United States: Michigan Court Of Claims Reconsiders And Rules Against IBM In Multistate Tax Compact Three-Factor Apportionment Case

In the ongoing drama surrounding the ability to elect to use the Multistate Tax Compact's three-factor apportionment formula for purposes of the Michigan Business Tax (MBT), the Michigan Court of Claims has granted the Michigan Department of Treasury's motion for summary disposition, denying IBM's election for purposes for the 2008 tax year.¹ In 2014, the Michigan Supreme Court had ruled in favor of IBM and allowed the three-factor apportionment election.² However, Michigan subsequently enacted legislation that retroactively repealed the Michigan statutes adopting the Compact effective January 1, 2008.³ Based on the Supreme Court decision, the Court of Claims initially granted IBM's motion for summary disposition. However, the Court of Claims recently granted the Department's motion to reconsider and motion for summary disposition because the legislation specifically precluded IBM's three-factor apportionment election.

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This tax, which consists of business income tax (BIT) and modified gross receipts tax (MGRT) components,⁸ expressly repealed the SBT, but did not expressly repeal the Compact.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 MBT purposes 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. The Department filed motions for rehearing, for immediate reconsideration and for stay.

In response to the IBM decision, 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.

On November 14, 2014, the Michigan Supreme Court granted the Department's motion for immediate consideration and denied the motions for rehearing and stay. On November 19, 2014, the Michigan Court of Claims complied with the Supreme Court's July 1, 2014 decision and entered an order granting IBM's motion for summary disposition. However, on December 3, 2014, the Department filed a motion for reconsideration of the Court of Claims' order and asserted that the retroactive change in the law controlled the outcome of IBM's litigation. The Department and IBM also filed motions for summary disposition.

On December 19, 2014, the Court of Claims decided cases filed by other taxpayers and upheld the validity of the legislation that retroactively repealed the Michigan statutes adopting the Compact effective January 1, 2008.¹⁵

IBM's Claim Barred by Retroactive Legislation

In the latest IBM decision, the Court of Claims granted the Department's motions for reconsideration and summary disposition due to the retroactive change in law following the Supreme Court's IBM decision. The Court of Claims explained that IBM was left in the position of explaining why its case, unlike those of all other similarly situated taxpayers, should not be governed by the retroactive legislation.

The Court of Claims rejected IBM's argument that the Department had not identified a palpable error that would entitle it to relief under the Michigan court rule providing for motions for rehearing or reconsideration. The rule provides that "[g]enerally, and without restricting the discretion of the court, a motion for rehearing or reconsideration which merely presents the same issues ruled on by the court, either expressly or by reasonable implication, will not be granted."¹⁶ Furthermore, "[t]he moving party must demonstrate a palpable error by which the court and the parties have been misled and show that a different disposition of the motion must result from correction of the error."¹⁷ As explained by the Court, cases interpreting this rule suggest that the rule is not as restrictive as IBM alleged. The Court acknowledged that it did not have discretion to grant reconsideration if it would violate the law of the case doctrine. Under this principle, "a ruling by an appellate court on a particular issue binds the appellate court and lower tribunals with respect to that issue."¹⁸ However, the Court noted that there was an intervening change in law that occurred after the Supreme Court's IBM decision. Therefore, the law of the case doctrine did not impede the Court of Claims' reconsideration of the order granting IBM's motion for summary disposition.

IBM unsuccessfully contended that the Supreme Court's denial of the Department's motion for rehearing, served as a consideration and rejection of the Department's argument that the retroactive legislation applied to IBM. In rejecting IBM's argument, the Court of Claims noted that the Supreme Court's order denying the Department's motion for rehearing provided no explanation of the reason why such motion had been denied. Thus, there was no basis for concluding that the Supreme Court evaluated the merits of the issue of the retroactive application of the legislation. For this reason, the law of the case doctrine did not apply to the Supreme Court's order.

