United States: U.S. Supreme Court to Revisit Carlton, Retroactivity Doctrine

Last Updated: May 23 2017
Article by Kyle O. Sollie and Jonathan E. Maddison

At a Glance...

On May 22, 2017, the U.S. Supreme Court denied to hear taxpayer challenges to the retroactive application of changes to tax laws in Dot Foods v. Washington Department of Revenue, and six cases challenging Michigan's retroactive repeal of an alternative apportionment method. Taxpayers have urged the Court to take a retroactivity case for years, and with today's denials, we can expect additional challenges in the future.


The U.S. Supreme Court denied seven petitions for a writ of certiorari seeking review of whether a retroactive change in tax law violates Due Process. One cert petition arose from a challenge to the Washington Legislature's retroactive repeal of an exemption, and six cert petitions arose from the Michigan Legislature's retroactive repeal of an alternative apportionment method. Although the facts vary, each petition involves the Court's prior decision in United States v. Carlton.1 Carlton involved a retroactive change to the Internal Revenue Code, and whether such a change violated Due Process. The majority opinion held that a retroactive change in law is constitutional if it is "supported by a legitimate purpose furthered by rational means."2 In a concurring opinion, Justice O'Connor agreed with the majority opinion, but noted that the decision was correct because the retroactivity period–roughly one year–was for a "relatively short period."3 But a period of retroactivity beyond one year would raise "serious constitutional questions."4

The petitions, as described in more detail below, rely on Justice O'Connor's concurring opinion in Carlton to demonstrate that the period of retroactivity is not for "a relatively short period." Rather, the petitioners argue that the retroactive changes upend taxpayers' expectations and understanding of how to comply with tax laws. This, the petitioners generally argue, violates Due Process.

Dot Foods, Inc. v. Washington Department of Revenue

Dot Foods, Inc. filed a cert petition requesting the Court to review the Washington Legislature's retroactive change of an exemption from tax.5 The period of retroactivity in this case (as counted by Dot Foods) is 27 years. In 1983, the legislature passed an exemption from the Business and Occupation Tax for out-of-state businesses engaged in in-state solicitation through separately organized direct sellers. In 1997, Dot Foods received a letter ruling from the Washington Department of Revenue that it qualified for this exemption. But even after issuing this letter ruling, the Department of Revenue assessed Dot Foods for sales made after January 1, 2000.

In 2009, the Washington Supreme Court held that, under the plain language of the statutory exemption, Dot Foods was entitled to claim the exemption.6 Realizing the financial impact additional refund claims would have on the state, the legislature–just six months after the 2009 decision–retroactively changed the statutory exemption to "conform the exemption to the original intent of the legislature."7 After this retroactive change, the Department of Revenue denied Dot Foods' refund claims previously filed for the 2006 and 2007 tax years, which were covered by the retroactive change.

Dot Foods challenged the denials in state court, arguing that the Department's denials violated Due Process. The trial court agreed with Dot Foods. But on appeal to the Washington Supreme Court, the trial court was reversed and the retroactive legislation was upheld.

Michigan Alternative Apportionment Cases

In 2014, the Michigan Legislature retroactively repealed the Multistate Tax Compact's alternative apportionment formula. Six cert petitions challenging this retroactive repeal were submitted to the U.S. Supreme Court, filed by the following taxpayers: International Business Machines, Gillette Commercial Operations, Goodyear Tire & Rubber Company, Sonoco Products Company, DIRECTV Group Holdings, and Skadden, Arps, Slate, Meagher & Flom LLP.

Each petition derives from a 2014 decision by the Michigan Supreme Court, holding that IBM was permitted to use the Compact's three-factor apportionment formula to determine its Michigan Business Tax liability.8 The Michigan Department of Treasury estimated that this decision, as applied to IBM and similarly situated taxpayers, would cost the state $1.1 billion in refunds. To avoid paying these claims, the legislature retroactively repealed the statutory provision that provided the option to use the MTC formula.9

Each cert petition raises the same general issue for review by the Court: "Consistent with due process, can a State, by statute, change its tax laws retroactively for a period of more than six years, where the change was not promptly instituted and where the change was designed to increase state tax revenue by overriding a Michigan Supreme Court decision determining taxpayer obligations under prior law?"10 

What's Next?

With today's denials, taxpayers remain captive to state legislatures' decisions to retroactively change tax laws. Coupled with the Court's previous denials of petitions raising substantially the same issue, today's denials suggest that the constitutionality of retroactive changes to tax laws will continue to be litigated state-by-state. 

About Reed Smith State Tax

Reed Smith's state and local tax practice is composed of more than 35 lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.

  1. 512 U.S. 26 (1994).
  2. Id. at 30-31.
  3. Id. at 32.
  4. Id.
  5. Dot Foods, Inc. v. State of Washington, Dep't of Revenue, Petition for Writ of Certiorari, U.S. Supreme Court Dkt. No. 16-308.
  6. Dot Foods, Inc. v. State of Washington, Dep't of Revenue, 215 P.3d 185 (Wash. 2009).
  7. Section 401(4), Act of April 23, 2010, Ch. 23, Washington Session Laws, 1st Spec. Sess. 2574.
  8. International Business Machines Corp. v. Department of Treasury, 852 NW.2d 865 (2014).
  9. 2014 PA 282., Enacting Section 1.
  10. Petition for Writ of Certiorari, International Business Machines Corp. v. Department of Treasury, U.S. Supreme Court Dkt. No. 16-698 at i.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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