When is a License Fee Really an Illegal Tax?

Faced with tighter budgets, Michigan cities and townships are looking for additional ways to raise revenue.  Due to the Headlee Amendment, property tax increases are severely restricted.   However, a municipality may establish or increase a fee without violating the Headlee Amendment.  The question is:  Where is the dividing line between a permissible fee and an illegal tax increase?

A tax is solely to raise revenue.   A permissible fee (typically a permit or license fee) has three characteristics: (a) the fee serves a regulatory purpose; (b) the amount of the fee is proportionate to the necessary costs for the municipality to provide that service, and (c) payment of the fee is voluntary.

Several years ago, we were involved in litigation that resulted in the Wayne County Circuit Court declaring a license fee imposed by Sumpter Township illegal.  The Court decided that the fee for a sand excavation license was really being used by the Township to discourage additional landfills from being located in the Township, and that the amount of the fee was excessive in relationship to the Township’s costs to regulate and inspect sand excavation sites.  The Ordinance was set aside.

On January 21, 2010, the Michigan Court of Appeals issued its decision in Wolf v City of Detroit.    The plaintiff claimed that a new Solid Waste Inspection Fee adopted by the City of Detroit was really just a disguised tax.  The inspection fee was imposed on properties that did not use the City’s Department of Public Works for solid waste pick-up.  The Court of Appeals analyzed the three criteria for a fee and decided that the fee was permissible.   A copy of the Court of Appeals’ decision is attached.

Whenever a municipality imposes a new fee, or dramatically increases the amount of a fee, then one should analyze whether the three criteria for a fee are met.  If not, the fee may be challenged as a hidden tax.

Click here to download a PDF copy of the Court of Appeals Decision.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.

Michigan Smoking Ban – Summary of House Bill No. 4377

The Michigan Legislature has passed a bill which bans smoking in almost all indoor public venues. This ban has been in the works for a long time; many other States have already enacted similar laws. Governor Granholm is expected to sign the bill into law, and it will go into effect on May 1, 2010.

“Smoking” is defined as “the burning of a lighted cigar, cigarette, piper or any matter or substance that contains a tobacco product.” There is a ban on smoking in “public places.” A “public place” includes areas owned and operated by the government; areas not owned or operated by the government, but used by the general public for certain specified purposes; and (unless otherwise exempt) a place of employment. The third one covers almost all of the businesses in the State. A “place of employment” is an enclosed indoor area that contains a work area for one or more people.

Business owners are expected to take steps to reasonably prevent customers, employees, or other people from smoking on their premises. Business owners are expected to do ALL of the following:

1. Clearly and conspicuously post no smoking signs (or the international no smoking symbol) at the entryway and in all buildings where smoking is prohibited.
2. Remove all ashtrays or other smoking paraphernalia from any place smoking is prohibited under the Act.
3. Inform individuals smoking in violation of the Act that they are in violation of state law and are subject to penalties.
4. Refuse to serve an individual smoking in violation of the Act.
5. Ask an individual smoking in violation of the Act to refrain from smoking, and ask them to leave if they refuse to stop.

If owners do all of the preceding things, they have an affirmative defense against any prosecution against them for a violation of the Act. This means that the business owner can be exempt from penalties under the Act, but only if all of the preceding conditions are met.

The Act includes a few exceptions. Casinos in existence before the Act can allow smoking in gaming areas only. Casinos built later cannot allow smoking. (The term casino in the bill does not include a casino operated under the Indian Gaming Regulatory Act. Thus, the smoking ban does not apply to these casinos.) An existing separate specialty tobacco shop may allow smoking. Cigar bars may also allow smoking (but only the smoking of cigars, not other tobacco products).  The ban also does not apply to motor vehicles.

Overall, business owners should be proactive in preventing smoking in their place of business by following the five requirements described above.

Download a copy of the Bill in PDF format by clicking here.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.

Business Purchasers: Beware of Seller’s Michigan Unemployment Tax Experience Account

If you are purchasing a Michigan business, then you need to be aware of Section 22 of the Michigan Employment Securing Act.  If you are not aware of how Section 22 can affect you transaction, please read the article “SUCCESSION TO MICHIGAN UNEMPLOYMENT TAX EXPERIENCE ACCOUNT OF PURCHASED MICHIGAN BUSINESS” by Steve Dunn.

Click here to download a PDF.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm.

