            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                                   FOR PUBLICATION
INC.,                                                             January 2, 2020
                                                                  9:00 a.m.
               Petitioner-Appellee,

v                                                                 No. 338218
                                                                  Tax Tribunal
CITY OF DETROIT,                                                  LC No. 16-000724-TT

               Respondent-Appellant.


                                        ON REMAND

Before: SERVITTO, P.J., and RONAYNE KRAUSE and BOONSTRA, JJ.

BOONSTRA, J.

        In our previous opinion, this Court affirmed the Michigan Tax Tribunal’s (the Tribunal)
order granting petitioner Apex Laboratories International, Inc’s (Apex) motion for summary
disposition and denying respondent City of Detroit’s (Detroit) motion for summary disposition. 1
Detroit applied to our Supreme Court for leave to appeal the May 17, 2018 decision of this
Court. In lieu of granting leave to appeal, the Supreme Court vacated this Court’s previous
opinion and remanded the case back to this Court for “reconsideration in light of S Dakota v
Wayfair, Inc, ___ US ___; 138 S Ct 2080, 2099; 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).”
Apex Laboratories Int’l, Inc v Detroit, 503 Mich 1034; 927 NW2d 243 (2019). We permitted the
parties to file supplemental briefs on remand.2 We now reconsider the instant case as our


1
 Apex Laboratories Int’l, Inc v Detroit, unpublished opinion per curiam of the Michigan Court
of Appeals, issued May 17, 2018 (Docket No. 338218). The facts of the case are provided in that
opinion; for brevity’s sake we will not repeat them here.
2
  See Apex Laboratories Int’l, Inc v Detroit, order of the Michigan Court of Appeals, entered
June 28, 2019 (Docket No. 338218).
Supreme Court has directed, and determine that a further remand to the Tribunal is required. We
therefore vacate the decision of the Tribunal and remand for further proceedings.

                              I. GENERAL LEGAL PRINCIPLES

        The case before us involves the ability of a taxing entity to impose a tax on the person,
property, or transaction it seeks to tax. More specifically, it concerns the ability of a taxing
entity to impose an income tax on a non-resident corporation. Challenges such as Apex’s
implicate both the Due Process and Commerce Clauses of the United States Constitution. See
US Const Am V; Const, art I, § 8, cl 3. To survive a due process challenge, there must be “some
definite link, some minimum connection, between a state and the person, property or transaction
it seeks to tax.” Wayfair, ___ US at ___; quoting Miller Brothers Co v Maryland, 347 US 340,
344-345; 74 S Ct 535; 98 L Ed 744 (1954). A “closely related” parallel to this requirement for
challenges under the Commerce Clause is that there must be a “substantial nexus” between the
taxing entity and the person, property or transaction being taxed. Wayfair, ___ US at ___;
quoting Complete Auto Transit, Inc v Brady, 430 US 274, 279; 97 S Ct 1076; 51 L Ed 2d (1977).

        A tax on a foreign corporation “that withstands a due process challenge will not
necessarily withstand a Commerce Clause challenge.” Gillette Co v Dep’t of Treasury, 198
Mich App 303, 312; 597 NW2d 595 (1993), quoting Quill, 504 US at 306. The Complete Auto
test for whether a tax is permissible under the Commerce Clause provides that the tax is
constitutionally permissible as long as it (1) applies 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 the state provides. Complete Auto, 430 US at 279; see
also Gillette, 198 Mich App at 313-314.

        Before its decision in Quill, the United States Supreme Court had held that a foreign
corporation that lacked a physical presence in the taxing state, but only sold products by mail
order, “lacked the requisite minimum contacts with the State required by both the Due Process
Clause and the Commerce Clause.” Wayfair, ___ US at ___; citing National Bellas Hess, Inc v
Dep’t of Revenue of Illinois, 386 US 753, 754-755; 87 S Ct 1389; 18 L Ed 2d 505 (1967),
overruled by Wayfair, ___ US at ___; 138 S Ct 2099. In other words, before Quill, the “physical
presence rule” applied to both Due Process and Commerce Clauses challenges to taxes levied
against a foreign corporation.

                                           A. QUILL

        In Quill, the United States Supreme Court reexamined the physical presence rule in the
context of a state attempting to require an out-of-state mail-order seller to collect and remit use
tax on goods purchased for use within North Dakota. Quill, 504 US at 301. The Quill Court
described the Due Process Clause and the Commerce Clause as “analytically distinct” despite the
“closely related” language of Complete Auto, noting that the two Clauses “reflect different
constitutional concerns” and that a state may, “consistent with the Due Process Clause, have the
authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the
Commerce Clause.” Id. at 305. The Quill Court therefore elected to treat the application of the
physical presence rule differently under each Clause.


