On December 19, 2014, the Michigan Court of Claims issued its decision and opinion in Yaskawa America Inc. v. Dep’t of Treasury, a case addressing the validity of Michigan legislation repealing the Multistate Tax Compact retroactively to January 1, 2008 (Mich. PA 282). Signed into law on September 11, 2014, PA 282 was a direct reaction to the Michigan Supreme Court’s July 14 decision in Int’l Business Machines Corp. v. Dep’t of Treasury (IBM). In IBM, the court held that Michigan had not impliedly repealed Articles III and IV of the Compact by virtue of 2007 legislation enacting the Michigan Business Tax (MBT) and that a taxpayer could validly make an election to apportion its business income under the MBT using the Compact’s three- factor formula until 2011, when the Compact election was expressly repealed.
The legislature quickly moved to preclude refund claims stemming from the IBM decision, which were estimated to cost the state $1 billion. On September 9, the Michigan House introduced a substitute bill to SB 156 containing PA 282’s repeal language, which it passed by a 100-to-10 vote that day. Less than 24 hours later, the Senate, without debate, approved the retroactive language by a 34-to-3 vote. Governor Rick Snyder signed PA 282 into law on September 11, 2014.
Summary of the Yaskawa Decision
Several taxpayers, including Yaskawa America Inc. and Ingram Micro, Inc., have directly challenged the validity of PA 282 and its retroactive applicability. In his Yaskawa decision, Chief Judge Michael J. Talbot ruled in favor of the Treasury, finding that PA 282 was a “valid, constitutional act by the Legislature.” To summarize, Judge Talbot upheld the validity of the retroactive repeal for the following reasons:
- The Compact was not a binding contract. Judge Talbot found that the Compact was “advisory” only and did not create a binding interstate compact with the MTC member states. Thus, the legislature was not prevented from retroactively repealing the Compact under the Contracts Clause. (The Michigan Supreme Court did not need to address this in IBM, since it found in favor of the taxpayers on other grounds.) This conclusion by the court of claims regarding the nature of the Compact is contrary to the California Court of Appeal’s decision in Gillette v. Franchise Tax Board. Judge Talbot also held that the Compact was not a binding contract under state law.
- The retroactive repeal did not violate other constitutional provisions. Judge Talbot addressed the Due Process Clause, Commerce Clause and separation of powers, among others, articulating the general principles that “a tax act is not necessarily unconstitutional because it is retroactive,” and a “statute is presumed constitutional unless there is a clear showing to the contrary.” Regarding the Due Process Clause, relying on U.S. v. Carlton, Judge Talbot found that taxpayers in general have no vested interests in tax statutes and therefore no valid claim that an interest in “life, liberty, or property” has been deprived by retroactive application of PA 282. The judge rejected the notion that a taxpayer could rely on a particular apportionment formula, stating that “no taxpayer has a vested right in a tax refund based on the continuation of the Compact election provisions, and any due process claim must fail.” (emphasis added).
Judge Talbot also found that the legislature had a legitimate purpose for giving retroactive effect to the repeal – “fixing a legislative error and preventing the potential loss of over $1 billion of MBT revenues”– and retroactivity was rationally related to such purpose. Regarding separation of powers (a state constitutional provision), Judge Talbot explained that PA 282 was valid because it “did not purport to overturn the IBM decision, nor did it repeal the final judgment as it applied to the plaintiff.”Judge Talbot noted that the IBM court “suggest[ed]” that retroactive repeal “would be an appropriate legislative response to the challenges being made.” (While the IBM court did address whether the 2011 legislation had a retroactive effect, the Michigan Supreme Court did not endorse any such retroactive repeal and clearly did not address whether a retroactive repeal of the Compact three years later, in 2014, would withstand constitutional scrutiny.)
Regarding the Commerce Clause, Judge Talbot found that the legislation was not discriminatory against interstate commerce, since the effect is that no taxpayer, whether in-state or out-of-state, can make an election to apply the Compact’s three-factor apportionment formula.
