This is the second in a series of articles written for MICPA members examining the far-reaching impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.

The United States Supreme Court in South Dakota v Wayfair abandoned Quill[i]’s bright-line physical presence nexus standard but its decision may not have eliminated “bright-line” nexus standards completely. Because Wayfair featured South Dakota’s legislative “bright-line” jurisdiction standard, one of the many questions that arise after Wayfair[ii] is how taxpayers should treat state legislation establishing bright-line standards for sales tax jurisdiction.

By statute, South Dakota established sales tax jurisdiction for businesses that, over an annual period, delivered more than $100,000 dollars of goods or services or, without regard to the level of sales, engaged in 200 or more separate transactions with South Dakota residents. The Supreme Court held that South Dakota’s legislative standard satisfied the “substantial nexus” requirement of Complete Auto.[iii]

But the Wayfair facts set a new test – sales activity that annually exceeds $100,000 in sales or consists of 200 separate transactions within a state likely establishes “substantial nexus” regardless of whether the state has a “bright-line” legislative standard.

The Supreme Court generally approved of the state’s authority to establish legislative “bright-line” jurisdictional standards provided that the state regulations do not discriminate against or impose excessive burdens on interstate commerce.

Like South Dakota, many states have enacted statutes to legislatively circumvent Quill’s physical presence standard. Some of these statutes (economic nexus statutes) look only to whether a business had a certain level of sales or economic activity in the state. Other statutes look to whether the out-of-state businesses have certain contractual or corporate relationships with a business in the state (for simplicity, we will refer to these related businesses as “affiliates”, although the definitions for affiliate relationships vary among states), and attribute the physical presence of the in-state business affiliate to the out-of-state business. Whether these other statutes satisfy the substantial nexus requirement has yet to be determined.

Michigan Statutes Michigan is one of the states that has enacted statutes to circumvent Quill’s physical presence standard. The Michigan legislature adopted an affiliate nexus standard for both sales tax and use tax. MCL § 205.52b; MCL § 205.95a. This legislation expands the concept of “the business of making sales at retail in the state” (i.e., businesses liable for Michigan sales and use tax) to include the activity of certain sales agents, representatives and “affiliated persons”[iv] that have a physical presence in Michigan and assist the out-of-state seller in making sales to Michigan customers.

The Michigan statutes presume that the out-of-state seller is doing business in Michigan if its Michigan affiliates engage in certain sales-related activity. For example, if the Michigan affiliates are allowed to use trademarks or trade names that are similar to the seller’s marks, the out-of-state seller is deemed to have nexus with Michigan and be subject to sales and use taxes on its Michigan sales. Delivery, storage, shared warehousing and handling of returns for the remote seller also result in a presumption that the seller has, through its affiliates, met the state’s nexus threshold.

The statute also contains a catch-all for “any other activities [by the affiliates] in this state that are significantly associated with the seller’s ability to establish and maintain the seller’s market in this state.”

This presumption can be rebutted largely by proving the opposite of the catch-all affiliated nexus standard. That is, if the activities of affiliates are not “significantly associated with the seller’s ability to establish and maintain the seller’s market in this state” there will not be a presumption that out-of-state seller was doing business in Michigan.

The Michigan statutes include a second alternative standard that presumes the out-of-state seller is engaged in the business of sales in Michigan if an in-state business, for commission, whether by website, conference, telephone calls or otherwise refers potential customers to the seller and economic thresholds have been met. For the immediately preceding 12 months, the affiliate’s own sales activity must have resulted in at least $10,000 in sales for the seller, and the seller must also have made sales into the state the exceeds $50,000. The statues provide a single safe harbor if the only in-state activity was advertising.

The second presumption can be rebutted if the seller has both a written agreement with the in-state affiliate that prohibits sale activity, and written statements from the in-state affiliate that no solicitation activity occurred. The statutes do not discuss whether the rebuttal is a per se rule, supply the evidence the presumption is rebutted, or discuss whether it is a discretionary rule. The Michigan Department of Treasury must be satisfied that the documents submitted are not evidence.

In many respects, the Michigan standard appears to be broader than the South Dakota statute in Wayfair. While Wayfair concerned the economic activity of a single taxpayer, the Michigan standard is not entity-based. Rather, it attributes activity of other businesses to the out-of-state seller.

This attribution may cover a wide range of facts. For example, having a wholly owned subsidiary deliver goods or contracting with a common carrier to deliver all of its goods could fall within the statutes. In the first affiliate standard, Michigan does not take time or quantity of goods into account. The alternate affiliate nexus standard, however, is significantly lower than the facts in Wayfair. The Department of Treasury issued Revenue Administrative Bulletin 2015-22that provides additional examples and discussion.

As a result of the Wayfair decision, taxpayers will confront an array of legal analysis, tax and business planning that simply has not existed in the last thirty years. After exploring whether a seller has met the facts of Wayfair,the seller will need to re-visit potentially lower bright-line standards in other state statutes. In Michigan, out-of-state businesses contracting with Michigan businesses, third-party vendors, solicitation companies and warehouse/distribution centers will need to conduct such a re-examination. The answers may very well lead to new planning and business restructuring.