Michigan Court Of Claims Upholds Legislation Retroactively

The Michigan Court of Claims has upheld the validity of legislation that retroactively repeals the Michigan statutes adopting the Multistate Tax Compact effective January 1, 2008.1 On September 11, 2014, this legislation was enacted to prevent taxpayers from claiming Michigan Business Tax (MBT) refunds based on an election to use the Compact's three-factor apportionment formula.2 This legislation was in response to the Michigan Supreme Court's decision in International Business Machines Corp. v. Department of Treasury that allowed a taxpayer to elect to use the Compact's three-factor apportionment formula on its MBT return for the 2008 tax year.3 In the instant case, the Court of Claims determined that the retroactive repeal of the Compact provisions was constitutional and provided clarity on the original intent of the MBT Act. The Court granted summary disposition for the Michigan Department of Treasury after concluding that the legislation retroactively applied to the instant case and all pending similar MBT refund actions.

Background

Effective July 1, 1970, the state of Michigan adopted the Compact.4 Under the Compact, a taxpayer subject to income tax may elect to use a state's apportionment formula or the Compact's equally-weighted three-factor apportionment formula.5 Michigan has changed its method of taxing businesses several times after adopting the Compact. In 1976, the state replaced its corporate income tax with the Single Business Tax (SBT).6 In 2008, Michigan replaced the SBT with the MBT.7 This tax, which consists of business income tax (BIT) and modified gross receipts tax (MGRT) components,8 expressly repealed the SBT, but did not expressly repeal the Compact. The MBT generally requires taxpayers to apportion their income using a single sales factor formula.9 Michigan returned to a corporate income tax (CIT) for tax years beginning on or after January 1, 2012.10 In May 2011, Michigan amended the statute adopting the Compact to expressly provide that the three-factor apportionment election is unavailable beginning January 1, 2011.11 This amendment was thought to imply that the election was available prior to that date.

On July 14, 2014, the Michigan Supreme Court held in IBM that a taxpayer was allowed to elect to use the Compact's three-factor apportionment formula for purposes of the MBT for the 2008 tax year.12 The Court found that the legislature did not repeal by implication the three-factor formula for tax years 2008 through 2010. Also, the Court determined that the BIT and MGRT components of the MBT were "income taxes" for purposes of the Compact, but did not consider whether the Compact constituted a contract.

On September 11, 2014, Michigan enacted legislation that included an "enacting section" providing that the Michigan statutes that adopted the Compact13 are repealed retroactively and effective beginning January 1, 2008.14 Furthermore, the legislation explained that it expressed the original intent of the legislature to eliminate the Compact's three-factor apportionment election.

Out-of-state taxpayers, including the taxpayer in the instant case, filed MBT returns in which they made the three-factor apportionment election. The Department denied the resulting refund claims, but the Court of Claims held the cases in abeyance until the Michigan Supreme Court decided IBM. After IBM was decided, the Court of Claims lifted its order holding the cases in abeyance. In the instant case, the Court of Claims considered the retroactive application of the...