Waiting For Relief From Retroactivity

Retroactivity is an endemic problem in the state tax world. The past year has seen retroactive repeal of the Multistate Tax Compact (MTC) in Michigan, as well as significant retroactivity issues in New York, New Jersey and Virginia. Relief appeared to be on the way until the Supreme Court of the United States denied certiorari in a Washington estate tax case, Hambleton v. Washington, on October 13, 2015. The Supreme Court's decision came just two weeks after the Michigan Court of Appeals upheld a retroactive period of almost seven years.

The Hambleton petition urged the Supreme Court to take the case in order to resolve the uncertainty of "how long is too long" when it comes to retroactive taxes, citing multiple examples of past and ongoing litigation in which lower courts have taken divergent approaches to the length of permissible retroactivity. For example, the petition cited the ongoing litigation in Michigan over the MTC's apportionment election. In July 2014, in International Business Machines Corp. v. Michigan Department of Treasury, the Michigan Supreme Court held that IBM could apportion its income using the so-called "MTC election," which allowed a taxpayer to use a three-factor formula consisting of property, payroll and receipts to apportion income, rather than the state's standard formula. 852 N.W.2d 865 (Mich. 2014). In September 2014, however, the Michigan legislature retroactively repealed the MTC election and effectively overturned the IBM decision. Fifty taxpayers challenged the retroactive repeal, and those cases were consolidated.

On September 29, 2015, the Michigan Court of Appeals upheld the retroactive repeal of the MTC election in the consolidated cases. Gillette Commercial Operations N. Am. & Subsidiaries v. Dep't of Treasury, et al, Dkt. No. 325258 (Mich. Ct. Claims, Sep. 29, 2015). While the case included several state and federal constitutional and statutory issues, this article will focus on the due process clause.

The due process clause (theoretically) prohibits retroactive laws, because persons must be able to know what the law is, and retroactive law changes prevent a person from having that knowledge. The Supreme Court of the United States' primary case regarding when due process prohibits a retroactive law is U.S. v. Carlton, 512 U.S. 26 (1994). In Carlton, the Supreme Court established a two-part test to determine whether the retroactive effect of a law is allowed under the due process clause. First, the...