Business Is Not Unitary and Currency Exchange Profits Properly Included in Sales Factor
In E I Du Pont De Nemours & Company v. Department of Treasury, Michigan Court of Appeals, No. 304758, August 7, 2012, the Court of Appeals affirmed a lower court's determination that a taxpayer and its subsidiary were not unitary and that certain profits were properly included in the sales factor under the former Michigan single business tax.
In 2001, the taxpayer sold its ownership interest in a subsidiary to an outside company; this sale resulted in a capital gain of about $2 billion.
Business Not Unitary
The taxpayer argued that the capital gains should not be included in the SBT tax base because the entities were not unitary. So long as the business activity is unitary, the state may tax the apportioned share of a taxpayer's multistate business. If the business activity involves the sale of an asset, including a subsidiary, the sale is considered unitary with the taxpayer's business if the two entities share functional integration, centralized management, and economies of scale.
Examining the evidence, the court agreed with the taxpayer and determined that the taxpayer and the subsidiary were not engaged in a unitary business. The two entities did not engage in the same line of business. All transactions were negotiated and performed at arm's-length. In addition, the initial flow of capital was for an investment (and not operational) function. The entities did not benefit from collective bargaining with suppliers. In sum, the management oversight was akin to that of an investor over a valuable asset.
Currency Exchange Profits
The taxpayer argued that the profits on currency exchanges from foreign exchange contracts should be included in the sales factor calculation. The SBT statute broadly defined "sales" to include the use of tangible and intangible property that constituted business activity. "Business activity," in turn, was similarly broadly defined to include activities performed with the object of gain or benefit to the taxpayer. As the contracts here involved exchanging U.S. dollars for foreign currency at fixed rates, the taxpayer received substantial revenue. Reasoning that the substantial revenue clearly benefited the taxpayer, the court agreed with the taxpayer and held that the profits on currency exchanges should be included in the sales factor calculation.