In recent days, the state tax world has focused on the State of Michigan’s retroactive repeal of the Multistate Tax Compact (Compact). Last week, the Michigan Legislature passed and Governor Snyder signed into law a bill (P.A. 282) that nullifies the effect of the state Supreme Court’s July 14, 2014 decision in International Business Machines v. Dep’t of Treasury, Dkt. No. 146440. In IBM, the state Supreme Court held that IBM may apportion its business income tax base and modified gross receipts tax base under the Michigan Business Tax (MBT) using the three-factor apportionment formula provided in the Compact, rather than the sales-factor apportionment formula provided by the MBT. Reflective of the urgency with which he views the situation, Michigan’s Governor Snyder signed the bill into law within twenty-four hours after its passage, with a statement that the state’s actions were an effort to ensure that “Michigan businesses are not penalized for investing in the State.” The Michigan Department of Treasury (MDOT) made no attempt to sugar coat its statements in language that would reflect support for Michigan business interests. Rather, it loudly proclaimed that the Legislature must act because the revenue impact to the State of the IBM decision was $1.1 billion.
The new law repeals L. 1969, P.A. 343, which enacted the Compact, retroactive to January 1, 2008, allegedly in order to express the original intent of the legislature regarding the application of M.C.L.A. §208.1403 of the MBT. (Section 208.1403 specifies that a multistate taxpayer must apportion its tax base to Michigan using the sales factor.) The law goes on to provide that the Legislature’s original “intended effect” of §208.1403 was to eliminate the ability for taxpayers to use the Compact’s three factor apportionment election provision in computing their MBT, and to “clarify” that the election provision included in the Compact is not available to the Michigan Income Tax Act, which replaced the MBT in 2012.
The actions of the state are perhaps not surprising, given MDOT’s revenue estimate and the number of related claims (more than 130) that are reported to be pending before MDOT and/or the Michigan courts on this issue. Earlier this week, the Michigan Court of Appeals issued an unpublished decision holding that the IBM ruling was dispositive on the issue of whether Lorillard Tobacco Company could elect to use a three-factor apportionment formula in computing its MBT for 2008 and 2009. Lorillard Tobacco Co. v. Dep’t of Treasury, No. 313256 (Sept. 16, 2014). Critics of the new law make strong arguments about the unfairness of the state’s recent actions, and tax pundits predict that the retroactivity of the law will soon be the subject of a court challenge. What do Michigan court’s prior rulings on retroactivity teach us about how the Michigan courts are likely to address this issue?
This is not the first time in recent memory that the state has acted to retroactively repeal legislation with the potential for large, negative implications to Michigan’s revenue stream. In General Motors Co. v. Dep’t of Treasury, 803 N.W.2d 698 (2010), the Michigan Court of Appeals upheld the constitutionality of a retroactive amendment to the state’s use tax law. The amendment was enacted in response to a Michigan Supreme Court ruling that new car dealers and vehicle manufacturers were exempt from use tax liability under the state’s sale for resale exemption, despite any interim use to which the vehicles were put pending resale. Betten Auto Center v. Dep’t of Treasury, 731 N.W.2d 424 (2007). While the Betten appeals were pending, GM filed use tax claims with the state in excess of $100 million for time periods going back eleven years to 1996. Following the Betten ruling, the state promptly amended the Use Tax Act to clarify that the interim use of a new vehicle was a “qualifying use” which eliminated the right to claim a resale exemption (Amendment). The Amendment was made effective beginning September 30, 2002 (seven years before the enactment of the Amendment), and for all tax periods not barred by the statute of limitations. The Amendment effectively eliminated GM’s refund claims.
In its legal challenge to the Amendment, GM argued that the Amendment was unconstitutional on several fronts, including the Due Process Clause of Fourteenth Amendment, the Taking Clause and the Title-Object Clause. GM also argued that the Amendment violated the Constitution’s Separation of Powers Clause by interfering with the province of the State judiciary, and that the Amendment was special purpose legislation designed to eliminate GM’s refund claim. All of these arguments were rejected by the Appellate Court.
With respect to the Due Process Clause, citing United States v. Carlton, 512 U.S. 26 (1994), the Appellate Court held that it “has almost universally been recognized” that a legislature’s action to “mend a leak” in the public treasury as a result of a judicial decision is rationally related to a legitimate legislative purpose. Addressing the question whether the legislature achieved its legitimate purpose by rational means, the court held that the period of retroactivity was “modest” for four reasons: (1) the Amendment served only to “confirm the application of a tax previously imposed;” (2) GM had not relied to its detriment on the prior language of the Use Tax law (evidenced by the fact that GM was filing claims for refund, not supporting an original return position); (3) the Michigan Legislature had acted promptly to enact the Amendment after the Betten ruling; and (4) there were many other cases affirming similar periods of retroactivity (which the court chose to characterize as seven years, not the eleven years claims by GM). The Michigan Supreme Court and the U.S. Supreme Court denied GM’s requests for higher court review.
The GM ruling underscores the difficulties that taxpayers face in bringing a constitutional challenge to a taxing statute, even one with a period of retroactivity widely criticized as unfair to taxpayers. The state tax world will watch with interest to see if a successful legal challenge can be raised to the retroactive application of P.A. 282.