High Court Delays Consideration of Retroactive Tax Cases

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By Che Odom

The U.S. Supreme Court wants Michigan’s Department of Treasury to respond to petitions filed by Goodyear, IBM, Sonoco and other companies arguing that the state’s retroactive application of a tax law violates the U.S. Constitution.

The court also delayed a conference in a case concerning a similar tax law in Washington state, possibly so justices can consider the two matters together in determining whether to revisit the constitutionality of retroactive taxation for the first time in more than 20 years.

Several businesses—Sonoco Products Co., Goodyear Tire & Rubber Co., International Business Machines Corp., Gillette Commercial Operations North America, DirecTV Group Holdings LLC and Skadden, Arps, Slate, Meagher & Flom LLP—are contesting several Michigan Court of Appeals rulings upholding a state law that alters taxes back to 2008.

Dot Foods Inc. is challenging a similar decision upholding a Washington state law that was retroactively applied to years for which the company had already paid taxes.

The Supreme Court on Jan. 10 asked that the Michigan Department of Treasury file responses to the various petitions by Feb. 9, pulling the cases from its Jan. 19 conference schedule. The high court also pulled the Dot Foods case from that conference.

The clerk of the Supreme Court may wait until Michigan’s responses come in to set a date for justices to consider both cases, an attorney familiar with the cases told Bloomberg BNA. The petitions in Washington and Michigan—arguing that retroactive application of tax laws amounts to due process violations—then would be distributed to justices together.

Michigan Law

The Michigan Legislature in 2014 amended the Michigan Business Tax Act and repealed the Multistate Tax Compact. Under the compact, business taxpayers could elect to apportion income using “an equally-weighted, three-factor apportionment formula based on a business’s sales, property, and payroll.” Under the amendment, businesses would need to apportion their tax base using a “sales-factor apportionment formula,” retroactive to Jan. 1, 2008.

Sonoco, Goodyear, IBM, Gillette, DirecTV and Skadden, Arps, Slate, Meagher & Flom LLP, all out-of-state taxpayers, are contesting several Michigan Court of Appeals rulings that upheld the move ( IBM Corp. v. Mich. Dep’t of Treasury, U.S., No. 16-698, cert. petition filed 11/18/16 ; Gillette Commercial Operations N. Amer. v. Mich. Dep’t of Treasury, U.S., No. 16-697, cert. petition filed 11/21/16 ; Goodyear Tire & Rubber Co. v. Mich. Dep’t of Revenue, U.S., No. 16-699, cert. petition filed 11/21/16 ; DirecTV Grp. Holdings, LLC v. Mich. Dep’t of Treasury, U.S., No. 16-736, cert. petition filed 12/5/16 ; Skadden, Arps, Slate Meagher & Flom LLP v. Mich. Dep’t of Treasury, U.S., No. 16-688, cert. petition filed 11/21/16 ; Sonoco Prods. Co. v. Mich. Dep’t of Treasury, U.S., No. 16-687, cert. petition filed 11/21/16 ).

Michigan had waived its right to respond in every case, before the high court issued the Jan. 10 call for responses.

The high court recently has rejected similar petitions involving the compact and its election by member states from California and Minnesota taxpayers, but several business and tax groups have called on the court to wade into the Michigan case in order to clarify when a retroactive tax law may be constitutional.

Washington Law

Dot Foods has challenged a Washington Supreme Court ruling that the retroactive application of a statutory amendment narrowing a business and occupation tax exemption didn’t violate due process. In a Dec. 21 reply, the company reiterated that the case is prime for review—arguing that the state court’s decision “deepens a conflict” among lower courts and implicates “millions, if not billions, of dollars” ( Dot Foods, Inc. v. Wash. Dep’t of Revenue , U.S., No. 16-308, reply in support of petition for certiorari filed 12/21/16 ).

The company also argues that its petition directly relates to an open question highlighted by Justice Sandra Day O’Connor the last time the high court considered the legality of retroactive taxation: in 1994.

Several parties have filed amicus briefs in support of the petition, including prominent taxpayer groups such as the Council On State Taxation and Tax Executives Institute Inc.

After Dot Foods successfully challenged the Washington Department of Revenue’s revised interpretation of the statutory exemption provisions ( Dot Foods I), state lawmakers responded by retroactively narrowing the scope of the business-and-occupation exemption and prospectively repealing it in 2010. The state’s high court sided with the revenue department in the second round of litigation, finding no constitutional violation with the retroactive legislation.

The U.S. Supreme Court also issued a call for response after Washington waived its right.

Likelihood of Acceptance Increased

Charles A. Rothfeld, special counsel with Mayer Brown LLP, told Bloomberg BNA in October that “if response to a petition is waived and the Court is at all interested, it will call for a response.”

Any justice can issue a call for response at any time between circulation of the certiorari petition and the conference date, said Rothfeld, a former clerk at the U.S. Supreme Court who has worked on more than 200 cases and argued more than 30 cases before the court.

Supreme Court filings from the 2001-04 terms show that the overall grant rate increases from 0.9 percent to 8.6 percent after the court calls for a response, according to a 2009 law review article by former Supreme Court clerk David C. Thompson and Melanie F. Wachtell, who worked for a congressional oversight panel at the time.

If Michigan files its briefs in opposition by Feb. 9 and doesn’t ask for an extension, the petitions in the Michigan and Washington cases will probably be considered by the court around mid-March.

If the court accepts the petitions, the cases wouldn’t be heard until the next term.

To contact the reporter on this story: Che Odom at COdom@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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