Newsletter - Winter 2005
Michigan Court of Appeals Case Supports Dealer Employee Lease Companies
by Edward J. Castellani
The Michigan Court of Appeals issued a published Opinion in a case known as Herald Wholesale, Inc. vs. Department of Treasury regarding the question of whether an officer of the corporation’s salary could be paid exclusively through the employee lease company, or whether the salary had to be paid by the client operating company. The Court ruled that if the corporate officers were solely compensated by the employee lease company for their day-to-day management responsibilities, then their salaries prior to 2002, do not have to be included in the client entity’s SBT base. The Single Business Tax Act had been amended to clarify that the officers’ compensation could be included in the lease company, not the dealership, for years after December 31, 2003. The question before the Court of Appeals in the Herald Wholesale, Inc. case is whether the salary of a corporate officer is included in the tax base of the employee lease company, and not in the tax base of the dealership, for tax years that began prior to December 31, 2003.
The Court of Appeals ruled that the officers of a corporation can be considered employees of the employee lease company and not the dealership for years that began prior to December 31, 2003.
Dealers who have set up employee leasing companies were often times confused about whether the compensation of officers of the dealership should be included in the employee lease company tax base or the dealership tax base. The recent published Opinion of the Court of Appeals clarifies that if the corporate officers were compensated for their day-to-day management responsibilities and not independently compensated as officers, then their salaries are included in the employee lease company tax base and not the dealership tax base.
Mr. Castellani is a member of our Business Department. He practices in the Lansing office and may be contacted at 517.377.0845 or toll free at 800.748.0436. You can also contact him via e-mail at ecastellani@fraserlawfirm.com.