Wednesday, November 24, 2010

The Perils of Responding to Nexus Questionnaires

A company should be very careful in determining whether to respond to the nexus questionnaire and how to respond to the questionnaire.   After all, any response is a statement to a government agency, which must be truthful and will be an admission on the part of the company.  A response that is inaccurate or a response that is not well thought out is worse than not responding at all.  In general, there is no obligation to respond to a nexus questionnaire, so the benefit of responding to a questionnaire may not be significant, yet the potential adverse consequences may be significant.

The problem in responding to a nexus questionnaire is highlighted by a recent case involving Barr Laboratories, in which the Michigan Court of Appeals held that the answers on a nexus questionnaire that indicated that the taxpayer’s employees visited Michigan between two and nine times during the year created a factual issue as to whether or not the company had nexus.   See Barr Laboratories, Inc. v. Department of Treasury (Mich. App. 2010).  The questionnaire indicated that the employees visited Michigan to solicit sales, but all sales were approved in New York.  Apparently that response overstated and mischaracterized Barr Laboratories’ connection to the state.  After an assessment by the Michigan Department of the Treasury of about $500,000, Barr Laboratories commenced a suit to abate the assessment.   In a summary judgment motion, Barr Laboratories submitted an affidavit of its Vice President of Taxation, which contradicted the responses in the questionnaire.  The affidavit stated that the visits to Michigan were only to gather information, and not to solicit sales, and were less frequent than stated in the questionnaire.   But the response to the questionnaire precluded Barr Laboratories from prevailing in the summary judgment motion, and the response was probably the basis for the assessment in the first place.