Court Opinion

ID: 9915330
Source: CourtListenerOpinion
Date Created: 2024-01-05 06:05:03.162894+00
Date Added: 2024-06-11T13:10:02.732929
License: Public Domain

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                 revision until final publication in the Michigan Appeals Reports.

                           STATE OF MICHIGAN

                            COURT OF APPEALS

APEX LABORATORIES INTERNATIONAL,                                     UNPUBLISHED
INC.,                                                                January 4, 2024

               Petitioner-Appellee,

v                                                                    No. 363984
                                                                     Tax Tribunal
CITY OF DETROIT,                                                     LC No. 16-000724-TT

               Respondent-Appellant.

Before: RIORDAN, P.J., and MURRAY and M. J. KELLY, JJ.

MURRAY, J. (dissenting)

         I respectfully dissent. As discussed below, the record before the Tax Tribunal established
a factual question regarding whether Apex Laboratories had a substantial nexus with Detroit such
that its net profits could be lawfully taxed. I would therefore vacate that decision and remand for
an evidentiary hearing to finally factually resolve this matter.

        In this Court’s first opinion involving this dispute, Apex Laboratories Int’l, Inc v Detroit,
unpublished per curiam opinion of the Court of Appeals, issued May 17, 2018 (Docket No.
338218) (Apex I), p 1-3, vacated by 503 Mich 1034 (2019), we recounted the facts about Apex’s
creation and activities:

       A Detroit-based private equity firm, Huron Capital Partners LLC (Huron), solicited
       investors to acquire partnership interests in a limited partnership, The Huron Fund
       II, LP (the Fund), which in turn was to acquire shares in existing “lower middle-
       market” companies. The general partner of the Fund was an entity known as Huron
       Capital Partners GP II, LLC (the general partner); however, the business operations
       of the general partner and the Fund were carried out by Huron.

               In 2006, Huron recommended that the Fund acquire shares in (as well as
       debt of) Labstat International, ULC (Labstat), a Canadian company, for eventual
       sale. As part of the transaction, Apex was incorporated as a Delaware corporation
       for the sole purpose of holding the shares of Labstat to be acquired by the Fund—
       Apex never possessed or acquired any other assets. Although Apex possessed a

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       Detroit mailing address, it did not have any employees, owned no real or personal
       property, provided no services, and sold no goods, either in Detroit or elsewhere.
       Various members and employees of Huron were appointed to Apex’s board of
       directors. Apex never held a board meeting.

               Apex earned dividend income from its shares of Labstat in 2010, and paid
       those dividends to the limited partners of the Fund. Apex paid 1% Detroit city
       income tax (approximately $70,000) in 2010. In 2012, Apex sold its Labstat shares
       to a Canadian corporation. According to the securities purchase agreement
       governing the sale, the closing was to be conducted in the city of Waterloo, in
       Ontario, Canada. Apex realized significant capital gains from the sale, in the
       amount of approximately $36 million (Canadian). Apex again paid 1% ($319,000
       (U.S.)) in city income tax to Detroit in 2012.

        After a remand from the Michigan Supreme Court to this Court, and then from this Court
to the Tribunal, the Tribunal addressed the parties’ motions for summary disposition, and in doing
so considered the recent United States Supreme Court decision in South Dakota v Wayfair, Inc,
585 US ___; 138 S Ct 2080; 201 L Ed 2d 403 (2018), which overruled Quill Corp v North Dakota
ex rel Heitkamp, 504 US 298; 112 S Ct 1904; 119 L Ed 2d 91 (1992), and Nat’l Bellas Hess, Inc
v Dep’t of Revenue of Illinois, 386 US 753; 87 S Ct 1389; 18 L Ed 2d 505 (1967). The Tax
Tribunal granted Apex’s motion for summary disposition and denied Detroit’s motion for
summary disposition, holding that it would violate the Commerce Clause for Detroit to tax1 Apex’s
net profits.2

