Multistate Tax Compact Elections Not Honored in Michigan

| 5/25/2017


The U.S. Supreme Court declined to review the Michigan court decisions that upheld the state’s retroactive legislation that denies taxpayers the right to apportion income based on the elective provisions found in the Multistate Tax Compact (MTC).1

The MTC obligates member states to allow apportionment under the states’ specific apportionment formula (often using a heavily weighted or 100 percent sales factor in the apportionment formula) or the MTC’s formula, which allows for an evenly weighted three-factor formula. Over the past several years, taxpayers have attempted to elect the MTC apportionment formula in a number of states, including California, Michigan, Minnesota, Oregon, and Texas. The states generally denied the claims, and taxpayers challenged the denial in state courts.

In Michigan, taxpayers were successful in maintaining that the MTC election applied to the corporate income tax base of the since-repealed Michigan Business Tax (MBT).2 It is estimated that the Michigan Supreme Court decision allowing the MTC election would have resulted in Michigan owing approximately $1.1 billion in taxpayer refunds. The state responded by enacting legislation in 2014 that retroactively repealed Michigan’s participation in the MTC, effective Jan. 1, 2008 (when the MBT became effective). This legislation allowed the state to deny refund claims and reject originally filed returns that elected to use the MTC three-factor formula. The Michigan appellate courts permitted the state’s denial of refund claims that exercised the MTC election, and the Michigan Supreme Court did not grant applications to appeal the lower court decisions.

Taxpayers filed petitions for writ of certiorari with the U.S. Supreme Court asking the court to review whether:

  • The MTC had the status of a contract that would require its members to allow the election of the MTC three-factor formula until the state prospectively withdrew from the MTC
  • A state law that imposes a tax liability retroactively for a period nearly seven years prior to the legislative change upsets settled expectations and reasonable reliance in violation of the Due Process Clause
  • Michigan’s retroactive repeal of, and withdrawal from, the MTC violates the Commerce Clause

The U.S. Supreme Court’s denial of cert lets stand the Michigan appellate court’s decisions and effectively upholds the rejection of returns that elected the MTC apportionment formula.

In addition to the impact on the Michigan MTC cases, the Supreme Court’s decision not to hear the Michigan cases might embolden other states to enact retroactive legislation to their benefit.



 

1 IBM Corp. v. Mich. Dep’t of Treasury, U.S., No. 16-698; Gillette Commercial Ops. N. Amer. v. Mich. Dep’t of Treasury, U.S., No. 16-697; Goodyear Tire & Rubber Co. v. Mich. Dep’t of Treasury, U.S., No. 16-699; DirecTV Grp. Holdings, LLC v. Mich. Dep’t of Treasury, U.S., No. 16-736; Skadden, Arps, Slate Meagher & Flom LLP v. Mich. Dep’t of Treasury, U.S., No. 16-688; and Sonoco Prods. Co. v. Mich. Dep’t of Treasury, U.S., No. 16-687. Note that the U.S. Supreme Court also denied cert in the application of a retroactive application in a state’s change in interpretation of its statute. See Dot Foods, Inc. v. Wash. Dep’t of Revenue, U.S., No. 16-308.
2 Int’l Business Machines Corp. v. Dep’t of Treasury, 496 Mich. 642 (July 14, 2014). 

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