JW Hobbs Corp. v. REV. DIV., TREASURY DEP'T

Judge O’CONNELL,

in his Shakespearean dissent, attacks the actions of defendant in issuing conflicting interpretations of Michigan’s SBT. While we share the sentiments of our colleague as stated in his eloquent soliloquy, we are unable to ignore the holding of Rayovac or to torch its application by distinguishing it away on the basis of the size of plaintiffs sales force. To ignore the application of Rayovac to this case, notwithstanding our shared disgust of the “bait and switch” tactics of defendant, would be contrary to binding precedent.5

*48B. NEXUS STANDARD

Plaintiff argues that Magnetek is not applicable and that defendant’s nexus standard requiring a resident employee was the only standard for statutory business activity jurisdiction in Michigan after Gillette. These arguments are unpersuasive in light of this Court’s recent application of Magnetek in Rayovac, which is very similar to the present case. In Rayovac, defendant Department of Treasury appealed the trial court’s order granting summary disposition for plaintiff Rayovac Corporation, holding that Rayovac was not liable for payment of the SBT for the period July 1,1989, through June 30, 1993. This Court reversed.

The Rayovac trial court ruled that the Commerce Clause, US Const, art I, § 8, cl 3, prohibited the defendant from collecting the SBT from the plaintiff, a Wisconsin seller of batteries in Michigan, because the plaintiffs Michigan sales staff was too small to create a “substantial nexus” between the corporation and Michigan. The trial court concluded that the presence in Michigan of three salespersons and one midwestern manager, who solicited but did not accept or approve orders, did not provide the required substantial nexus. Rayovac, supra at 442-443. This Court disagreed with the trial court and relied on the analysis in Magnetek to reverse, stating:

We find this Court’s analysis in Magnetek, albeit of a different fact situation, to be instructive. The Magnetek Court reasoned that Quill should be interpreted to preserve the bright-line rule by not giving any consideration to the substantiality of the physical presence of the sales force and, instead, finding that the presence of any sales force at all provides “more than a ‘slightest presence’ in [a] state[ ],” so that the substantial nexus will be found. Magnetek, supra at 410-412, citing In re Orvis Co, Inc v Tax Appeals Tribunal of the State of New York, 86 NY 2d 165, 176-178; *49654 NE2d 954 (1995). Any other approach would negate the bright-line rule and invite chaos from a lack of certainty regarding precisely what size or character of a sales force would meet the standard. Magnetek, supra at 410, citing Orvis, supra at 177. [Id. at 445-446.]

Rayovac’s arguments regarding the application of Magnetek were similar to plaintiffs arguments here: both argue that Magnetek does not apply because it addressed whether a Michigan company is immune from the SBT for that portion of its sales outside the state, not whether an out-of-state company is subject to the SBT. The Rayovac Court rejected this reasoning and concluded:

The nature of Magnetek’s contacts with other states was important because its sales to customers in states where Magnetek “is not taxable” are considered to be Michigan sales for the purpose of the SBT. MCL 208.52(c); Magnetek, supra at 404. To avoid the SBT, Magnetek would have to be subject to the other state’s taxing jurisdiction “regardless of whether, in fact, the state does or does not” impose a tax. MCL 208.42; Magnetek, supra at 404. Accordingly, the constitutional question presented in Magnetek is identical to the constitutional question here: whether an out-of-state seller has sufficient contacts with another state to satisfy the “substantial nexus” requirement of the Commerce Clause permitting the other state to tax the out-of-state seller. Moreover, we find the reasoning of Magnetek persuasive without regard to whether it is deemed to control this case pursuant to MCR 7.215(C)(2). [Id. at 446.]

As in Rayovac, we extend Magnetek’s test to this case so that “the presence of any sales force at all provides more ‘than a “slightest presence” in [a] state[ ],’ so that the substantial nexus will be found.” Rayovac, supra at 445 (citations omitted). We do not determine whether minimum contacts have been established, but remand *50the issue for the trial court to determine using the appropriate nexus standard.

