Michigan Calls on U.S. High Court to Bypass State Tax Cases

By Michael J. Bologna

The Michigan Department of Treasury contends the state isn’t bound by the Multistate Tax Compact and called on the U.S. Supreme Court to not accept petitions to review the state’s retroactive repeal of the compact three years ago ( Sonoco v. Michigan Dept. of Treasury , U.S., 16-687, brief in opposition to petitions for review filed 3/13/17 ).

The treasury department in a March 13 response brief portrayed the MTC as an “advisory compact, not binding on the state, especially with respect to taxpayers who aren’t parties to the compact” or third-party beneficiaries. The state agency added that the high court had recently denied similar petitions for review involving other states.

Moreover, the department said the dispute with several dozen out-of-state corporate taxpayers was resolved through a legislative correction, controlling on Michigan courts and definitively establishing that the MTC’s three-factor apportionment formula is deemed to have been repealed in 2008. As a result, the treasury department said the Supreme Court lacks jurisdiction to review any questions premised on retroactive application of the apportionment method.

The Michigan Legislature in 2014 amended the Michigan Business Tax Act and repealed the MTC. Under the amendment, businesses were forced to apportion their tax base using a “sales-factor apportionment formula,” retroactive to Jan. 1, 2008. Several taxpayers, including DirecTV, Goodyear, IBM and Sonoco, have asked the Supreme Court to review the state’s retroactive repeal.

The petitioners ask the high court to review the Michigan Supreme Court’s decisions to reject review of multiple consolidated cases seeking refunds and to deny a declaration of the companies’ right to use the compact’s three-factor apportionment formula instead of the BTA’s apportionment regime. At stake is more than $1 billion in potential refunds.

The dispute dates back to the Michigan Supreme Court’s July 2014 holding that IBM could calculate its 2008 tax liability with the compact apportionment election, finding that state legislation repealing the compact beginning January 2011 wasn’t controlling. Months later, the Michigan Legislature withdrew from the compact, retroactive to January 2008.

Consolidate With Washington Case?

The Supreme Court had ordered the state’s response. Now, it may choose to set a hearing to decide whether it will rule on the Michigan petitions, as well as petitions against a similar Washington state law ( Dot Foods, Inc. v. Wash. Dep’t of Revenue, U.S., No. 16-308, reply in support of petition for review filed 12/21/16 ).

The court could combine the Michigan and Washington cases in one hearing.

The Washington case involves Dot Foods Inc.'s challenge of 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.”

Meanwhile, the Tax Foundation has joined a large chorus calling for the U.S. Supreme Court to review Michigan’s retroactive repeal of the Multistate Tax Compact.

The Washington-based tax research organization filed a friend of the court brief Feb. 9. Several briefs filed in December by various tax and business groups—American College of Tax Counsel, Council on State Taxation, National Association of Manufacturers, and Tax Executives Institute, Inc.—echoed the plea for the high court to review the companies’ petitions.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

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

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