                                                -2-
        With regard to the Due Process Clause, the Quill Court concluded that the “definite link”
and “minimum connection” between a state and a foreign corporation could be satisfied without
the foreign corporation having a physical presence in the state, noting that a foreign corporation
may be subject to a state’s in personam jurisdiction without the requirement of a physical
presence in the state if it “purposefully avails itself of the benefits of an economic market in the
forum State.” Id. at 307, citing Burger King Corp v Rudzewicz, 471 US 462; 105 S Ct 2174; 85
L Ed 2d 528 (1985). The Quill Court therefore concluded that

       [t]he requirements of due process are met irrespective of a corporation's lack of
       physical presence in the taxing State. Thus, to the extent that our decisions have
       indicated that the Due Process Clause requires physical presence in a State for the
       imposition of duty to collect a use tax, we overrule those holdings as superseded
       by developments in the law of due process. [Id. at 308.]

        However, with regard to challenges brought under the Commerce Clause, the Quill Court
opted to retain the physical presence requirement for a finding of a “substantial nexus,” rejecting
North Dakota’s contention that if “a mail-order house that lacks a physical presence in the taxing
State nonetheless satisfies the due process ‘minimum contacts’ test, then that corporation also
meets the Commerce Clause ‘substantial nexus’ test.” Id. at 312. The Quill Court reasoned that,
in contrast to the Due Process Clause’s concern with “fairness for the individual defendant,” the
Commerce Clause and the substantial nexus requirement were informed by “structural concerns
about the effects of state regulation on the national economy.” Id. at 313. The Quill Court found
that the bright-line physical presence rule of Bellas Hess furthered the goal of avoiding undue
burdens on interstate commerce by creating a “discrete realms of commercial activity that is free
from interstate taxation.” Id. at 315. While the Quill Court noted that the Bellas Hess rule
“appears artificial at its edges” it concluded that “[t]his artificiality is more than offset by the
benefits of a clear rule” such as clearly establishing the “boundaries of legitimate state
authority” to impose taxes, encouraging “settle expectations” and “foster[ing] investment by
businesses and individuals. Id. at 315-316. The Quill Court therefore declined to overrule the
physical presence rule of Bellas Hess in the context of challenges to taxation of foreign
corporations brought under the Commerce Clause. Id. at 318.

                                          B. WAYFAIR

       In Wayfair, the United States Supreme Court considered the constitutionality of a South
Dakota Act providing for the collection of sales taxes from certain remote sellers who lacked a
physical presence in South Dakota. Wayfair, ___ US at ___, 138 S Ct at 2092. Justice Kennedy,
writing for the majority and joined by Justices Thomas, Ginsburg, Alito, and Gorsuch,3 reviewed


3
   Although Chief Justice Roberts authored a dissenting opinion joined by Justices Breyer,
Sotomayor, and Kagan, the dissent agreed that “Bellas Hess was wrongly decided, for many of
the reasons given by the Court.” Wayfair, ___ US at ___; 138 S Ct at 2101 (ROBERTS, C.J.,
dissenting). The dissenting Justices would have adhered to the doctrine of stare decisis and left
it to Congress to decide the “important question of current economic policy” implicated by the
case. Id. at ___; 138 S Ct at 2101 (ROBERTS, C.J., dissenting).


                                                -3-
the development of Commerce Clause jurisprudence through Quill, found that the physical
presence rule did not reflect the “economic reality” of 21st century internet sellers, and resulted
in “significant revenue losses to the States.” Id. at ___, 138 S Ct at 2092. The Court in Wayfair
concluded that

       Quill is flawed on its own terms. First, the physical presence rule is not a
       necessary interpretation of the requirement that a state tax must be “applied to an
       activity with a substantial nexus with the taxing State.” Complete Auto, 430 US,
       at 279, 97 S Ct 1076. Second, Quill creates rather than resolves market
       distortions. And third, Quill imposes the sort of arbitrary, formalistic distinction
       that the Court’s modern Commerce Clause precedents disavow. [Id. at ___, 138 S
       Ct at 2092.]

        Unlike in Quill, the Court in Wayfair did not believe that the different standards of the
Due Process and Commerce Clauses compelled a different result when analyzing the physical
presence rule, stating that “[t]he reasons given in Quill for rejecting the physical presence rule
for due process purposes apply as well to the question whether physical presence is a requisite
for an out-of-state seller's liability to remit sales taxes. Physical presence is not necessary to
create a substantial nexus.” Id. at ___, 138 S Ct at 2093. The Court in Wayfair noted that its
Commerce Clause jurisprudence had generally “eschewed formalism” and moved toward a
“case-by-case analysis of purposes and effects,” while the physical presence rule of Quill treated
“economically identical actors differently, and for arbitrary reasons.” Id. at ___, 138 S Ct at
2093. The Court in Wayfair reasoned that the artificial nature of the physical presence rule had
only grown more apparent since Quill was decided in light of the dramatic growth of “modern e-
commerce” that can utilize “targeted advertising,” “instant access to most consumers via any
internet-enabled device,” and “a virtual showroom . . . with greater opportunities for consumer
and seller interaction than might be possible for local stores.” Id. at ___, 138 S Ct at 2095. In
the face of these economic realities, the Wayfair Court concluded that it “should not maintain a
rule that ignores these substantial virtual connections to the State.” Id. at 2095.4