C. COMMERCE CLAUSE VIOLATION

This issue was addressed by this Court’s decision in Rayovac. The Rayovac Court specifically rejected the plaintiffs contention that application of a newly expanded SBT statutory jurisdiction standard discriminated against interstate commerce, stating:

We agree with the trial court that if the SBT imposed here survives scrutiny under the Commerce Clause it will resolve the issues presented in this case. “A tax will sustain a Commerce Clause challenge when it: (1) is applied to an activity with a substantial nexus with 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.” Gillette, supra at 313, citing Complete Auto Transit, Inc v Brady, 430 US 274, 279; 97 S Ct 1076; 51 L Ed 2d 326 (1977), and Caterpillar, Inc v Dep’t of Treasury, 440 Mich 400, 415; 488 NW2d 182 (1992).
In Quill, the United States Supreme Court reaffirmed its holding in Nat’l Bellas Hess, Inc v Illinois Dep’t of Revenue, 386 US 753, 758; 87 S Ct 1389; 18 L Ed 2d 505 (1967), that an out-of-state seller whose only contacts within the taxing state were by mail or other common carrier lacked the “substantial nexus” required by the Commerce Clause. Quill, supra at 312. The Court noted that the Commerce Clause draws a sharp distinction between sellers who have a physical presence in the taxing state and those who do not. Id. at 311-312, citing Nat’l Geographic Society v California Bd of Equalization, 430 US 551, 559; 97 S Ct 1386; 51 L Ed 2d 631 (1977). The bright-line physical presence requirement of Bellas Hess furthers the purpose of the Commerce Clause by prohibiting undue burdens on interstate commerce and creating a safe harbor for vendors who only market their products to customers in the taxing state by common carrier or the United States mail. Quill, supra at 314-315. Thus, whether *51a state may impose a tax on an out-of-state seller “may turn on the presence in the taxing State of a small sales force, plant, or office.” Id. at 315; see, also, Gillette, supra at 313. [Id. at 444.]

The difference between this case and Rayovac is that the trial court in Rayovac held that the Commerce Clause prohibited the imposition of the SBT on the plaintiff. In the present case, the trial court found that plaintiffs challenge to the application of the SBT as a violation of the Commerce Clause failed. The trial court’s opinion makes clear that its grant of summary-disposition was based on its determination that defendant could not retroactively apply the SBT due to the legally binding nature of the RABs. The trial court did not perform the nexus test that is required byMagnetek and Rayovac. Thus, the trial court’s partial grant of summary disposition is reversed, and on remand the question remains whether plaintiffs part-time independent contractor-salesman and a handful of yearly visits by other employees is enough contact for the application of the SBT using the correct nexus test.

D. TAX PENALTY

Plaintiff was assessed penalties only for the tax years 1998 through 2000, which were upheld by the trial court. The trial court ordered that “[p]laintiff is entitled to the return of the moneys paid for the 1989-1997 tax years with any interest or penalty assessed[.]” Plaintiff, in its brief on cross-appeal, argues that it should not have to pay interest6 on its entire assessment. Defendant, in its brief on appeal, does not raise the issue *52whether interest was properly assessed for 1989 through 1997, nor does defendant address this issue in its brief as cross-appellee. Thus, the interest issue is not properly before this Court. To have standing to bring an appeal, a party must be aggrieved by the lower court’s decision. Rymal v Baergen, 262 Mich App 274, 318; 686 NW2d 241 (2004).

