The retroactive legislation enacted in response to IBM v. Department of Treasury is now being examined by the Michigan courts. On July 14, 2014, the Michigan Supreme Court ruled in favor of the taxpayer in IBM, holding that IBM was entitled to elect the Multistate Tax Compact’s (“MTC” or the “Compact”) three-factor apportionment formula under the Michigan Business Tax Act (“MBT”) instead of the single sales factor apportionment formula provided by the MBT for tax year ending 2008. Electing to use the MTC formula instead of the single sales factor formula can benefit many out-of-state taxpayers by permitting them to dilute their sales factor with a lower property and payroll factor. In fact, the Michigan Senate Fiscal Agency estimated that the Michigan Department of Treasury (the “Department”) would potentially owe tax refunds of $1.09 billion plus interest to taxpayers electing to use the MTC formula for tax years January 1, 2008 through December 31, 2010. In an attempt to limit the impact of IBM, the Michigan legislature retroactively repealed the MTC Compact in its entirety, including the MTC election, effective January 1, 2008 (Public Act 282 of 2014, effective September 12, 2014). For background information on Michigan’s retroactive repeal of the MTC, see prior Tax News and Developments article Never a Dull Moment…Michigan Seeks to Re-Write History By Retroactive Repeal of the Multistate Tax Compact ( Vol. 14, Issue 5, Oct. 2014) available under publications at www.bakermckenzie.com.
The retroactive repeal of the MTC election effective as of January 1, 2008 (the “2008 MTC Repeal”) is the state’s second repeal of the MTC election. On May 25, 2011, the Michigan legislature repealed the MTC election provision effective as of January 1, 2011 (Public Act 40 of 2011). The effective date of this first retroactive repeal of the MTC election provision was of significance to the Michigan Supreme Court in IBM, as the court noted that “[t]here is no dispute that the Legislature specifically intended to retroactively repeal the Compact’s
election provision for taxpayers subject to the [MBT] beginning January 1, 2011. . . . the express repeal of the Compact's election provision effective January 1, 2011, is evidence that the Legislature had not impliedly repealed the provision when it enacted the [MBT].” Following the second retroactive repeal of the MTC election provision, the Department filed supplemental authority to its request for rehearing in IBM in order to address the 2008 MTC Repeal, and the Michigan Supreme Court denied the Department’s request for rehearing. But this is not the end of the MTC election controversy.
The MTC saga continues in similar Michigan cases that address the taxpayers’ ability to elect the MTC apportionment formula for tax years prior to 2011 in light of the 2008 MTC Repeal. These cases include: Anheuser-Busch v. Department of Treasury, Lorillard Tobacco Co. v. Department of Treasury, and Arby’s Restaurant Group v. Department of Treasury. It is questionable which, if any, of these cases will be the first to address the 2008 MTC Repeal, but they are all contenders for the title of lead case on this issue.
Lead Case Contenders on the 2008 MTC Repeal Issue
Anheuser-Busch is currently before the Michigan Court of Appeals, which ordered Anheuser-Busch, Inc. (“Anheuser-Busch”) to file a supplemental brief addressing the effect of the 2008 MTC Repeal. Despite this order, it is unclear whether the Court of Appeals will address the 2008 MTC Repeal in its ruling because it was not previously addressed at the Michigan Court of Claims and is now being raised for the first time on appeal. As a general matter, Michigan’s appellate courts do not rule on issues raised for the first time on appeal, absent exceptional circumstances; however, the 2008 MTC Repeal could very well be considered an exceptional circumstance warranting first-impression consideration by the state’s highest courts.
In Lorillard, the Michigan Court of Appeals ruled in favor of the taxpayer and denied the Department’s motion of reconsideration that was based on the 2008 MTC Repeal. Lorillard could potentially end up becoming the lead case on the 2008 MTC Repeal if the Department successfully appeals to the Michigan Supreme Court and that court addresses the 2008 MTC Repeal issue. But given the procedural posture of Anheuser-Busch and Lorillard and the appellate courts’ traditional resistance to opine on issues that were not initially raised at the trial court level, the Arby’s case before the Michigan Court of Claims could be the first court to opine on the effect of the 2008 MTC Repeal.
Substantive Challenges to the 2008 MTC Repeal
Regardless of which case first addresses the 2008 MTC Repeal, the resolution of the substantive issues related to the 2008 MTC Repeal will be of great interest, not only to the Michigan taxpayers who have filed refund claims but also to taxpayers in other states where similar challenges to the MTC election are ongoing. Some of the more persuasive substantive arguments raised by the taxpayers address the membership withdrawal terms of the Compact itself, the potential applicability of the Contract Clause of the US constitution, and reconciling the actions of the Michigan legislature in its first and second repeals of the MTC election provision.
Membership Withdrawal Provisions of the Compact and the Contract Clause
Reconciling a retroactive withdrawal from the Compact with the membership terms of the Compact is a difficult proposition, considering that the Compact contains language that appears to be designed to prevent retroactive withdrawal and further considering the constitutional Contract Clause issue of whether retroactive legislation may override the Compact. MTC Article X, “Entry Into Force and Withdrawal” provides that a state legislature may enact legislation to withdraw from the Compact; however, “[n]o withdrawal shall affect any liability already incurred by or chargeable to a party State prior to the time of such withdrawal.” This latter provision could be viewed to be in direct conflict with the 2008 MTC Repeal depending on how the liabilities associated with tax years 2008 to 2010 are ultimately categorized.
A related consideration is the Contract Clause of the US constitution, which generally prohibits state laws that impair state obligations pursuant to its contracts. Assuming that the MTC Compact is recognized as an interstate contract to which Michigan is a party and that the taxpayers have standing to enforce its terms, the 2008 MTC Repeal could be subject to judicial review as to whether it passes constitutional muster pursuant to the Contract Clause.
Retroactively Imputing Legislative Intent
Another significant issue that could be addressed by the Michigan courts is the legislature’s ability to override the IBM case--a case decided in part on the Michigan Supreme Court’s interpretation of the legislature’s intent. As discussed above, the court in IBM considered the effect of the legislature’s decision to repeal the MTC election provision effective as of January 1, 2011 when determining IBM’s ability to make the MTC election for tax year 2008.
In contrast, Public Act 282 of 2014 provides that the original legislative intent of the legislature which enacted the MBT was to repeal the MTC election in connection with its enactment of the MBT’s single sales factor apportionment formula. Public Act 282 further provides that the 2011 Michigan legislature that repealed the MTC election provision effective as of January 1, 2011 “. . . was to further express the original intent of the legislature. . . .” This language potentially undermines the IBM court’s ruling. Further, whether the 2014 Michigan legislature even has the ability to dictate the original intent of prior legislatures is questionable and raises separation of powers questions regarding the role of the judicial branch.
The retroactive repeal arguments outlined above, among others, have potential to take center stage in the Michigan MTC debate. Depending on the timing of the decision(s), the resolution of this issue by the Michigan courts could also influence courts in other states considering MTC issues. Until then, taxpayers both in Michigan and elsewhere should monitor the progress of the lead case contenders in Michigan to see how the issue develops.