Michigan Freedom of Information Act

Let’s say that your business is interested in purchasing a particular property, but you know that there have been some disputes in the past regarding this property.  These disputes have been between the city (and its various departments) and prior owners and neighbors.  How can you learn the details of these disputes?  One easy way is by requesting information from the city itself under the Michigan Freedom of Information Act, or “FOIA.”

FOIA could also be helpful if your business was negotiating with a city to enter into a contract.  You could use FOIA to obtain copies of prior contracts that the city has entered into with other businesses.

If your business was involved in a dispute with a business that is required to be licensed by the state (such as a medical practice or insurance company), you could submit a FOIA request to the state regarding their licensing history and any disciplinary proceedings.

The Michigan Freedom of Information Act, MCL 15.231 et seq., requires all “public bodies” in the State of Michigan to disclose certain public records upon request.  The entire Act is available at http://tinyurl.com/l22wnu.

“Public records” include, but are not limited to, the following:

• open meeting minutes;
• voting records;
• staff manuals;
• written statements interpreting laws, rules, and policies;
• reports

The records may be in any format – hand-written, typed, photocopies, photographs, sound recordings, maps, discs, or any other means of recording information.

There are also several types of records that are exempt from FOIA disclosure.  These include, among other types:

• records disclosing personal information about an individual;
• investigation records compiled for law enforcement proceedings (with limitations);
• any records that would compromise security;
• student records;
• trade secrets;
• information subject to attorney-client or other privilege;
• test questions and answers;
• pending public bids

To obtain information under FOIA, simply send a letter detailing the requested information to the FOIA Coordinator at the applicable “public body,” which includes all state and local government agencies, divisions, and officials in the state, with the exception of the governor, lieutenant governor, and employees of the executive branch.  “Public body” also includes all bodies created or funded by state or local authority, including public schools, some hospitals, and public libraries.

Based on the above example, your letter should request all applicable information regarding the particular property and the appropriate time frame, and should be addressed to the FOIA Coordinator in the appropriate city.

You may request to inspect, copy, or receive a copy of the applicable public records.  The FOIA Coordinator must respond to your request within 5 business days, with a possible extension of 10 business days.  The “public body” may charge you for copying or inspecting records, as well as separating confidential information from the other requested records.  This fee must be limited to actual copying, mailing, and labor costs.

If the FOIA coordinator denies your request, they must provide a full explanation for the denial, and advise you of your right to appeal.   You may appeal then to the head of the applicable public body, or directly to circuit court.  If you choose to file in circuit court, the lawsuit must be filed no more than 180 days after the public body’s final denial.  If the court finds that the public body violated FOIA, it can award actual and/or compensatory damages, as well as punitive damages of $500.00.

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm. Click here to view her professional resume.

Beware the “Choice of Law” Provision

Do you realize that many of the contracts, equipment leases and loan documents that you have signed would require a Michigan judge to use other States’ laws in deciding lawsuits rather than Michigan’s?

This is because many contracts contain a “choice of law” or “governing law” provision, by which the parties choose to apply the law of one particular state to govern their contract.  A choice of law provision may affect the outcome of a lawsuit if the law of the chosen state differs from Michigan law on a key issue.

When reviewing a proposed contract before signing it, it is essential to read and understand the entire contract.  This is not just the price or the interest rate.  It also includes the general provisions at the end or on the back of the page—otherwise known as the “fine print” or “boilerplate”.

Many companies do business in multiple states.  For them, it is important to have certainty about what their contracts mean.  As a result, their standard contracts will contain a choice of law provision.  In addition, they may choose the law of a state that is most favorable to them — such as the law of a state that allows lenders to charge higher interest rates without violating usury laws.

If the law of Michigan doesn’t differ from the law of the chosen state on any important issue for the contract, then the choice of law provision is moot.  If, however, there is an important difference, then the party being asked to accept the choice of law provision has three options:  (1) Negotiate to change the contract; (2) Refuse to sign the contract containing the choice of law provision; or (3) Sign the contract knowing that it contains that provision and its implications.  If you are dealing with a much bigger company, they may not be willing to alter their standard contract.  You need to go into the transaction with a full understanding of its terms, so you are not surprised when a dispute arises.

