On July 14, 2014, in a case closely watched by both corporate tax attorneys and state revenue departments across the country, the Michigan Supreme Court determined that a taxpayer subject to the Michigan Business Tax Act ("MBTA") during tax years 2008-2010 may elect to use the three-factor apportionment formula under the Multistate Tax Compact ("the Compact," codified in Michigan at MCL 205.581 et seq., in 1970) instead of the single-sales factor apportionment formula specifically provided for in the MBTA (MCL 208.1301). The Supreme Court determined a taxpayer may elect to use the Compact's three-factor apportionment formula when apportioning both its income tax base and modified gross receipts tax base under the MBTA. By using the MTC 3-factor apportionment formula, out of state businesses may reduce their MBT tax base that is apportioned to Michigan and thus their MBT liability.
Quick Review of State Tax Apportionment
Generally, a state calculates how much of a multi-state taxpayer's business is conducted within its borders, and therefore, subject to its business tax, by applying an apportionment formula, so as not to run afoul of the Due Process Clause and Commerce Clause of the United States Constitution. Theoretically, an out-of-state company with few or no employees or property physically in the taxing state would likely reduce its tax liability in that state if it were to apportion its tax base using an equally-weighted formula based on property, payroll, and sales, rather than a single-factor formula based only on sales into the state.
The apportionment formula in MCL 208.1301 of the MBTA is based exclusively on the taxpayer's sales into Michigan (the taxpayer's sales in Michigan divided by the taxpayer's sales everywhere). MCL 205.581 of the Multistate Tax Compact, enacted in 1970, provides that a taxpayer subject to a Michigan "income tax" may elect an alternative apportionment formula with three equally-weighted factors: property, payroll, and sales. The MBTA, enacted in 2007, makes no reference to the Compact. In 2011, the Legislature amended the Compact to state that as of January 1, 2011, taxpayers subject to the MBTA and Michigan's Corporate Income Tax (which for the most part replaced the MBTA, effective January 1, 2012) must apportion using the MBTA's single-factor apportionment provision and not the Compact's three-factor apportionment formula.
The IBM Decision
When IBM filed its MBT tax return for tax year 2008, it elected to apportion both the income tax base and modified gross receipts tax base of the MBTA using the Compact's equally-weighted, three-factor apportionment formula, rather than the single-factor sales formula provided for in the MBTA. IBM's Compact election reduced its 2008 MBTA liability by approximately $4,800,000.
Both the Michigan Court of Claims and Court of Appeals found in favor of the Michigan Department of Treasury, determining that the Legislature's enactment of the single-factor apportionment formula in the MBTA "repealed by implication" the Compact's apportionment formula. In a divided 4-3 Opinion, the Michigan Supreme Court reversed the lower courts' decisions, determining that, for tax years 2008-2010, a taxpayer may elect to apportion both the MBTA’s income tax and modified gross receipts tax bases using the Compact's three-factor apportionment formula. The Supreme Court, recognizing that "repeal by implication" in Michigan is strongly disfavored, rejected the Department's argument. The Supreme Court determined that the two apportionment statutes in the MBTA and the Compact must be reconciled. Reading the provisions together, the Supreme Court determined the Compact election and the MBTA apportionment formula were "compatible and can be read as a harmonious whole," by offering taxpayers two options for apportioning their income tax and modified gross receipts tax base under the MBTA for tax years 2008-2010. The Supreme Court noted that the Legislature's amendment to the Compact in 2011 further supports that the Compact election is available to MBT taxpayers in tax years 2008-2010. The full Supreme Court opinion is available at: http://www.michbar.org/opinions/supreme/2014/071414/57609.pdf.
Many matters are currently pending before the Court of Appeals, Court of Claims, Michigan Tax Tribunal, and the Department's informal conference hearings division, involving taxpayers electing to apportion using the Compact's three-factor apportionment formula in a variety of contexts. The issues left to be resolved in those cases in the wake of IBM include whether a taxpayer may elect to apportion its tax base using the Compact's three-factor formula on:
- An amended MBT return;
- A SBT return, thereby asserting the SBT also fits within the Compact's definition of "income tax";
- A 2011 MBT return, notwithstanding 2011 PA 40; and
- A Michigan Corporate Income Tax Return for tax years 2012 or later, notwithstanding 2011 PA 40.
It is important to keep in mind that, in Michigan, the statute of limitations on filing a tax refund claim is four years under MCL 205.27a(3), unless the running of the statute of limitations has been tolled (extended) during the period of audit, conference, hearing, or litigation of liability for federal income tax or a tax administered by the Michigan Department of Treasury, and for one year thereafter.