The Michigan Supreme Court recently reversed an odd Michigan Court of Appeals decision, which held that an out-of-state securities broker-dealer had nexus sufficient to subject it to the Single Business Tax (SBT) by virtue of the activities of in-state, independent registered representatives who contracted with the broker-dealer to facilitate trades for the representatives’ customers on out-of-state security exchanges. Vestax Sec. Corp. v. Dep’t of Treasury, 2011 Mich. LEXIS 945 (June 1, 2011), rev’g, 2010 Mich. App. LEXIS 2093 (Oct. 28, 2010).
Vestax Securities Corporation, an out-of-state securities broker-dealer company, had contractual relationships with independent registered representatives who used Vestax to facilitate securities transactions. These independent representatives had in-state customers who would request a securities trade from the representative, and the representative, in turn, would rely on Vestax to execute the transaction on a national securities exchange outside of Michigan.
The Michigan Court of Appeals ruled that the in-state physical presence of the representatives in Michigan was on behalf of Vestax and created in-state business for Vestax, resulting in substantial nexus sufficient under the Commerce Clause for SBT purposes. The appellate court noted at the outset that constitutional “substantial nexus” is met when a taxpayer’s in-state physical presence is more than a “slightest presence,” manifested by the presence of “property or conduct of economic activities in the taxing State performed by the vendor’s personnel or on its behalf.” The court reasoned that the representatives conducted business in Michigan on behalf of the taxpayer as its agents because they were required to use Vestax in order to process their customers’ securities transactions.
The Michigan Supreme Court reversed the appellate court’s judgment on the grounds that the evidentiary record did not support the determination that the representatives were Vestax’s agents or that there was a substantial nexus between Michigan and Vestax’s business activity.