High Court Urged to Review Michigan Retroactive Tax Case

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By Che Odom

IBM, Goodyear and other companies asking the U.S. Supreme Court to examine the retroactive application of a Michigan tax law are receiving support from various tax and business groups.

The American College of Tax Counsel, Council On State Taxation (COST), National Association of Manufacturers (NAM) and Tax Executives Institute (TEI) have filed briefs urging the high court to consider the businesses’ challenge to Michigan’s application of a law enacted in 2015 to taxes going back to 2008. At stake is more than $1 billion in potential refunds to the companies.

“The uncertainty of when tax legislation may be applied retroactively does great harm to the fair and equitable administration of state and federal taxes,” TEI said in its Dec. 22 amicus brief ( Int’l Bus. Machs. Corp. v. Mich. Dep’t of Treasury , U.S., No. 16-698, brief in support of petitions for certiorari 12/22/16 ).

Despite the support, attorneys familiar with the petitions don’t believe the Supreme Court will take up the matter, having recently rejected similar petitions in other state supreme court cases. Practitioners have said that the retroactivity issue present in the Michigan cases may make them more interesting to the high court, but that still won’t be enough.

Compact Repealed

The Michigan Legislature in 2014 amended the Michigan Business Tax Act and repealed the Multistate Tax Compact.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.

Sunoco Products Co., Goodyear Tire & Rubber Co., International Business Machines Corp., Gillette Commercial Operations North America, DirecTV Group Holdings Inc. and Skadden, Arps, Slate, Meagher & Flom LLP, all out-of-state taxpayers, are contesting several Michigan Court of Appeals rulings that upheld the moves.

They want the Supreme Court to rule that the appeals court erred by not finding the new law to be an unconstitutional due-process violation.

Response Waved

Michigan’s Treasury Department, despite the outside attention, notified the Supreme Court on Dec. 20 that it wouldn’t file a response to the petitions.

Unless the high court calls for a response, the likelihood that it considers the case is very low, appellate attorneys say.

Charles A. Rothfeld, special counsel with Mayer Brown, 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.

Critique of Retroactivity

The high court recently has rejected similar petitions involving the compact and its election by member states, 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.

“The level of controversy and uncertainty in recent years over the constitutional limitations of retroactive state tax legislation has increasingly affected COST’s membership,” COST’s Dec. 22 amicus brief said, urging the high court to rule in favor of the companies.

Their critique focuses on the unpredictability businesses face when a state can retroactively change a tax bill, even those already paid. In addition, states have been able to, in essence, overturn court opinions legislatively, the groups say.

The Supreme Court’s intervention is “necessary to reconfirm due process imposes meaningful constraints on retroactive tax legislation, especially when such legislation is enacted to overturn judicial decisions,” the TEI brief said.

“This ploy creates uncertainty for taxpayers, undermines their ability to make informed business judgments and decisions, is inconsistent with sound tax policy and administration, and wastes judicial resources,” it said.

‘Dot Foods’ Case

Another petition regarding retroactive state taxation is pending before the high court, though the odds of that case moving forward also are low ( 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 ).

And the briefs in support of the Michigan cases make clear: This issue isn’t unique to any one state or legislature.

“Individuals and businesses relying upon the tax laws that applied when their affairs were structured are seeing those expectations retroactively upset without warning and through no fault of their own,” according to the American College of Tax Counsel brief.

The Supreme Court should step in to clarify when retroactive tax laws are appropriate and constitutional, the groups say. The court’s decisions in United States v. Carlton, 512 U.S. 26 (1994) and Comptroller of the Treasury of Maryland v. Wynne,135 S. Ct. 1787 (2015) don’t go far enough, they say.

Uphill Battle

The Michigan petitions are part of a broader challenge to states repealing the compact election, which has been largely unsuccessful.

The high court on Dec. 12 rejected Kimberly-Clark Corp.’s appeal from Minnesota, and earlier this year it turned down a petition to review a similar, foundational case from California involving Gillette Co.

Meanwhile, similar cases continue to percolate through Michigan courts. The state appeals court ruled Dec. 20 against Solo Cup Operating Corp.'s challenge to the state repeal of the compact and retroactive application ( Solo Cup Operating Corp. v. Mich. Dep’t of Treasury , Mich. Ct. App., No. 332891, unpublished 12/20/16 ). The court cited its 2015 holding in a case also involving Gillette, which upheld repeal of the compact.

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

For More Information

Text of the TEI brief is at http://src.bna.com/k08.

Text of the COST brief is at http://src.bna.com/k07.

Text of the American College of Tax Counsel brief is at http://src.bna.com/k06.

Text of the Dec. 20 Michigan Court of Appeals decision is at http://src.bna.com/kX6.

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