Leased Employee Cost Included In Apportionment Payroll Factor, But Not Tax Base
In Lason Systems, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 300267, January 26, 2012, the Michigan Court of Appeals concluded that work performed by leased employees was properly included in the sales factor for apportionment purposes under the single business tax (SBT).
The taxpayer provided record management services, document workflow reports and imaging systems and services, both within and without Michigan. It was these services for which the taxpayer received consideration.
An affiliated company provided non-executive staffing needs. Under the applicable state law, sales included the amount received for consideration for the performance of services and business activity included the performance of services in Michigan, but not the services by an employee for the employer or the services as a director of a corporation.
The court rejected the taxpayer's assertion that the business activities to calculate the sales factor were the work performed by the executives (e.g., marketing, identification of customer needs, customer retention). The applicable cost of performance here was the expenditures the taxpayer incurred to provide the services it promised to customers, not the payroll amount paid to executives. Thus, it was the amounts paid for the leased employees that was the cost of performance that should be included in the sales factor.