Earlier this fall, the Cook County Board voted to repeal its constitutionally suspect, politically unpopular one cent per ounce sweetened beverage tax (Tax). The short-lived Tax will expire at the end of the County’s fiscal year on November 30, 2017.

Having been tasked with implementing the Tax, the Cook County Department of Revenue (Department) is now charged with unwinding it. Distributors and retailers who have paid the Tax are entitled to credits or refunds on their unsold inventory at month’s end. The Department recently issued guidance on the credit/refund procedure.

Retailers that have paid Tax to their distributors may claim a credit/refund from their distributors for Tax paid on their unsold inventory by completing the Department form entitled “2017 Sweetened Beverage Retailer Inventory Credit Request Form and Schedule A.” Retailers should complete and submit the form to their distributors, not the Department.

Distributors must file a final Tax return with the Department on or before December 20 (Final Return). To the extent a distributor already has refunded or credited Tax to its retailers, the distributor may claim a credit for the amount refunded on the “other deductions” line of its Final Return. Distributors must file the Department’s standard refund application, found on the Department’s website, to claim refunds for amounts refunded or credited to retailers after December 20. The Department has issued a new form (the “Sweetened Beverage Tax Distributor Credit Form Schedule”) to be submitted by distributors to the Department in support of any credit or refund claims. The form requires distributors to identify the retailers to which it has provided credits/refunds and the amounts thereof.

Retailers who self-remit the Tax may take a credit on their Final Return with supporting documentation. In addition, retailers that have unsold inventory as of December 1, on which they previously remitted floor tax, may obtain a refund of the floor tax through the Department’s standard refund procedure.

Practice Notes:

  1. To the extent possible, Taxpayers should take advantage of the opportunity to claim a credit on their Final Returns in order to avoid the time and expense associated with the County’s standard refund procedure.
  2. Since the Tax was repealed, enthusiasm has waned for various Illinois House Bills (HB 4082-84) proposing to limit the authority of localities to impose beverage taxes. It’s difficult to predict whether the bills will be enacted.
  3. However, the State of Michigan has passed legislation, signed into law by Governor Snyder on October 26, 2017, which prohibits municipalities from levying local taxes on food or beverages.

Last month, a bill (The False Claims Amendment Act of 2017, B22-0166) was introduced by District of Columbia Councilmember Mary Cheh that would allow tax-related false claims against large taxpayers. Co-sponsors of the bill include Chairman Jack Evans and Councilmember Anita Bonds. Specifically, the bill would amend the existing false claims statute to expressly authorize tax-related false claims actions against persons that reported net income, sales, or revenue totaling $1 million or more in the tax filing to which the claim pertained, and the damages pleaded in the action total $350,000 or more. The bill was referred to the Committee of the Whole upon introduction, but has not advanced or been taken up since then. Nearly identical bills were introduced by Councilmember Cheh in 2013 and 2016. Continue Reading DC Council Introduces False Claims Expansion – Taxpayers Beware!


As detailed in our blog last month, MoneyGram Payment Systems, Inc. (MoneyGram) is stuck in between a rock and a hard place as states continue to duel with Delaware over the proper classification of (and priority rules applicable to) MoneyGram’s escheat liability for uncashed “official checks.”  The dispute hinges on whether the official checks are properly classified as third-party bank checks (as Delaware directed MoneyGram to remit them as) or are more similar to “money orders” (as alleged by Pennsylvania, Wisconsin and numerous other states participating in a recent audit of the official checks by third-party auditor TSG). If classified as third-party bank checks, the official checks would be subject to the federal common law priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram’s state of incorporation (Delaware) since the company’s books and records do not indicate the apparent owner’s last known address under the first priority rule. However, if the official checks are classified as more akin to money orders under the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Act), as determined by TSG and demanded by Pennsylvania, Wisconsin and the other states, they would be subject to the special statutory priority rules enacted by Congress in response the Supreme Court of the United States’ Pennsylvania v. New York decision and escheat to the state where they were purchased. See 12 U.S.C. § 2503(1) (providing that where any sum is payable on a money order on which a business association is directly liable, the state in which the money order was purchased shall be entitled exclusively to escheat or take custody of the sum payable on such instrument).

In addition to the suit filed by the Pennsylvania Treasury Department seeking more than $10 million from Delaware covered in our prior blog, the Wisconsin Department of Revenue recently filed a similar complaint in federal district court in Wisconsin, alleging Delaware owes the state in excess of $13 million. Other states participating in the TSG audit (such as Arkansas, Colorado and Texas) also recently made demands to MoneyGram and Delaware.

