IBM, Goodyear, DirecTV Still Owe ‘Retroactive’ State Taxes

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By Che Odom and Michael Bologna

The U.S. Supreme Court decided it wouldn’t review challenges by IBM, Goodyear and other companies to retroactive tax laws in Michigan and Washington state.

The high court announced its decision May 22 among a list of unrelated orders, and tax attorneys immediately expressed disappointment that the court didn’t take the opportunity to provide more clarity on how far back in time a state may stretch its tax statute.

Peter L. Faber, a partner with McDermott Will & Emery LLP in New York and author of the American College of Tax Counsel’s brief in the Washington-based litigation, said the denial would “embolden” state revenue departments and legislatures.

Faber said his brief had called on the high court to correct some of the state conduct after its 1994 decision in United States v. Carlton. Instead, Faber said, the court left the retroactivity door wide open.

The justices passed up the opportunity to narrow Carlton, “which leaves the states with a wide open determination as to what they want to do retroactively,” said Joe Huddleston, an executive director in Ernst & Young LLP’s National Indirect Tax group and former executive director of the Multistate Tax Commission.

Brian Kirkell, Washington national tax leader for the tax services firm RSM US LLP, said the ruling would sow “confusion” within the broader community of taxpayers seeking consistency and fairness from state revenue departments. Taxpayers will have to think long and hard about litigating debatable state tax positions, he said, and businesses may find themselves worrying about the viability of tax returns filed in previous years.

“The U.S. Supreme Court just told me it’s a pretty good rule of thumb that states can go back six years and change their tax laws, even after a court has ruled in a specific business’s favor,” he said. “So now, how does a business do a financial statement? Do you have to do reserves for every tax issue going back six years?”

Jeremy Abrams, counsel in the tax group at Crowell and Moring LLP, told Bloomberg BNA retroactive tax laws “will remain a serious problem for taxpayers going forward, and we can expect more challenges in the future.”

Not on Merits

However, “it’s important to remember that cert denial is not a decision on the merits,” Abrams said.

And the denial “does not mean anything substantive about the general validity of retroactive tax increases,” said Dirk Giseburt, partner at Washington state-based Davis Wright Tremaine LLP who represented Dot Foods Inc., the petitioner in the Washington case.

Officials from Michigan and Washington didn’t immediately respond to requests for comment.

Attorneys for the companies had expressed some optimism that the justices would take the petitions after deferring ruling on them after three previously scheduled conferences.

Several out-of-state companies had asked the U.S. Supreme Court to review state court opinions upholding statutes in the two states that retroactively impact tax assessments years before the laws were enacted. The number of companies challenging the Michigan law increased in mid-April with another petition for review filed by R.J. Reynolds Tobacco Co., the second-largest tobacco company in the U.S. A response to that petition is due June 21.

The retroactive tax law cases denied review are:

  • IBM Corp. v. Mich. Dep’t of Treasury, U.S., No. 16-698 ;
  • Gillette Commercial Ops. N. Amer. v. Mich. Dep’t of Treasury, U.S., No. 16-697 ;
  • Goodyear Tire & Rubber Co. v. Mich. Dep’t of Treasury, U.S., No. 16-699 ;
  • DirecTV Grp. Holdings, LLC v. Mich. Dep’t of Treasury, U.S., No. 16-736 ;
  • Skadden, Arps, Slate Meagher & Flom LLP v. Mich. Dep’t of Treasury, U.S., No. 16-688 ;
  • Sonoco Prods. Co. v. Mich. Dep’t of Treasury, U.S., No. 16-687 ; and
  • Dot Foods, Inc. v. Wash. Dep’t of Revenue, U.S., No. 16-308 .

Washington Case

Dot Foods Inc. was challenging 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 December 2016 reply, the company reiterated that the case was prime for review—arguing that the state court’s decision “deepens a conflict” among lower courts and implicates “millions, if not billions, of dollars.”

The Iowa Supreme Court denied review earlier this year of a lower court decision striking down a retroactive city tax increase, on facts very similar to Dot Foods, Giseburt said. The U.S. Supreme Court may not have seen “a path forward to resolving the issue, given the fractures of legal philosophy among its members today,” he said.

“For now, at least, each state is free to develop its interpretation of the federal standard in its own silo,” he added.

Michigan Cases

In the other cases, 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.

Effect of Denial

Denial of the companies’ petitions for review doesn’t mean the court thinks retroactive tax laws, in general, are constitutional, David Hughes, partner at Chicago-based Horwood Marcus & Berk Chartered, told Bloomberg BNA.

“The Supreme Court receives thousands of cert petitions each year,” Hughes said. “Denial of a cert petition does not mean that the Supreme Court either agrees or disagrees with the lower court decision, only that the case will not be reviewed. If the petition is denied, it has significance to the parties in the case, but it does not necessarily impact other cases.”

The court must weigh many factors when deciding which cases to take,"and I don’t think tax practitioners will, or should, give up hope because the Court wasn’t inclined to take the Michigan and Washington cases at this time,” Maddie Schueler, associate attorney at Kentucky-based Stoll Keenon Ogden PLLC, told Bloomberg BNA.

‘Carlton’ Opinion

Still, Faber said leaving Carlton alone was problematic.

Carlton was a classic example of bad facts creating bad law,” Faber said. “We had hoped that Supreme Court, in Dot Foods, would accept our request that it clarify what it said in Carlton. The pitch we made was that state courts have been misinterpreting what you—the Supreme Court—had said.”

He added, “so I’m really worried that the denial of cert will be read by people as being a license for state legislatures to go out and do anything they want retroactively.”

Huddleston also expressed disappointment that the court made no attempt to refine the standard established under Carlton. He said the court could have established ground rules governing time frames and the “legitimate purposes” of state governments in establishing retroactive tax statutes.

Giving Go-Ahead

Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thonton LLP, agreed the high court had essentially given the states a green light to legislate a retroactive prescription for any negative state court ruling affecting their revenue collections.

“With respect to retroactivity, you have a situation now where state legislatures and governors effectively can overturn judicial precedents,” Yesnowitz told Bloomberg BNA. “That’s not the best approach. This puts taxpayers in a position where they can fight for years and years to get a verdict, but they can’t rely on that verdict because—if it has a significant effect—the legislature and the governor can come back and retroactively overturn the decision. That’s definitely problematic for taxpayers long-term.”

Kirkell said the decision creates clarity in a very narrow sense, related to active and potential tax disputes under the Multistate Tax Compact involving Michigan taxpayers.

To contact the reporters on this story: Che Odom at and Michael Bologna at

To contact the editor responsible for this story: Ryan C. Tuck at

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