The issue of the penalties assessed only for tax years 1998 through 2000 is properly before this Court. MCL 205.24 provides authority for the imposition of a penalty and states in relevant part:

(1) If a taxpayer fails or refuses to file a return or pay a tax administered under this act within the time specified, the department, as soon as possible, shall assess the tax against the taxpayer and notify the taxpayer of the amount of the tax. A liability for a tax administered under this act is subject to the interest and penalties prescribed in subsections (2) to (5).
(2) Except as provided in subsections (3), (6), and (7), if a taxpayer fails or refuses to file a return or pay a tax within the time specified for notices of intent to assess issued on or before February 28, 2003, a penalty of $10.00 or 5% of the tax, whichever is greater, shall be added if the failure is for not more than 1 month, with an additional 5% penalty for each additional month or fraction of a month during which the failure continues or the tax and penalty is not paid, to a maximum of 50%. Except as provided in subsections (3), (6), and (7), if a taxpayer fails or refuses to file a return or pay a tax within the time specified for notices of intent to assess issued after February 28, 2003, a penalty of 5% of the tax shall be added if the failure is for not more than 2 months, with an additional 5% penalty for each additional month or fraction of a month during which the failure continues or the tax and penalty is not paid, to a maximum of 25%. In addition to the penalty,' interest at the rate provided in section 23 for deficiencies in tax payments shall be added on the tax from the time the tax was due, until paid. After June 30, 1994, the penalty *53prescribed by this subsection shall not be imposed until the department submits for public hearing pursuant to the administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to 24.328, a rule defining what constitutes reasonable cause for waiver of the penalty under subsection (4), which definition shall include illustrative examples.
(4) If a return is filed or remittance is paid after the time specified and it is shown to the satisfaction of the department that the failure was due to reasonable cause and not to willful neglect, the state treasurer or an authorized representative of the state treasurer shall waive the penalty prescribed by subsection (2). [Emphasis added.]

The administrative rule, 1999 AC, R 205.1013 defines reasonable cause for failure to pay, stating in relevant part:

(2) If a return is filed or a remittance is paid after the time specified, the taxpayer may request that the commissioner of revenue waive and the commissioner shall waive the penalty authorized by section 24(4) of the act if the taxpayer establishes that the failure to file the return or to pay the tax was due to reasonable cause and not to willful neglect.
(3) A waiver of penalty request shall be in writing and shall state the reasons alleged to constitute reasonable cause and the absence of willful neglect.
(4) The taxpayer bears the burden of affirmatively establishing, by clear and convincing evidence, that the failure to file or failure to pay was due to reasonable cause.
(5) A taxpayer is required to exercise ordinary business care and prudence in complying with filing and payment requirements.

Here, plaintiff unpersuasively argues that defendant had changed its nexus standard for a third time and plaintiff did not know if it could rely on this change. *54Defendant changed its interpretation of the nexus standard on the basis of rulings from this Court. Plaintiff was undoubtedly annoyed and frustrated by defendant’s actions, but deliberately choosing to ignore the new standard is not “reasonable cause.” Plaintiff was aware of RAB 1998-1 and knew that it required plaintiff to file returns and pay the SBT. Plaintiff argues that the Tax Tribunal has held that the “reasonable cause” standard has been satisfied when the position advocated by the taxpayer represents “an honest difference of opinion” relative to the effect or application of law. Here, defendant’s opinion was supported by Michigan case law and statute. Plaintiffs argument that it did not know if it could rely on RAB 1998-1 because the nexus standard had changed over the course of several years does not present an honest difference of opinion. Therefore, this Court affirms the trial court’s ruling on penalties.

Reversed in part and affirmed in part and remanded for proceedings consistent with this opinion. We do not retain jurisdiction.

BORRELLO, J., concurred.

In response to Judge O’Connell’s dissent and his villainous reference from Hamlet, we note that Shakespeare also wrote, “Though this be madness, yet there is method in’t.” Shakespeare, Hamlet, act 2, sc 2.

Plaintiff states that the interest assessed amounts to “over half a million” dollars. It is not certain how plaintiff calculated this number, as the case documents only show that plaintiff was assessed $115,491.37 in interest, which it paid under protest.