Expert Insight: Recent MTC Trends, States Begin to Respond to 'Gillette'

Two weeks ago, in Anheuser-Busch v. Michigan Dept. of Treas. (No. 11-85-MT), the Michigan Court of Claims ruled that multistate taxpayers are entitled to apportion their Michigan income under the Multistate Tax Compact (“MTC”) irrespective of statutes mandating otherwise. Specifically, taxpayers may utilize the MTC’s election apportionment provision, which gives taxpayers the option to use the member state’s laws or the MTC’s equally weighted, three-factor apportionment formula. In doing so, the court found the MTC binding upon future legislatures and accordingly determined that it can only be repealed in whole by statute, not in part by subsequent, conflicting laws. 

The ruling, however, creates a split in the Michigan courts over the function and authority of the MTC when the compact conflicts with state law. Just last November, in IBM v. Michigan Dept. of Treas.(No. 306618), in an unpublished, nonbinding opinion, the Michigan Court of Appeals found the opposite and determined that state law prevails in such a circumstance. Ultimately, the Michigan Supreme Court will likely determine the issue as IBM is currently awaiting word whether the Court will hear the appeal.

Practitioners familiar with the aforementioned issues will recognize that the Anheuser-Busch ruling follows the reasoning handed down last year by the California Court of Appeals in Gillette Co. et al v. FTB (209 Cal. App. 4th 938). In reaction to Gillette,which is on appeal to the California Supreme Court, states are beginning to enact legislation to avoid audit ramifications that could emerge should their respective courts likewise find Gillette persuasive. 

Accordingly, Oregon, whose alternative apportionment formulas also conflicted with the MTC, recently repealed the MTC and immediately re-enacted it without the corporate income apportionment and election provisions. Utah passed the same bill in April and Minnesota currently has similar legislation pending.

We asked Jeremy Abrams of Crowell & Moring LLP about these recent developments impacting the MTC and the states that have adopted its provisions.

BBNA:With the current split in Michigan, there is potential for significant ramifications – we have a binding lower court decision versus a nonbinding Court of Appeals decision that could have a substantial impact on the state’s revenue collecting efforts, both now and for potential audits issues down the road.  Should the state follow the IBM reasoning, they are rolling the dice with potential substantial and costly implications.  What sort of an impact do you see the recent split having on both the state and on taxpayers?

Abrams:I expect taxpayers and the [state] Department of Revenue to stick to their respective positions for now.  The uncertainty created by conflicting state court decisions -- IBM & Anheuser-Busch -- increases the urgency for the Michigan Supreme Court to accept the IBM appeal and resolve this issue.  Assuming the Court decides to hear the case, the logic in the Anheuser-Busch & Gillette decisions should prevail. 

BBNA: The reasoning behind both positions in IBMand Anheuser-Buschare persuasive, however, which do you find more compelling and which position do you think will ultimately prevail, not only in Michigan (or California), but in other states? Why?

Abrams:Again, if courts are intellectually honest in their assessment of these cases, the logic in Gillette & Anheuser-Busch should prevail.  Frankly, the Court of Appeals’ logic in the IBM decision (the Compact was repealed by implication) is not very convincing.   Having said that, there’s a lot of money at stake in these cases -- not only for the specific taxpayers and tax years involved in the cases, but for all taxpayers in Compact states, both for open periods and going forward.  It will be interesting to see where this goes.

BBNA: As it stands now, one can view Gillette as a bit of an outlier in the sense that up until Anheuser-Busch, it was the first and only of its kind.  While not citing Gillette, Anheuser-Busch followed its reasoning.  In addition, some state revenue departments are panicking in wake of Gillette with these repeal/re-enact bills.  It seems that states are taking the Gillette threat seriously, and now lower courts could be finding the reasoning persuasive. In your experience, do you see courts upholding the MTC as a binding contract as becoming a trend?

Abrams:A lot of taxpayers do business in California, so any case coming out of its courts, although not binding on any other state, is going to have some degree of influence.  In addition, the Court of Appeal’s reasoning and analysis in Gillette is sound and led to the correct result. I think we could see more decisions like Gillette in the future in other Compact states.

BBNA:These repeal/re-enact bills are becoming increasing popular in the wake of Gillette.  The Multistate Tax Commission has expressed the position that subsequent re-enactment of the MTC without the election provision is “substantially similar” in form to other states and accordingly, the Commission will continue to recognize these states as full members under the compact.  In addition, the Commission has taken the stance in their amicus briefs in Gillette and IBM that states are not required to adopt the MTC verbatim and that the compact’s language suggests as much.  Do you agree with this stance and in your opinion, would the absence of the election provision constitute a “substantially similar” form of the MTC?

Abrams:The apportionment election provision is a critical aspect of the Compact and any legislation that does not contain the election is not substantially similar to the Compact.  Some states have tried to draft their way around this.  For example, in Oregon, the re-enacted statute not only does away with the election provision, but it also makes state law controlling in the event of an inconsistency with a “Compact” provision, which cuts against the Compact’s goal of uniformity.

BBNA:What kind of impact do you see these repeal/re-enact bills having and what can taxpayers take away from their passage?

Abrams:The flurry of repealing legislation that we’re seeing confirms that Compact states are taking this issue very seriously, and for good reason.  States potentially could owe millions of dollars in refunds if more decisions like Gillette are handed down.  This risk creates some leverage for taxpayers, and they ought to use that leverage to their advantage during audits.  We suggest that taxpayers recompute their taxes for years under audit using the Compact’s evenly weighted 3-factor apportionment formula to see what effect the calculations have on a proposed assessment.  In some cases, it might wipe out the entire assessment or even result in a refund claim.

 By: Christopher Young

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