The Michigan Court of Appeals held that a $2.2 billion transaction involving the sale of assets related to the Grey Goose vodka product line did not constitute a “sale” for purposes of apportioning the Michigan Single Business Tax (SBT). Sidney Frank Importing Co., Inc. v. Dep’t of Treasury, No. 306742 (Mich. Ct. App. 2012). The taxpayer, Sidney Frank, transferred all of its tangible and intangible assets in the top-shelf vodka, including inventory, to Bacardi, Ltd. The transaction produced a substantial gain, and Sidney Frank included the proceeds in the denominator of its sales factor for 2004 apportionment purposes.
For purposes of the SBT, which was repealed in 2006, “sale” was defined in relevant part as the amounts received from the rental, lease, license or use of property that constitutes business activity. The taxpayer argued that the transfer of the Grey Goose assets was a sale of intangible property (and thus the proceeds should be included in the sales factor denominator) because it was a “use” of intellectual property. The Department argued that the term “sale” includes only transactions where the taxpayer allows a person to use property and does not transfer title to the property.
The court rejected the taxpayer’s interpretation on the ground that it would render the definition of “sale” superfluous because “use” conceivably could capture every business activity. Removing the proceeds of the Grey Goose transaction from the taxpayer’s sales factor denominator caused its Michigan apportionment percentage to increase almost 443%. Nonetheless, the court held that the taxpayer failed to meet the burden of providing clear and cogent evidence of unconstitutional distortion. The taxpayer’s sales of vodka in Michigan, the court found, contributed to the value of the Grey Goose brand. However, the court remanded the case for a determination of whether alternative apportionment is appropriate given the exclusion of the receipts from the sales factor—a substantive legal question that was not before the court as a result of a procedural issue.
The now-repealed SBT was a modified value-added tax that did not operate like a typical corporate net income tax. The SBT’s definition of “sale” excluded transfers of intangible property from the sales factor calculation. In contrast, Article IV of the Multistate Tax Compact defines “sales” broadly to include all gross receipts not subject to allocation, and subsections 16 and 17 provide rules for sourcing sales of both tangible and intangible property. Michigan’s current Corporate Income Tax, enacted in 2011, also defines “sales” broadly to include sales of both tangible and intangible property.