Support Grows for High Court to Review Retroactive Tax Case

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By Jennifer McLoughlin

The Tax Foundation has joined the 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, urging the high court to intervene in a challenge over the state’s retroactive application of a tax law governing apportionment of business income ( Skadden, Arps, Slate, Meagher & Flom, LLP v. Mich. Dep’t of Treasury , U.S., No. 16-688, amicus brief filed 2/9/17 ).

“States should not get a free pass to change settled outcomes retroactively decades later just because they left something ambiguous, unaddressed, or deliberately open to multiple interpretations or agency regulation,” Joseph Henchman, Tax Foundation vice president of state and legal projects, said in a Feb. 9 statement.

Sonoco 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 the state Legislature’s 2014 amendment to the Michigan Business Tax Act (BTA) that altered the apportionment approach for business income.

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.” The 2014 amendment provided that businesses must apportion their tax base using a “sales-factor apportionment formula,” retroactive to Jan. 1, 2008.

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.

The Supreme Court requested the state respond to the petitions by March 13.

Legislative Reversal of Courts

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.

According to the Tax Foundation’s statement, “the use of retroactive tax legislation to reverse an unfavorable court ruling is arbitrary and disrupts the separation of powers.”

States Pushing Constitutional Constraints

In its brief, the Tax Foundation highlights a divide among lower federal and state courts over the constitutional constraints on retroactive tax legislation. Specifically, the brief seeks the Supreme Court’s guidance to rein in retroactive tax laws that don’t abide by due process limitations or precedent in United States v. Carlton, 512 U.S. 26 (1994).

The Carlton court upheld Congress’ retroactive amendment to federal estate tax legislation, finding the amendment wasn’t illegitimate or arbitrary as it served to correct an earlier drafting mistake that “would have created a significant and unanticipated revenue loss.” The court further found the amendment extended for a “modest period of retroactivity"—slightly more than one year.

“In Carlton, the Court determined that the purpose for retroactively enacting the amendment was legitimate because it was ‘curative': Congress sought to correct a mistake that would have led to extreme and unanticipated revenue loss,” according to the Tax Foundation’s brief. “In its reasoning, the Court in Carlton gave weight to the fact that a significant, unanticipated revenue loss was imminent and that it was obvious the drafters of the original statute did not intend to create a loophole.”

However, the Tax Foundation notes that many courts broadly interpret the Carlton ruling to mean that any retroactive legislation that avoids revenue loss or raises revenue automatically presents a legitimate legislative purpose. Furthermore, states are operating under a broad meaning of “curative,” which risks a Michigan-type scenario where the evidence doesn’t suggest the original drafters were unaware of the potential revenue impact from adopting legislation.

Appealing for Guidance

“This case presents an opportunity for this Court to provide guidance as to whether preventing revenue loss or raising funds alone makes a retroactive statute legitimate, or if something more is required,” according to the brief. “This case also presents an opportunity for this Court to address whether ‘curative’ retroactive changes encompass provisions deliberately adopted but left ambiguous, or provisions (or court interpretations of those provisions) later legislators decide they now do not like.”

The Tax Foundation further calls for the high court’s guidance on the “permissible temporal limits on tax retroactivity,” noting the wide range of retroactive periods permitted by states.

The Supreme Court 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, after it receives responses from the state. 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” ( 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 ).

To contact the reporter on this story: Jennifer McLoughlin in Washington at

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

For More Information

Text of the Tax Foundation's friend of the court brief is at

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