It is interesting to note that in 2015, Minnesota (MoneyGram’s former state of incorporation) turned over in excess of $200,000 to Pennsylvania upon its demand for amounts previously remitted to Minnesota for MoneyGram official checks. Apparently not only do the states in which the transaction occurred disagree with but even a former state of incorporation took the majority path.   Continue Reading Unclaimed Property Hunger Games: States Seek Supreme Court Review in ‘Official Check’ Dispute

On February 16, 2016, the Michigan Department of Treasury announced its new acquiescence policy with respect to certain court decisions affecting state tax policy. The Treasury’s acquiescence policy is similar to the Internal Revenue Service’s (IRS) policy of announcing whether it will follow the holdings in certain adverse, non-precedential cases.

In Michigan, while published decisions of the Michigan Court of Appeals and all decisions of the Michigan Supreme Court are binding on both the Treasury and taxpayers, unpublished decisions of the Court of Appeals and decisions of the Court of Claims and the Michigan Tax Tribunal are binding only on the parties to the case and only with respect to the years and issues in litigation. Nonetheless, the Treasury has determined that a particular decision, while not binding, may constitute “persuasive authority in similar cases.” The Treasury may therefore decide to follow a non-precedential decision that is adverse to the Treasury in other cases, a policy known as acquiescence. Beginning with its May 2016 quarterly newsletter, the Treasury will publish a list of final (i.e., unappealed), non-binding, adverse decisions, and announce its acquiescence or non-acquiescence with respect to each. The Treasury points out that an indication of acquiescence does not necessarily mean that the Treasury approves of the reasoning used by the court in its decision. Continue Reading Michigan Department of Treasury’s New Acquiescence Policy: A Model for Other States

After refusing to back down on the issue for years, the Michigan Department of Treasury (Department) issued guidance last week to taxpayers announcing a change in its policy on the sales and use taxation of remotely accessed prewritten computer software.  This comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property.  See our prior coverage here.  The Department has announced it will apply Auto-Owners (and the numerous other favorable decisions) retroactively and thus allow for refunds for all open tax years.  This is a huge victory for taxpayers; however, those that paid the tax (both purchasers and providers alike) must act promptly to coordinate and request a refund prior to the period of limitations expiring.


In issuing this guidance, the Department specifically adopts the Michigan Court of Appeals interpretation of “delivered by any means” (as required to be considered taxable prewritten computer software).  Going forward, the “mere transfer of information and data that was processed using the software of the third-party businesses does not constitute ‘delivery by any means’” and is not prewritten software subject to sales and use tax.  See Auto-Owners, at 7.  Not only has the Department admitted defeat with respect to the delivery definition, but it also appears to have acquiesced to taxpayers’ arguments with respect to the true object test (or “incidental to services” test in Michigan).  This test was first announced by the Michigan Supreme Court in Catalina Marketing, and provides that a court must objectively analyze the entire transaction using six factors and determine whether the transaction is “principally” the transfer of tangible personal property or the transfer of services with a transfer of tangible personal property that is incidental to the service.[1]  In last week’s guidance, the Department states that if only a portion of a software program is electronically delivered to a customer, the “incidental to service” test will be applied to determine whether the transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property.  However, if a software program is electronically downloaded in its entirety, it remains taxable.  This guidance comes in the wake of Department and the taxpayer in Thomson Reuters, Inc. v. Dep’t of Treasury stipulating to the dismissal of a Supreme Court case involving the same issues that had been appealed by the Department.  In light of these developments, it appears that the Department has given up all ongoing litigation over cloud services.

Immediate Action Required for Refunds

Taxpayers who paid sales or use tax on cloud based services are entitled to receive a refund for all open periods.  In Michigan, the period of limitations for filing a refund is four (4) years after the filing deadline of the original return (including extensions).  See Mich. Comp. Laws Ann. § 205.30 (citing Mich. Comp. Laws Ann. § 205.27a).  Because sales and use tax returns are filed periodically, typically monthly, taxpayers should act quickly to avoid missing out on a portion of their refund.[2]  The Department states that a taxpayer seeking a refund of taxes paid for a product falling within the Auto-Owners opinion should file a written refund request with the Department, which should include any necessary supporting documentation.  The guidance sets forth the requirements and procedure for filing a refund claim, including the address to send the claim to and return requirements.

