This past July the Michigan Supreme Court handed down one of the more controversial recent rulings in state corporate income tax in IBM v. Dept. of Treasury. The Court ruled that IBM was entitled to elect to use the three factor apportionment formula in the Multistate Tax Compact (MTC), of which Michigan was a signatory, to calculate their tax liability for the year 2008. The formula in the MTC yielded a much lower tax liability for IBM than the single sales factor formula of the Michigan Business Tax.
The ruling was controversial for several reasons. First, the court based its ruling on the premise that when the Michigan Business Tax was repealed it was specified that MTC formula election was not available as of 2011. The court took this to mean that the legislation intended to keep the election available for tax years from 2008 through 2010. Second, it has been argued that the ruling could give out-of state corporations an unfair advantage over competitors by allowing them to get a lower tax rate. Finally, representatives of the Michigan Treasury estimated that the ruling would cost the state $1 billion in refunds when various corporate entities recalculate their tax liability from the three year window established by the court.
Representatives of the state Treasury asked the court to rehear the case, which seems unlikely. The legislature has responded by enacting S.B. 156 (Public Act 282). The bill retroactively repeals the MTC in Michigan for tax years beginning Jan. 1, 2008. Governor Rick Snyder signed the bill on September 11. The bill is intended to reverse the ruling of the Michigan Supreme Court, though it cannot directly affect IBM for the 2008 tax year in question in the case.
Challenges to the new law are expected in the near future. The legislature has stated in the new law that it was not their intent to allow the MTC election in years from 2008 through 2010, but the court may not decide to reconsider their decision based on the new law. Additionally, the law must be found not to violate due process as it is applied retroactively. The case raises questions about separation of powers in state law, and whether a legislature may effectively overturn a ruling by a state Supreme Court.
Both the corporate community and state tax regulators will be watching this case closely to see how the result affects both states that are signatories of the MTC and the relationship between state legislatures and courts.
By Alex Dowd
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