The Michigan courts will normally enforce a choice of law provision, with two major exceptions:

1. The chosen state must have some relationship to the transaction, such as one of the states being based there, or part of the transaction being performed there.  A choice of law provision may not be enforced if two Michigan companies, with a transaction to be performed in Michigan, try to choose the law of some other state for the purpose of avoiding the application of a Michigan law.
2. A Michigan court may also refuse to enforce a choice of law provision if that would violate Michigan public policy.  In other words, if the result would be contrary to an important Michigan law, and Michigan has a greater interest in the outcome than the state whose law was chosen by the parties, the Court may disregard the choice of law provision.  This does not occur very often, particularly where there is no irregularity in the making of the contract containing the choice of law provision.

Many contracts also contain a “choice of venue”  provision, by which the parties agree to litigate their disputes in the courts of a particular state.  Choice of venue provisions will be discussed in a future article.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm. Click here to view his professional resume.

Working Minors Must Be Supervised by an Adult, Or Serious Penalties can be Assessed

School is out and many minors are looking for summer jobs.  Employers should be aware that special rules apply when employing a minor (any person less 18 years of age).  For example, a minor may not be employed unless the employer or another employee 18 years of age or older provides supervision.  Supervision means being on the premises to direct and control the work of minors and to assist in case of an emergency.  Generally this requires the supervisor to be within sight and sound of the minor.   Even a very mature seventeen year old cannot be allowed to work without adult supervision.

Failure to properly supervise a minor in the workplace is a violation of both the Michigan Youth Employment Act and the Health and Safety (MIOSHA) standards.  A violation of the Michigan Youth Employment Act is a misdemeanor and punishable by imprisonment of not more than 1 year or a fine of not more than $500.00 or both.

Serious penalties also apply for employing minors in occupations involving cash transactions after sunset or 8:00 p.m., whichever is earlier, without the required supervision. A violation of this particular provision of the Michigan Youth Employment Act is a misdemeanor and punishable by imprisonment of not more than 1 year, or a fine of $2,000 or both.  Repeated violations may lead to imprisonment for up to 10 years and a fine of not more than $10,000, or both.

This violation of the law could also possibly lead to civil liability if a minor were injured as a result of the lack of supervision.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm. Click here to view her professional resume.

Understanding Michigan Usury Law

Beware of Evergreen Clauses

“Evergreen contract – A contract that renews itself from one term to the next in the absence of contrary notice by one of the parties” – BLACK’S LAW DICTIONARY 321 (7th ed. 1999).

Imagine that your business entered into a contract with a company to supply all of your paper needs for one year.  Towards the end of that year, you decide that you’d prefer to switch to a different paper supplier.  When you contact your current supplier to tell them that you’re going to be using another supplier, they inform you that your contract won’t allow you to do that.  In fact, you are contractually obligated to keep using the current supplier for another year!

The problem here is an “evergreen” clause in your contract.  Many contracts – particularly service or supply contracts, as well as leases – include a so-called “evergreen” clause.  This type of contract automatically renews at the end of the contract term, unless one of the parties notifies the other party that it does not want to renew the contract.  Often, this notice must be given within a specified time period prior to the end of the current contract term.

Here is a typical evergreen clause:

Term.  The Commencement Date will be May 1, 2009.  The Term of this Contract will be for five (5) years beginning on the Commencement Date.  The Contract will automatically be renewed at each fifth anniversary for an additional five (5) year term unless terminated by either party by giving written notice to the other party at least ninety (90) days, but no more than 120 days, prior to the end of the then-current five (5) year term.

Under this specific clause, the customer would have to notify the service company, in writing, that they did not want to renew the contract no less than 90 but no more than 120 days prior to the last day of the contract.  If the customer failed to notify the service company in writing within that time frame, the contract would automatically renew.

So how can your business avoid a scenario like the one above involving the paper supply company?  The simplest option is to review every contract before signing, and pay special attention to anything that could be an evergreen clause.  If you’re unsure whether a particular term is an evergreen clause, you should consult with an attorney.  If there is an evergreen clause in the contract, you should negotiate with the other company to try to get the clause removed before signing the contract.

If the company refuses to remove the evergreen clause, you have two options.  First, you can “calendar” the specific date or time period in which you would need to provide notice that you will not be renewing the contract.  That way, you will ensure that you won’t forget about the automatic renewal provision.  Second, you can simply refuse to sign the contract and choose another company that doesn’t require this type of provision!

To avoid getting stuck in a contract with an evergreen clause, we recommend you always consult an attorney before signing a supply or service contract, or any other contract about which you have concerns.

The small cost of due dilligence up front could save your company big money down the road.

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm. Click here to view her professional resume.