Vendors who collected the tax from customers will need to carefully review the requirements in Michigan about customer reimbursement to determine what must be done (such as notify customers, etc.) to satisfy the state refund procedures.  Customers who paid tax to vendors on these purchases must notify the vendors (not the Department) that they are owed a refund from the vendor.  Specifically, Michigan statutorily provides that a cause of action against a seller for overcollected sales or use taxes does not accrue until a purchaser has provided written notice, including sufficient information to determine the validity of the request, to a seller and has given the seller 60 days to respond.  See Mich. Comp. Laws Ann. §§ 205.60(2), 205.101(3).  This statutory requirement will force purchasers of cloud-based services to dig deep in their records—as far back as 2012—for documentation that sales tax was paid on the transactions (and collected and paid to the state by whom) and require vendors to promptly respond to customer requests.

Practice Note

While this guidance represents a monumental victory in Michigan, we are wary that the Department may pursue alternative avenues to tax remotely accessed software in the future, such as through the Legislature.  With Michigan starting its 2016 session yesterday, companion exemption bills that were introduced (but not passed) in 2015 will be carried over and are likely to be reconsidered.  There have been discussions that the Department may seek an imposition through the Legislature, so vendors should monitor the 2016 session carefully.

[1] See Catalina Marketing Sales Corp. v. Dept. of Treasury.  678 N.W.2d 619 (Mich. 2004) (identifying six factors to consider when making this determination that include: (1) what the buyer sought as the object of the transaction; (2) what the seller or service provider is in the business of doing; (3) whether the goods were provided as a retail enterprise with a profit-making motive; (4) whether the tangible goods were available for sale without the service; (5) the extent to which intangible services have contributed to the value of the physical item that is transferred; and (6) any other factors relevant to the particular transaction).

[2] In Michigan, taxpayers with annual sales, use and withholding tax due of less than $750 file annually; taxpayers with between $750 and $3,600 annual tax due for the year of the same taxes file quarterly; and taxpayers with over $3,600 annual tax due for the same taxes file monthly—with the return due on the 20th of the following month.

McDermott Will & Emery has released the December 2015 issue of Focus on Tax Controversy, which provides insight into the complex issues surrounding U.S. federal, international, and state and local tax controversies, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation.

Mark Yopp authored an article entitled “Waiting for Relief from Retroactivity,” which discusses how courts are expanding the ability of state legislatures to retroactively change taxpayer liability going back many years.

View the full issue (PDF).

On Tuesday, a three-judge panel sitting for the Michigan Court of Appeals unanimously affirmed a lower court decision finding that the use of cloud-based services in Michigan is not subject to use tax in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015). While there have been a number of cloud-based use tax victories in the Michigan courts over the past year and a half, this decision marks the first published Court of Appeals opinion (i.e., it has precedential effect under the rule of stare decisis). See Mich. Ct. R. 7.215(C)(2). Therefore, the trial courts and Michigan Court of Appeals are obligated to follow the holdings in this case when presented with similar facts, until the Michigan Supreme Court or Court of Appeals say otherwise. While the ultimate outcome (i.e., not taxable) of the lower court decision was affirmed, the analysis used by the Court of Appeals to get there was slightly different and the court took the time to analyze over a dozen different contracts, as discussed below. Given the fact that a petition for review is currently pending in another Court of Appeals case (Thomson Reuters) decided on similar issues in 2014, it will be interesting to see if this development increases the Michigan Supreme Court’s appetite to hear a use tax case on cloud-based services. The Department of Treasury (Department) has approximately 40 days to request that the Auto-Owners decision be reviewed by the Michigan Supreme Court.


Auto-Owners is an insurance company based out of Michigan that entered into a variety of contracts with third-parties to provide cloud-based services. These contracts were grouped into six basic categories for purposes of this case: (1) insurance industry specific contracts, (2) technology and communications contracts, (3) online research contracts, (4) payment remittance and processing support contracts, (5) equipment maintenance and software customer support contracts and (6) marketing and advertising contracts.  The contracts all involved, at some level, software accessed through the internet. Michigan audited Auto-Owners and ultimately issued a use tax deficiency assessment based on the cloud-based service contracts it utilized.  In doing so, the Department cited the Michigan use tax statute, which like many states, provides that tax is imposed on the privilege of using tangible personal property in the state. See generally Mich. Comp. Laws Ann. § 205.93. The Department took the position that the software used in Michigan by Auto-Owners was “tangible personal property,” which is defined to include prewritten, non-custom, software that is “delivered by any means” under Michigan law. See Mich. Comp. Laws Ann. § 205.92b(o). The taxpayer paid the tax under protest and filed a refund claim, which was the focus of the Court of Claims decision being appealed.

