The U.S. Supreme Court has requested Michigan’s response to several certiorari appeals from taxpayers seeking relief from Michigan’s retroactive repeal of its Multistate Tax Compact (“MTC”) election. The Court was originally scheduled to review the Michigan petitions at its conference on January 19, but has now provided a February 9 deadline for Michigan’s response. Additionally, the Court’s January 19 conference to discuss Dot Foods, Inc., another state tax retroactivity case appealed to the Court several months ago dealing with the interpretation of a Washington business and occupation tax exemption, has been put on hold. See Dot Foods, Inc. v. Wash. Dep’t of Revenue, U.S., No. 16-308, cert. petition filed 9/9/16 and cert response filed 12/5/16. These recent actions by the Court appear to signal an interest in retroactivity cases, with heightened potential to take one or both cases.
As a brief recap, the Michigan Supreme Court is the only high court to uphold taxpayers’ ability to elect the MTC three-factor formula to apportion income. See IBM v. Dep’t of Treasury, 496 Mich 42 (2014). However, even that victory was short-lived as Michigan retroactively repealed the MTC back to January 1, 2008, effectively invalidating the Michigan Supreme Court’s decision. Michigan taxpayers challenged the retroactive repeal, but the Michigan Court of Appeals ruled against the taxpayers and the Michigan Supreme Court declined to intervene. See Gillette Commercial Operations v. Dep’t of Treasury, 312 Mich App 394 (2015), cert denied Dkt. 152588 (Mich. June 24, 2016). Six taxpayers, to date, have filed petitions with the U.S. Supreme Court requesting the Court to review the retroactivity issue, noting three of those petitions also request a review of the MTC binding agreement issue. The Michigan Office of Attorney General initially waived its right to file responses.
Although Michigan was initially viewed as a taxpayer victory for the MTC election (at least pre-retroactive law change), other state taxing authorities have had success arguing that the MTC is an advisory, non-binding, agreement. See Kimberly-Clark; Gillette; Health Net, Inc. and Subsidiaries v. Dep’t of Revenue, Or. Sup. Ct., Dkt. No. S063625; Graphic Packaging v. Hegar, Tex. Sup. Ct., Dkt. No. 15-0669. Just in the last few months, the Court declined taxpayer requests to review the Minnesota and California Supreme Court decisions. Kimberly-Clark Corp. v. Minn. Comm’r of Revenue, U.S., No. 16-565, cert denied 12/12/16; Gillette Co. v. Cal. Franchise Tax Bd., 2016 BL 337826, 196 L. Ed. 2d 238, U.S., No. 15-1442., cert denied 10/11/16.
Although the Court’s recent certiorari denials signals their reluctance to weigh in on the MTC election issues, the constitutional issues raised by Michigan’s retroactive repeal of the MTC appear to be piquing the Court’s interest. Now, the Court’s focus seems to be not on the MTC election, but on retroactivity in general – as evidenced by its request for Michigan to reply and rescheduling of DOT Foods. Retroactive law changes is an enormous concern for both taxpayers and the Court, as it calls into question the efficacy of the judicial process. For example, if the legislature can retroactively repeal a law any time it loses a case involving statutory interpretation, judicial power is greatly diminished and the concept of fairness and certainty is virtually eliminated. The fact that there are two separate retroactive laws, in different jurisdictions, currently being challenged before the Court illustrates the troubling trend of increased retroactive changes in state tax law. The states’ arguments for retroactivity in Gillette (MI) and Dot Foods (WA) draws focus on a 1994 Court decision. See U.S. v. Carlton, 512 U.S. 26 (1994) (permitting a retroactive law change to fix a simple and obvious drafting error, months after the error was identified). Carlton involved significantly different facts than either of the cases on appeal. The Court may want to address, and hopefully curtail, the state’s reliance on Carlton for retroactive tax policy going forward.
Retroactivity has become a significant issue in state taxation. The time for the Court to take action is now. Fortunately, the Court appears to be seriously weighing its options. Hopefully the Court will grant certiorari in the Michigan and/or Washington retroactive cases this spring and address these problematic retroactive decisions.