- There were no procedural violations relating to enactment of the repeal legislation. One of the key complaints levied against PA 282 was the fact that the legislature passed the bill in less than 24 hours after it had been amended to include the retroactive repeal language. Judge Talbot held that the enactment did not violate Michigan’s constitutional “five-day” rule, because technically SB 156 had been in front of both chambers for at least five days (though in its previous form, as a general revenue raising bill). Judge Talbot also rejected the taxpayer’s other procedural complaints, including violation of the title-object clause of the Michigan Constitution, as well as violation of the tax-title clause.
Judge Talbot issued a nearly identical decision to Yaskawa in Ingram Micro, Inc. v. Dep’t of Treasury on December 19. That same day, Judge Talbot dismissed a total of 54 cases involving taxpayers seeking MBT refunds under the IBM holding.
The Michigan Court of Appeals is also set to issue a decision in Anheuser-Busch Inc. v. Dep’t of Treasury on the issue of the validity of PA 282’s retroactive repeal. The court of claims ruled in 2013 (prior to the supreme court’s IBM decision) that the taxpayer could apportion its MBT business income under the Compact’s three-factor formula. However, following enactment of PA 282, the court of appeals asked the parties to brief the retroactive repeal issue.
Evolving Compact Landscape
Clearly, the Compact’s state of play in Michigan is evolving rapidly. While taxpayers should take note of this decision, it is unclear what impact it will ultimately have. Interpreted broadly, Judge Talbot’s ruling regarding the Due Process Clause is concerning because it implies that taxpayers can never succeed in challenging retroactive tax legislation on due process grounds given his conclusion that taxpayers have no vested right in such laws. However, in our view, the applicable holding of Carlton upon which Judge Talbot relies is less expansive. In addressing an argument made by the taxpayer that a tax amendment violated due process because he detrimentally relied on a pre-amendment version of the statute, the Supreme Court stated that “[a taxpayer’s] reliance [in structuring a business transaction] alone is insufficient to establish a constitutional violation. Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.” (emphasis added). This does not mean that retroactive tax legislation (and a denial of a refund related thereto) can never violate due process, notwithstanding the taxpayer’s lack of a “vested interest” in the tax law.
As noted, the court of appeals asked the parties in Anheuser-Busch to brief the retroactive repeal issue, and any ruling by the court of appeals on that issue would override Yaskawa. Given the inconsistencies between Yaskawa and Anheuser-Busch, in which the court of claims held that the Compact was a binding interstate compact, the court of appeals may take a different view. Taxpayers should also watch Lorillard Tobacco Co. v. Dep’t. of Treasury, which the Treasury has appealed to the Michigan Supreme Court after the court of appeals found that IBM was controlling. Given the current state of play, taxpayers are still well-advised to consider refund opportunities in Michigan and other states.
The landscape also continues to change in other states, including California, Minnesota, Oregon and Texas. In California, oral argument in Gillette is pending before the California Supreme Court. The Court of Appeal held in a 2012 decision that the Compact is binding, and the state could only repeal the three-factor apportionment election by withdrawing from the Compact in its entirety.
In late 2013, Kimberly-Clark Corp. filed an appeal in Minnesota Tax Court seeking refunds based on the asserted right to apportion under the Compact’s three-factor formula. Minnesota attempted to repeal Articles III and IV in 1987 but did not repeal the entire Compact until 2013. All three judges on the Minnesota Tax Court will hear motions for summary judgment on March 19, 2015.
On July 28, 2014, the Oregon Tax Court heard oral arguments in Health Net Inc. v. Dep’t of Revenue. The taxpayer there argues that the Compact was never entirely repealed in Oregon, and therefore, the taxpayer has the option of using the Compact’s apportionment formula. There is no timetable for a decision by the Tax Court.
Finally, in Texas, a trial court rejected Graphic Packaging Inc.’s claim that it was entitled to use the three- factor apportionment method provided by Articles III and IV of the Compact in lieu of Texas’ single-factor apportionment method. The taxpayer has recently filed an appeal in the 3rd Court of Appeals of Texas. A presentation by the Texas Comptroller of Public Accounts on October 22, 2014, stated that Texas now has 18 lawsuits seeking to allow use of the three-factor apportionment method, totaling more than $70 million in claims.