         Specifically, the Tax Tribunal distinguished Wayfair (which it was not certain could even
be applied retroactively) because Apex, unlike the companies in Wayfair, did not have continuous
activities and exposure to the taxing locale, and ruled that Apex’s activities were, by design,
minimal. The tribunal found that Apex lacked nexus with Detroit under the Commerce Clause
because it was neither physically nor virtually present in Detroit, and thus Detroit could not impose
the taxes.3

1
  As the majority notes, Detroit imposed a 2% income tax on the “taxable net profits” of Apex on
the basis that Apex earned the net profits “as a result of work done, services rendered and other
business activities conducted in the city.” Detroit City Code § 44-2-8(a)(3); Detroit City Code
§ 44-2-9(c). “Doing business” is defined as “the conduct of any activity with the object of gain or
benefit.” Detroit City Code § 44-2-3.
2
  “A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint.” Maiden v
Rozwood, 461 Mich 109, 120; 597 NW2d 817 (1999). “In evaluating such a motion, a court
considers the entire record in the light most favorable to the party opposing the motion, including
affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties.”
Corley v Detroit Bd of Ed, 470 Mich 274, 278; 681 NW2d 342 (2004).
3
 Detroit moved for reconsideration, and although the tribunal partially agreed with Detroit, it again
granted summary disposition in favor of Apex because Apex’s physical presence in the city was
de minimis and did not meet the “substantial nexus” requirement of Wayfair.

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       This conclusion is similar to that made by the Apex I panel, which held:

       The Tribunal rejected Detroit’s argument that, although Apex had no employees,
       the activities of Apex’s officers and directors were conducted on Apex’s behalf for
       its benefit, finding that the evidence showed that Apex’s officers and directors acted
       on behalf of Huron or Labstat, not Apex. That conclusion is supported by the
       substantial, competent, and material evidence. Briggs Tax Svc [, LLC v Detroit Pub
       Sch], 485 Mich [69,] 75 [; 780 NW2d 753 (2010)]. Various officers and directors
       of Apex, through deposition testimony and affidavits, attested that they were
       employed by Huron and worked for the benefit of Huron. Essentially, these officers
       and directors worked to increase the value of Labstat and negotiate the sale of
       Labstat shares for the benefit of Huron; these activities were not conducted “on
       behalf” of Apex any more than a business transaction is conducted “on behalf” of
       the bank account into which the proceeds will be deposited. Moreover, the Tribunal
       noted that to the extent Apex employed professional consultants, this fell under the
       exclusion found in MCL 206.621(2)(b). We agree, as the record shows that the use
       of professional consultants, such as law firms and marketing consultants, was done
       to facilitate the sale of a Canadian company to a Canadian purchaser in order to
       benefit the Fund's investors, not to establish or maintain a market in Detroit.
       Additionally, the Tribunal noted the uncontested fact that Apex was not engaged in
       the sale of any goods or services in Detroit (or indeed, anywhere), and declined to
       find that a physical presence or substantial nexus existed between Apex and Detroit
       based on the use of a Detroit mailing address. [Apex I, unpub op at 5-6.] 4

        My disagreement with the majority opinion comes down to its conclusion that as a matter
of law there is a substantial nexus5 between Apex’s net profit and Detroit. Despite my reluctance
to articulate a position that would further prolong what has otherwise been an extraordinarily long
case, any desire for efficiencies are overcome by the need to factually resolve who was doing what

4
  The majority is correct in that the Apex I panel seems to have applied the incorrect standard of
review to the tribunal’s summary disposition ruling.
5
  An important issue raised by Apex is whether Wayfair can be applied retroactively. Although
not cited by Apex, at least one court has recently held that it cannot be, US Auto Parts Network,
Inc v Comm’r of Revenue, 491 Mass 122, 138; 199 NE3d 840 (2022), and as noted, the Tribunal
determined it likely should not be retroactively applied. At oral argument before this Court,
however, the parties seemed to concede that it would not matter, because if Wayfair was not
applied retroactively, the “physical presence” test from Quill would apply and cover Apex. I am
not as certain. Many courts across the nation held prior to Wayfair that the Quill test was limited
to sales and use taxes, and not to income taxes. See, e.g., Bridges v Geoffrey, Inc, 984 So2d 115,
128 ; 2007-1063 (La App 1 Cir 2/8/08); Tax Comm’r v MBNA America Bank, NA, 220 W VA 163,
169; 640 SE2d 226 (2006); Geoffrey, Inc v Comm’r of Revenue, 453 Mass 17, 26-27; 899 NE2d
87 (2009). These courts resolved the income tax/Commerce Clause issue by utilizing the
“substantial nexus” test without regard to physical location. Thus, even if Wayfair was not
retroactively applied, the same substantial nexus test would apply.