Procedural History

At the trial court level, the Court of Claims determined that the application of use tax to the software used in Michigan by Auto-Owners would be improper. In doing so, the court issued three separate holdings—all in favor of the taxpayer. First, the court held that use tax did not apply because prewritten computer software was not “delivered by any means.” The court concluded that the vendors “did not surrender possession and control of the software … or actually transfer the software….” Software was not transferred, only information and data was transferred.  Further, the court concluded that “delivery by any means” was likely intended to mean the electronic and physical delivery of software, not the remote access of a third-party provider’s technology infrastructure because the business model was “essentially unheard of at the time the use tax statute was enacted.” Second, the court held that the software was also not “used” by Auto-Owners (i.e., they did not have control over the software as it only had the “ability to control outcomes by inputting certain data to be analyzed”).  The court rejected the argument that mere access to property equates to use because Auto-Owners did not “exercise a right or power incident to ownership in the underlying software.” Finally, the court held that even if prewritten computer software was delivered and used, the use was “merely incidental to the services rendered by the third-party providers and would not subject the overall transactions to use tax.” Michigan case law provides that if a transaction includes the transfer of tangible personal property and non-taxable services, the entire transaction is not taxable if the transfer of property is incidental to the services, similar to the “true object” test implemented in many other states.  The Michigan Supreme Court articulated a six factor test in Catalina Marketing to determine the proper application of the test, and the trial court found that any use of property was “merely incidental” under the factors.

Court of Appeals Holding

Reviewing the Court of Claims decision de novo, the Court of Appeals rejected the Department’s argument that the lower court erred in its determination that the cloud-based transactions were not taxable.  The court noted that “the transactions at issue in this case were taxable under the [Use Tax Act] if plaintiff exercised control over a set of coded instructions that was conveyed or handed over by any means and was not designed and developed by the author or another creator to the specifications of a specific purchaser.”  Similar to the Court of Claims, the Court of Appeals found that a majority of transactions in this case were not subject to use tax because they did not involve the delivery of prewritten computer software by any means; however, the Court of Appeals noted two caveats to the trial court’s holdings.  First, the appellate court pointed out that the Court of Claims erred to the extent it found all software was located on third-party servers (a factual discrepancy).  Second, and more significantly, the Court of Appeals held that the lower court “improperly narrowed the scope of the term ‘deliver’ to preclude electronic delivery.” Nonetheless, the appeals court conceded that “the Court of Claims correctly determined that the mere transfer of information and data that was processed using the software of the third-party businesses does not constitute delivery by any means of prewritten computer software” noting that “[i]n that situation, only data resulting from the third-party use of software is delivered.”

After analyzing each of the contractual transactions at issue, the Court of Appeals disqualified most of them from the alleged use tax obligation in Michigan on that basis that Auto-Owners lacked sufficient control over the software (i.e., they never exercised an ownership-type right or had access to any of the code that enabled the system). Because of the factual discrepancy noted by the court above, the court proceeded to evaluate the remaining transactions under the six-part Catalina Marketing test.  For each of the remaining transactions, including Cisco WebEx and a Wolters Kluwer online insurance research subscription that included print materials in conjunction with the online subscription, the Court of Appeals found that any tangible personal property controlled by Auto-Owners was merely incidental to the services received. Specifically, the court noted that “[t]here is no indication that [Auto-Owners] could purchase the software or other tangible personal property independent of the services, and the services gave value to the software and other tangible personal property.”

Practice Note

The Department has roughly 40 days to request review of the Michigan Supreme Court, which has no obligation to take the case. It will be interesting to see how the Department reacts to the binding precedent that will certainly set them back in their quest to enforce the use tax against cloud-based service providers. It should be noted that a similar unpublished Court of Appeals case decided in 2014 (Thomson Reuters) currently has a petition for review pending in the Michigan Supreme Court. If the Michigan Supreme Court refuses to take either case, the Department will be bound by the holding and barred from ignoring the binding precedent—at least in the courts. It should also be noted that the Michigan Legislature has considered legislation in the past two regular sessions that would amend the definition of “prewritten computer software” to explicitly exclude granting the right to use software installed on another person’s server for sales and use tax purposes. If judicial defeat does not stop the Department from enforcing use tax on cloud-based services, legislative action may be the only option.

