the case of a tax on an activity, there must be a connection to the activity itself, [and] a connection . . . to the actor the State seeks to tax. . . . Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 778, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). Accordingly, two different inquiries may arise in determining whether the substantial nexus prong is satisfied. Id. First, the state must have the authority to tax. Id. For this authority to exist the taxpayer must have a physical presence in the taxing jurisdiction. See Quill Corp. v. North Dakota, 504 U.S. 298, 311, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). Second, the state must not exceed its legitimate power to tax. Allied-Signal, Inc., 504 U.S. at 778, 112 S.Ct. 2251. [T]he State's power to tax an individual's or corporation's activities is justified by the `protection, opportunities and benefits' the State confers on those activities. Id., quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 85 L.Ed. 267 (1940). In this case, the parties stipulated that plaintiff performed construction management and material procurement activities in Michigan. On the basis of this presence, the state clearly has the power to tax plaintiff. The question becomes whether the state exceeded the legitimate reach of its power. A taxpayer arguing that a tax lacks a substantial nexus to the activity taxed cannot rely on the argument that the source of the income is attributable to another state. Mobil Oil Corp. v. Vermont Comm'r of Taxes, 445 U.S. 425, 438, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980). Rather, to mount a successful challenge on this ground, the taxpayer must show that the income taxed was earned in the course of activities unrelated to [the taxing] State. Id. at 439, 100 S.Ct. 1223. Plaintiff cannot make this showing. Because the receipts at issue arose from services that plaintiff provided for Michigan construction projects, there is a substantial nexus between the state and the activity being taxed. As long as plaintiff has some physical presence in the state, the state may tax services that plaintiff performs out of state but that are generally consumed within Michigan. See Trinova Corp., 498 U.S. at 374-377, 111 S.Ct. 818. Plaintiff also claims that the interpretation advocated by defendant violates the Commerce Clause requirement of fair apportionment. According to plaintiff, the tax is not internally consistent. It reasons that, under this interpretation, every state with a similar statute could tax all of a business's receipts for planning and design activities. The result would be duplicative taxation, unconstitutionally putting interstate commerce at a competitive disadvantage. In 1992, this Court ruled that [f]air apportionment requires that each state tax only its fair share of interstate business activity. Caterpillar, Inc. v. Dep't of Treasury, 440 Mich. 400, 417, 488 N.W.2d 182 (1992). Before that, the United States Supreme Court ruled that, to ascertain whether a tax is fairly apportioned, it must be examined for both internal and external consistency. Goldberg v. Sweet, 488 U.S. 252, 261-262, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). Plaintiff does not challenge the external consistency of the tax; therefore, in deciding whether this tax is fairly apportioned, it is examined for internal consistency only. The United States Supreme Court discussed internal consistency in Oklahoma Tax Comm. v. Jefferson Lines, Inc., 514 U.S. 175, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995). It stated: Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear. This test asks nothing about the degree of economic reality reflected by the tax, but simply looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate. A failure of internal consistency shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transaction, since allowing such a tax in one State would place interstate commerce at the mercy of those remaining States that might impose an identical tax. [ Id. at 185, 115 S.Ct. 1331.] Applying these principles to MCL 208.53, I conclude that the tax is internally consistent. Subsection c of the statute specifically deals with construction projects. When a construction project is involved, subsection c, being the more specific provision, applies and subsections a and b do not. Subsection c ascribes the business activity [9] for construction projects to the state where the construction occurs. Therefore, when a construction project is involved, only the state where the construction occurs taxes the business activity, and there is no double taxation. An example is helpful to illustrate why there is no internal-consistency problem. Consider the situation where a company performed services both in Michigan and Ohio for a construction project in Michigan. If Ohio adopted the same tax apportionment formula as Michigan, both states would ascribe all the business activity to the state where the construction occurs. Because the construction occurred in Michigan, only Michigan would tax the services. As a result, only one state would tax the business activity and there would be no internal-consistency problem. [10]