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on behalf of whom during the relevant time. To do so, the Tribunal should hold an evidentiary
hearing.

        A nexus is substantial with the taxing state “when the taxpayer . . . avails itself of the
substantial privilege of carrying on business in that jurisdiction.” Wayfair, 138 S Ct at 2099
(quotation marks and citation omitted). Here, in light of the controlling law and myriad factual
questions, it is impossible to determine on appeal whether Apex had a substantial nexus with
Detroit. With respect to the law, no one disputes that corporations are treated as separate entities.
See Wells v Firestone Tire & Rubber Co, 421 Mich 641, 650; 364 NW2d 670 (1984) (“We
recognize the general principle that in Michigan separate entities will be respected.”); Rymal v
Baergen, 262 Mich App 274, 293; 686 NW2d 241 (2004) (“The law treats a corporation as an
entirely separate entity from its shareholders, even where one individual owns all the corporation’s
stock.”). So, Apex and Huron Capital are valid, separate entities. One employs people and owns
property in Detroit (Huron), while the other does not (Apex). It is in fact undisputed that Apex
owns no property, employs no one, makes no sales of goods or services, produces no materials,
and has the sole purpose of holding the stock shares from the original purchase of Labstat.
However, corporations act only through their officers and employees, Altobelli v Hartmann, 499
Mich 284, 296-297; 884 NW2d 537 (2016), and Apex and Huron shared common officers—Brian
Demkowicz, Michael Beauregard, Christopher Sheeren, and Nicholas Barker. Each of them were
active officers or employees of Huron, while also serving as directors of Apex.

        The majority concludes that the activities of Demkowicz, Beauregard, Sheeren and Barker,
relative to the sale of Labstat, were done in their roles as directors or officers of Apex. The majority
cites facts purporting to show that the Apex and Huron officers did all their work out of Huron’s
Detroit offices, but I fail to see the definitive proof that they were working on behalf of Apex when
doing so, such that summary disposition on this issue was appropriate. After all, each was also
employed by Huron, which was active in not only overseeing Labstat’s initial purchase and
subsequent growth, but was also hired by Apex to manage much of the details in closing the Labstat
sale in 2012.6 So perhaps, if seeing these gentlemen testify in person, their testimony that they
were acting on behalf of Huron when conducting the transactions would be believed by the
tribunal. Or not. But with all the moving parts between Apex, Huron, and Labstat, it is difficult
to determine as a matter of law that Apex had a substantial nexus to Detroit through these
individuals. And again, no dispute exists but that Apex was validly created to hold Labstat stock
shares while Huron oversaw the “build-up” of Labstat and ultimately assisted in its sale. It was a
Delaware corporation with no ownership of any real or personal property in Detroit, no employees
in Detroit, no sales or services offered in Detroit, and when the sale was completed, the money
was wired to an account outside of Detroit.

6
  Contrary to what Apex’s counsel stated at oral argument, the contract with Huron was between
Apex and Huron, not Labstat and Huron. Demkowicz signed the contract on behalf of both
entities, again making the record unclear as to who was doing what for whom. And though the
contract exhibits some business activity on the part of Apex, it does not reflect any business activity
related to income, just an expenditure.

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       For these reasons, I would hold that there was a genuine issue of material fact whether
Apex established a nexus with Detroit by “avail[ing] itself of the substantial privilege of carrying
on business in [Detroit].” Wayfair, 138 S Ct at 2099 (quotation marks and citation omitted).

                                                             /s/ Christopher M. Murray

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