On June 6, 2013, the Michigan Court of Claims became the second court in the country to hold that the Multistate Tax Compact (the Compact) is a binding multistate compact that cannot be repealed by a separate, subsequent statute. Anheuser-Busch, Inc. v. Michigan Dep’t of Treasury, Case No. 11-85-MT (Order and Opinion, Mich. Ct. of Claims June 6, 2013) (Collette, J.). The taxpayer was thus entitled to apportion its income under the former Business Income Tax (BIT) component of the Michigan Business Tax (MBT) using the Compact’s equally-weighted three factor formula rather than the statutory single sales factor formula.
The decision is significant because it represents the first court since the California Court of Appeal’s seminal decision in Gillette to apply interstate compact law principles in upholding the Compact’s election. See Gillette Co. v. Franchise Tax Bd., 209 Cal. App. 4th 938 (2012), review granted and opinion superseded sub nom., 291 P.3d 327 (Cal. Jan. 16, 2013).
Michigan adopted the Compact effective July 1, 1970. Under Article III of the Compact, a taxpayer may elect, with respect to a state “income tax,” to apply the Compact’s equally-weighted three factor formula in lieu of the state’s apportionment formula. The Compact remained largely dormant for nearly 40 years under the former Single Business Tax – a form of value added tax rather than an income tax – until the MBT became effective in 2008.
The MBT was comprised of two components, the BIT, a tax based on net income, and the Modified Gross Receipts Tax (MGRT), a tax based on gross receipts less certain deductions. Under the MBT, taxpayers elected to apportion their income using the Compact’s equally-weighted three factor formula in lieu of the MBT’s statutory single sales factor formula if it was advantageous to do so.
Anheuser-Busch filed its original returns claiming the Compact’s apportionment election for the tax years 2008-2010, which resulted in refund claims of estimated taxes paid. Following the denial of its refund claims by the Michigan Department of Treasury (Department), Anheuser-Busch filed suit in the Court of Claims challenging the denials.
Many observers believed that the fate of the Compact election in Michigan would rest solely on a November 2012 Compact election decision by the Michigan Court of Appeals. See Int’l Business Mach. Corp. v. Dep’t of Treasury, 2012 WL 6913772, Dkt. No. 306618 (Mich. App. Nov. 20, 2012) (unpublished) (hereinafter IBM), application for leave to appeal filed, Dkt. No. 146440 (Mich. Dec. 28, 2012) (application pending). IBM, however, was an unpublished – and thus non-binding – decision. The Court of Claims in Anheuser-Busch, left free to make an independent judgment on the merits of the case, reached a different conclusion than that of the Court of Appeals in IBM.
Sutherland Observation: The Michigan Court of Appeals, following its decision in IBM, denied a request from the Michigan Attorney General’s Office to publish its November 20, 2012 decision – an act that would have rendered the opinion binding on the Court of Claims. The recent Anheuser-Busch decision may provide the Court of Appeals with another opportunity to consider the Compact election should the Michigan Supreme Court deny review in IBM and perhaps reach a different result than that reached in IBM.
The Compact Is a Binding Contract Among States
The Court of Claims first concluded, like the California Court of Appeal in Gillette, that the Compact “is a binding compact that cannot be repealed by a conflicting statute.” Applying Michigan case law, the court found that the language of the Compact plainly and unambiguously demonstrated an intent to bind future Legislatures. The court held that Section 1 of the Compact, which provides that “[t]he multistate tax compact is enacted into law and entered into with all jurisdictions legally joining therein,” “plainly states an intent to enter into a binding contractual relationship . . . [and] to limit the Legislature’s power.” Anheuser-Busch at 6-7.
The Court of Claims further ruled, agreeing with a portion of the Court of Appeals holding in IBM, that the plain language of the MBT Act (MCL 208.1301) purports to override the Compact’s election by providing that, “each tax base established under this act shall be apportioned in accordance with this chapter.” Id. at 8. As a binding multistate compact, the Michigan legislature’s subsequent enactment of the MBT Act’s single sales factor apportionment formula “cannot impair the election provision of the [Compact],” Id. at 7. Thus, the “the [Compact] controls and functions as an exception to the mandatory language of the MBT [Act].” Id. at 8.
Sutherland Observation: The court’s holding that the Compact is a binding multistate compact could have broad implications for the numerous Michigan taxpayers that have similar Compact election cases pending. According to the Michigan Attorney General’s Office, as of late 2012, there were roughly 60 to 70 cases held in abeyance either in the Court of Claims or the Michigan Tax Tribunal pending the outcome of cases like Anheuser-Busch, plus approximately 50 more at the informal conference stage before the Department of Treasury’s Hearings division.
Compact Election Applies to the BIT, But Not the MGRT Component of the MBT
Applying the Compact’s definition of an “income tax,” the court had no reservation in holding that the BIT component of the MBT is an income tax subject to the Compact’s election provision. Id. at 9.
As a matter of first impression, however, the court ruled that the MGRT component of the MBT is not an income tax and thus not subject to the Compact election. The court described the MGRT component as a modified “sales-subtraction value added tax.” While the computation of the tax base allowed for certain expense deductions, “the expenses that are deducted under the MGRT are related to particular transactions,” and thus “the MGRT is not imposed on or measured by net income” within the meaning of the Compact. Id. at 10-11.
Sutherland Observation: This case is the first judicial decision to address whether the MGRT component of the MBT is properly characterized as an “income tax” under the Compact’s definition of that term. Similar issues arise with the Texas Margins Tax, a different form of modified gross receipts tax, and whether it constitutes an “income tax.”
A split of authority now exists in Michigan regarding whether the Compact’s apportionment election is available to taxpayers under the MBT, and the new Anheuser-Busch decision provides a welcome, taxpayer-favorable contradiction to the previous IBM decision. Taxpayers with pending refund claims in Michigan should closely monitor the Michigan Supreme Court’s potential grant of review in IBM’s pending application, as well as the Department’s likely appeal of Anheuser-Busch.