Sales of Bus Parts, Remanufacturing Services were Sourced to Michigan Where the Service Was Performed
In Midwest Bus Corporation v. Department of Treasury, Michigan Court of Appeals, No. 288686, the Michigan Court of Appeals found that sales of bus parts and remanufacturing services were properly sourced to Michigan under the single business tax (SBT) for sales factor apportionment purposes. The issue in the case involved the determination as to whether the taxpayer was in the service business or in the business of selling tangible personal property. Different sourcing rules apply for the SBT.
The taxpayer argued that the contracts provided for the sales of tangible personal property so that the sales should be sourced to the destinations where they were shipped, outside of Michigan.
The Department of Treasury (Treasury) argued that the taxpayer provided the service of installing bus parts and that the service was not merely incidental to the sale of the parts themselves. Thus, according to Treasury, the sales should be sourced to Michigan where the services were performed.
The Single Business Tax Act (SBTA) provides that sales of tangible personal property were in Michigan if the property was shipped to a purchaser in Michigan. Sales, other than sales of tangible personal property, were in Michigan if the business activities were performed in Michigan.
A very interesting and noteworthy aspect of this case is the Court's reliance on a sales tax case which was decided by the Michigan Supreme Court. In Midwest Bus, the court looked at Catalina Marketing Sales Corp. v. Department of Treasury, 470 Mich. 13; 678 N.W.2d 619 (2004) to determine how to source sales that consisted of both tangible personal property and services.
Under the remanufacturing or rehabilitation contracts at issue, the buyer sought, and the contracts required, extensive servicing of the buses, including disassembling, removing, repairing, inspecting, reconditioning, rebuilding, replacing, restoring, painting, servicing, cleaning, testing, and reassembling various components of the buses. In the context of these contracts, the parts were merely a means to accomplish the objective of the contract. The services provided contributed a lot of value; the remanufacturing contracts could not have been performed without the services. Accordingly, the sales were properly sourced to Michigan and included in the sales factor numerator for apportionment purposes.
The Court in this case has provided a methodology to make the determination. The final determination is based on the facts and circumstances. In prior years, Treasury has allowed a proration of the sales where the sale included both the sale of property and the sale of services. Now it is all or none. This change in Treasury policy and the Court's decision may necessitate the review of filed SBT returns and possibly amended returns.