The Court of Claims then summarily granted the Department's motion for reconsideration. According to the Court, the procedural posture of the case did not mandate that IBM be given a unique status among taxpayers seeking a refund under the three-factor apportionment election argument. Based on the cases that the Court decided on December 19, 2014, the Court concluded that legislation repealing Michigan's adoption of the Multistate Tax Compact precluded IBM from claiming a refund premised on the Compact's elective apportionment formula. The Court of Claims granted the Department's motion for reconsideration and motion for summary disposition.

Commentary

The three-factor apportionment election issue has received considerable attention in Michigan and other states. This most recent decision is not surprising in light of the Court of Claims' previous decisions holding that the legislation could retroactively repeal the Michigan statutes adopting the Compact. However, IBM seemingly had a stronger case for arguing that it should be allowed to make the three-factor election. As discussed above, the Michigan Supreme Court had found in favor of IBM and held that it could make the three-factor apportionment election for 2008. Subsequent retroactive legislation effectively reversed the Supreme Court's decision and prevented IBM from making the election. Clearly, the reason for the retroactive legislation was the $1.1 billion in refunds that otherwise would have had to be paid to taxpayers, many of which are primarily located outside Michigan. The Court of Claims' approval of this retroactive legislation is troubling because court cases decided on the merits in favor of a taxpayer, even by the highest court in the state, effectively can be overruled by a legislature (in conjunction with the tacit failure of that court to intervene) whenever the cost of such litigation for similarly situated taxpayers is deemed to be too great. Considering the controversy surrounding this issue, further litigation challenging the retroactive application of the legislation is virtually certain. Unfortunately, it is becoming less likely that taxpayers will have any measure of success in Michigan regarding this issue.

Footnotes

1 International Business Machines Corp. v. Department of Treasury, Michigan Court of Claims, No. 11-000033-MT, April 28, 2015.

2 International Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014), reh'g denied, 855 N.W.2d 512 (2014).

3 Act 282 (S.B. 156), Laws 2014.

4 MICH. COMP. LAWS § 205.581.

5 MICH. COMP. LAWS § 205.581(Art III)(1).

6 Former MICH. COMP. LAWS § 208.1 et seq.

7 MICH. COMP. LAWS § 208.1101 et seq.

8 MICH. COMP. LAWS §§ 208.1201; 208.1203. The BIT base is calculated by taking federal taxable income and applying several state-specific additions and subtractions before apportionment. The MGRT base consists of a taxpayer's gross receipts less "purchases from other firms" before apportionment.

9 MICH. COMP. LAWS § 208.1301(1), (2).

10 MICH. COMP. LAWS § 206.601 et seq.

11 Act 40 (H.B. 4479), Laws 2011, amending MICH. COMP. LAWS § 205.581(Art III)(1).

12 852 N.W.2d 865 (Mich. 2014), reh'g denied, 855 N.W.2d 512 (2014). For a discussion of this case, see GT SALT Alert: Michigan Supreme Court Allows Multistate Tax Compact Three-Factor Apportionment Election for 2008 MBT Return.

13 MICH. COMP. LAWS §§ 205.581 to 205.589.

14 Act 282 (S.B. 156), Laws 2014. For further discussion of this legislation, see GT SALT Alert: Michigan Enacts Legislation Designed to Eliminate Multistate Tax Compact Apportionment Election Refunds Allowed by IBM Case.

15 Yaskawa America, Inc. v. Department of Treasury, Michigan Court of Claims, No. 11-000077-MT, Dec. 19, 2014. Note that the Court issued a virtually identical opinion in Ingram Micro Inc. v. Department of Treasury, No. 11-000035-MT, Dec. 19, 2014. For a discussion of this case, see GT SALT Alert: Michigan Court of Claims Upholds Legislation Retroactively Repealing Multistate Tax Compact.

16 MICH. CRT. RULE 2.119(F)(3).

17 Id.

18 Ashker v. Ford Motor Co., 627 N.W.2d 1 (Mich. Ct. App. 2001).

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