Michigan Gov. Rick Snyder signed legislation that retroactively repeals Michigan’s participation in the Multistate Tax Compact (MTC) effective Jan. 1, 2008. The purpose of the legislation is to eliminate the state’s obligation to pay refund claims based on the Michigan Supreme Court’s decision in International Business Machines Corp. v. Department of Treasury (IBM).
In IBM, the taxpayer successfully argued it was entitled to make an election to use the MTC’s three-factor formula for apportioning business income when it filed its 2008 taxes and wasn’t required to use the sales-only apportionment formula mandated in the now-repealed Michigan Business Tax (MBT). The new legislation retroactively precludes taxpayers from making the election. The Michigan Department of Treasury estimates that approximately $1.1 billion in refunds would be paid as a result of the court’s decision.
This legislation will keep the state from paying refunds to companies that filed original returns or refund claims based on the election to use the MTC three-factor apportionment formula. This law effectively overturns the IBM decision and denies all MTC election refunds for tax years 2008 through 2010. Taxpayers are expected to challenge the retroactive nature of the new legislation in the courts.
As the ultimate outcome of refund claims remains uncertain, businesses should consider filing protective refund claims under the MBT for any open tax under the state’s four-year statute of limitations.