Michigan ~ Corporate Income Tax: Retroactive Repeal of MTC Provisions Was Valid and Constitutional

Affirming the Court of Claims, the Michigan Court of Appeals has held that S.B. 156 (P.A. 282) that retroactively repealed the state’s Multistate Tax Compact (MTC) provisions, including the MTC three-factor apportionment formula, effective January 1, 2008 (TAXDAY, 2014/09/15, S.13), was a valid act by the state Legislature and did not violate the U.S. or Michigan Constitution because the law provided clarity to taxpayers concerning the Legislature’s original intent of the Michigan Business Tax (MBT) Act to require the use of a single sales-factor apportionment formula. In the consolidated appeals, the taxpayers claimed an MBT refund based on the election to use the three-factor apportionment formula under the MTC, instead of the single-factor apportionment formula mandated by the MBT. The Michigan Supreme Court approved this filing method in International Business Machines Corp. v. Department of Treasury, No. 146440, July 14, 2014, in which a taxpayer was allowed to elect to use the three-factor apportionment formula under the MTC for the 2008 MBT year. (TAXDAY, 2014/07/16, S.21) Two months later, the state Legislature enacted S.B. 156, to limit the impact of the IBM decision and prevent the significant fiscal harm to the state that would have resulted if taxpayers had been permitted to elect apportionment provisions under the MTC.

The enactment of S.B. 156 did not violate the Contracts Clause of the federal or state constitution. According to the court, the compact lacked the three “classic indicia” of a binding interstate compact under federal law. The MTC does not: (1) establish a joint regulatory body; (2) require reciprocal action for effectiveness; or (3) prohibit unilateral modification or repeal. Therefore, it was more properly interpreted as a non-binding advisory compact. The court also found that the MTC was not a binding contract under state law because there was no clear indication under the Michigan law that enacted the MTC that the state contracted away its ability to either select an apportionment formula that differed from the MTC or repeal the MTC altogether. The compact even expressly stated that members could withdraw unilaterally without notice to other states. Since no contract was created under federal compact or Michigan law, there was no impairment of contractual obligations and therefore no violation of the Contracts Clause of the federal or state constitution. Consequently, the state Legislature was free to amend or repeal the MTC. Also, the court noted that the taxpayers had no vested interest in the continuation of any tax law.

The court also determined that the retroactive application of S.B. 156 did not violate other provisions of the state or federal constitution. The legislation did not violate due process because the taxpayers had no vested rights in a tax refund based on the continuation of the MTC election provisions, the protection of state revenues provided the Legislature with a legitimate purpose for giving retroactive effect to the legislation, and retroactive application of the legislation was a rational means of furthering the legitimate purpose. Similarly, the steps taken by the state Legislature to correct a mistake made clear in the IBM decision and to retroactively repeal the MTC provisions explicitly, clarifying its original intent in enacting the MBT, did not impinge upon the judiciary’s functions in violation of the separations of powers. Furthermore, the legislation did not violate the Commerce Clause because the MBT single-factor apportionment formula was not facially discriminatory and did not have the effect of discriminating against an out-of-state taxpayer. The legislation prevents all taxpayers, whether in-state or out-of-state, from making an election to apply a three-factor apportionment formula for MBT purposes. The retroactive application of the legislation likewise did not violate a taxpayer’s First Amendment right to petition the government.

Gillette Commercial Operations North America & Subsidiaries, et al. v. Department of Treasury, Michigan Court of Appeals, No. 325258, September 29, 2015, ¶402-005

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