Michigan alternative apportionment for out-of-state business sale

Jun 11, 2020
Income & franchise tax State & local tax

Recently, the Michigan Court of Appeals ruled in Vectren Infrastructure Services Corp v. Department of Treasury to allow an alternative apportionment methodology when calculating the Michigan sourced income related to the gain from the sale of an out-of-state business. Minnesota Limited Inc. (MLI) was an S corporation, involved in the construction and maintenance of oil and gas pipelines as well as responding to special projects on a contract by contract basis. The company did not have employees or a location in Michigan, but entered into a one-time contract in Michigan that lasted from 2010 through 2011. The stock of MLI was sold in 2011 and the buyer and seller agreed to make an election under section 338(h)(10) to treat the sale as a deemed asset sale. 

MLI filed a 2011 short year return for the portion of the year before the sale and included the sale in its pre-apportioned tax base and in the denominator of the sales factor. This resulted in a sales factor of slightly less than 15%. Under state law, the Michigan tax base is calculated by taking the taxpayer’s pre-apportioned tax base and multiplying it by the sales factor which is calculated by dividing Michigan sales by sales everywhere. Under audit, the Michigan Department of Treasury determined that the sale should not have been included in the sales factor, resulting in a sales factor of slightly less than 70%. The assessed tax, interest and penalties amounted to approximately $3 million.

MLI appealed the decision to the trial court which ruled in favor of the department. MLI then appealed to the Michigan Court of Appeals which ruled in its favor. The court held that the department’s calculations violated both the Commerce Clause and the Due Process Clause of the U.S. Constitution. The court further found that the department’s use of the statutory formula clearly resulted in an unreasonably large apportionment of income to Michigan which led to a grossly distorted result and extraterritorial activity being unconstitutionally taxed. Finally, the court stated that the value of the business and its assets was built up over many years and attributable to activity in many states and that “much of the activity and assets involved in the sale never had any connection to Michigan.” The court did not, however, establish the alternative apportionment method to be used but instead urged the parties to agree on an appropriate method.  


Every year many businesses go through acquisitions. The gains recognized as a result of these acquisitions may have significant state implications. For state purposes, the gain recognized from the sale of the business is often excluded from the apportionment factor. Out-of-state businesses operating in Michigan should be aware that an alternative apportionment methodology may apply. Businesses with Michigan presence should consult with their state and local tax advisors for more information. 

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