        The Wayfair Court overruled Quill and Bellas Hess. Id. at ___, 138 S Ct at 2099. In the
absence of the physical presence rule, the Court in Wayfair stated that “the first prong of the
Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus
with the taxing State.” Id. at ___; 138 S Ct at 2099, citing Complete Auto, 430 US, at 279. A
substantial nexus is established when a foreign seller ‘avails itself of the substantial privilege of
carrying on business’ in that jurisdiction.” Id., citing Polar Tankers, Inc v City of Valdez, 557
U.S. 1, 11, 129 S Ct 2277, 174 L.Ed.2d 1 (2009).




4
 The Court in Wayfair further concluded that stare decisis did not bar reconsideration of Quill
and Bellas Hess. See Wayfair, ___ US at ___-___; 138 S Ct 2096-2099.


                                                -4-
                                        II. ANALYSIS

        We conclude that, under the circumstances of this case, remand is required for the
Tribunal to address the impact of Wayfair and the overruling of Quill and Bellas Hess, and, if
necessary, to address Apex’s alternative arguments. As we noted in our previous opinion, the
parties and the Tribunal “did not specifically address the application of the Due Process or
Commerce Clauses to Detroit’s assessment of income tax to Apex; nonetheless, the majority of
the parties’ arguments, and the Tribunal’s decision, centered on whether Apex had a “nexus”
with Detroit such that the assessment of income tax against it was constitutionally valid.”5 The
Tribunal, in reaching its decision, repeatedly stated that it based its holding on Apex’s lack of
physical presence in Detroit, stating, for example: “Plainly, there must be some physical
presence established in order for [Apex] to be subjected to tax” and “[Detroit] must show ‘some
minimum connection’ or physical presence . . .” and “[b]oth parties agree that physical presence
is a key component in establishing nexus[.]” The parties and the Tribunal relied on as persuasive
the definition of “physical presence” found in the Michigan Income Tax Act,
MCL 206.621(2)(b); however, the Tribunal’s analysis of Apex’s physical presence was based on
the applicability of the physical presence rule in Quill to the question before it. And the
Tribunal’s ultimate conclusion that Apex lacked a “nexus” with Detroit at least suggests that the
conclusion was based on Commerce Clause analysis.

        We believe that the most prudent course of action is to vacate the Tribunal’s decision and
to remand for further proceedings to allow the parties to focus their arguments concerning
Wayfair, Quill, and the Due Process and Commerce Clauses, and to allow the Tribunal to make a
ruling in the first instance. We are an error-correcting Court, see W.A. Foote Mem Hosp v Mich
Assigned Claims Plan, 321 Mich App 159, 181; 909 NW2d 38 (2017), vacated in part on other
grounds ___ Mich ___ (2019), and our review of Tribunal decisions is constitutionally and
precedentially limited in many respects. See Briggs Tax Svc, LLC v Detroit Public Schools, 485
Mich 69, 75; 780 NW2d 753 (2010). Therefore, while we can determine from the existing
record that the Tribunal’s previous decision was based on “adoption of a wrong principle” in
light of the United States Supreme Court’s repudiation of Quill, Bellas Hess, and the physical
presence rule, see Briggs Tax Svc, 485 Mich at 75, we conclude that we are not compelled by
Wayfair or our Supreme Court’s order to reverse the Tribunal so as hold that Apex does owe the
challenged taxes, nor do we believe that it to be appropriate for us to do so. This is especially
true because the Tribunal declined to consider several alternative arguments from Apex in the
event that the Tribunal were to resolve the constitutional question in Detroit’s favor. Although
the parties did discuss these arguments in their supplemental briefs, we do not believe we are the
appropriate forum for these arguments to be initially decided. See Autodie, LLC v City of Grand
Rapids, 305 Mich App 423, 430-431; 852 NW2d 650 (2014) (declining to reach issues on appeal
that the Tribunal did not address below and noting that this Court had “neither the benefit of a
decision by the . . . Tax Tribunal nor sufficient briefing by the parties.”).




5
    See Apex, unpub op at 4.


                                               -5-
       We therefore vacate the Tribunal’s decision and remand for further proceedings
consistent with this opinion. We do not retain jurisdiction.

                                                    /s/ Mark T. Boonstra
                                                    /s/ Deborah A. Servitto
                                                    /s/ Amy Ronayne Krause




                                         -6-
