Corporate Close Up: Recent Cases Illustrate Trend Toward Retroactive Application of Laws

Tax laws that are applied retroactively or interpretations of laws applied retroactively can be a big concern for taxpayers. It can be the difference between obtaining a refund and owing large sums to the state (which ultimately will include penalties and fees).

A recent example of this is Oregon Dept. of Rev. v. Rent-A-Center, Inc., No. TC 5224 (Or. T. C. 2015). In that case the department attempted to retroactively apply its preferred definition of a “single trade or business” to Rent-A-Center Inc.'s 2003 tax return. The department wanted to use a rule interpreting the statutory definition that was adopted in 2006—three years after the tax year for which the return was filed. The revised rule provided for a more expansive definition of “unitary business.” It provided the presence of one of two of the factors listed in the statute can “demonstrate the flow of value requisite for a single trade or business.”

The three statutory factors of concern are:

  • centralized management or a common executive force;
  • centralized administrative services or functions resulting in economies of scale; and
  • flow of goods, capital resources or services demonstrating functional integration.  

In 2007, the legislature changed the statute to reflect the rule, using the conjunctive "and" instead of "or."
A determination that a Rent-A-Center entity or operation located outside of Oregon was part of the corporation's “unitary group” would result in the inclusion of that income in Rent-A-Center's worldwide business income subject to Oregon tax. The court looked to legislative history to determine whether the 1984 legislature intended the word “and” to be read disjunctively or conjunctively.

The court concluded Jan. 26 that the legislature in 1984 intended that the statutory definition be read as requiring all three factors be present if there was to be a finding of a “single trade or business.” Judge Breithaupt stated “the only law relevant to this case is the 1984 statute. The substantive changes made by the 2007 statute were expressly applicable only for years beginning on or after January 1, 2007.”

Retroactive legislation has been used in the past to avoid results a state finds unfavorable. Last year, Michigan enacted legislation retroactively repealing the state’s adoption of the Multistate Tax Compact beginning Jan. 1, 2008. This was partly in response to Intl. Bus. Machs. Corp. v. Dept. of Treas., 852 N.W.2d 865 (Mich. 2014), where the court concluded that IBM was allowed to elect to use the Multistate Tax Compact’s three-factor apportionment formula on its Michigan Business Tax return for the 2008 tax year.

The court found that the legislature did not repeal by implication the three-factor formula for tax years 2008 through 2010 solely by repealing the Single Business Tax and replacing it with the Michigan Business Tax. The MBT generally requires taxpayers to apportion their income using a single sales factor formula.


by Erica Parra

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Given these two examples, what do you believe the policy of retroactive legislation should include?

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