If the Department of Treasury (Treasury) was hoping that the Michigan courts would simply overlook the previous two cloud computing losses this year in Thomson Reuters (previously covered here) and Auto-Owners (discussed here), they appear to have been mistaken.  Last Wednesday’s Court of Claims opinion in Rehmann Robson & Co. v. Department of Treasury marked the third Michigan decision this year to rule that cloud-based services are not subject to use tax in the state.  In Rehmann Robson, the Court of Claims found that the use of Checkpoint (a web-based tax and accounting research tool) by a large accounting firm was properly characterized as a non-taxable information service, despite Treasury’s continued effort to impose use tax and litigate similar cloud-based transactions.  This taxpayer victory comes just six months after the Michigan Court of Appeals in Thomson Reuters found that a subscription to Checkpoint was primarily the sale of a service under the Catalina Marketing test, Michigan’s version of the “true object” test, which looks to whether the use of tangible personal property was incidental to the provision of services when both are provided in the same transaction.  The Thomson Reuters decision reversed a 2013 Court of Claims opinion that granted summary disposition in favor of Treasury’s ability to tax the cloud-based service as “prewritten computer software.”


While all three Michigan decisions issued this year reach the same conclusion, the most recent decision makes an explicit effort to affirmatively block any potential avenue Treasury may use to impose the use tax on cloud-based transactions.  For what it’s worth, the Rehmann Robson opinion was written by the same judge who wrote the Auto-Owners opinion released in March 2014, and contained an identical analysis.  Unlike the Thomson Reuters decision that found use of prewritten computer software in the state, but simply found it to be incidental to the nontaxable information services provided under Catalina Marketing, Auto-Owners (and now Rehmann Robson) both undercut the Treasury’s argument before it begins.

First, the court held that there was no tangible personal property transferred because the definition of “prewritten computer software” was not satisfied.  Like many other states, Michigan defines this term as software “delivered by any means.”  The court reasoned that because the accounting firm simply accessed information via the web that was processed via BNA and Thomson Reuter’s own software, hardware and infrastructure, there was no “delivery” under a conventional understanding of the word.  Absent delivery, there was no prewritten computer software for Treasury to impose tax upon.

Second, the Court of Claims went on to note that even if prewritten computer software was delivered, the accounting firm did not sufficiently “use” the software to impose the tax.  Because the accounting firm did not exercise a right or power over the software incident to ownership (other than the ability to control research outcomes by inputting research terms), there was no use.  The court explicitly turned down Treasury’s argument that mere “access” to Checkpoint’s computer servers equates to use.

Finally, the court noted that even if prewritten computer software was delivered and used within the meaning of the use tax statute, the use of the software was merely incidental to the services rendered under the Catalina Marketing test.  The court objectively considered the six Catalina factors and determined that as a whole, any prewritten computer software was an incidental component of the principal transaction (the provision of information services).

The Rehmann Robson opinion, when paired with Auto Owners and Thomson Reuters, provides three cases that set strong precedents that Treasury has to overcome before subjecting cloud-based services to use tax in Michigan.  It remains to be seen whether Treasury will ignore the Michigan judiciary and continue to litigate cloud-based cases.  With three strikes against them, Michigan taxpayers can only hope that Treasury will take a seat on the bench when it comes to litigating alleged use tax obligations for cloud-based transactions.

Legislative Fix?   

Last Wednesday’s opinion should spark discussion in Michigan over a pair of bills (SB 0142 and SB 0143) introduced in 2013 and carried over into 2014 that would amend the definition of prewritten computer software to explicitly exclude granting the right to use prewritten software installed on another person’s server for sales and use tax purposes.  While these bills will not be carried over into 2015, they certainly appear to be prime candidates to be reintroduced if Treasury continues to assess and litigate the issue.  While no pre-filing of bills is allowed in Michigan, the 2015 session is set to begin January 14, 2015.

Practice Note:  The Rehmann Robson opinion would appear to settle any debate that cloud-based transactions are subject to use tax in Michigan.  At the same time, Michigan has been plagued by a long history of economic difficulties that have put serious pressure on Treasury to raise revenue.  Any party interested in legislatively fixing this ongoing dilemma in Michigan is encouraged to contact the authors as soon as possible to discuss.

On September 11, 2014, Michigan Governor Rick Snyder signed legislation (SB 156) retroactively repealing the Multistate Tax Compact (Compact, formerly codified at MCL § 205.581 et seq.) from the state statutes, effective January 1, 2008.  Among other things, the bill’s passage ostensibly supersedes the Michigan Supreme Court’s decision in Int’l Bus. Machines Corp. v. Dep’t of Treasury, 496 Mich. 642 (2014) (holding that (1) the enactment of a single sales factor under the Business Tax Act (codified at MCL § 208.1101 et seq.) did not repeal Compact by implication and (2) the state’s modified gross receipts tax fell within the scope of Compact’s definition of “income tax” which the taxpayer could calculate using Compact’s three-factor apportionment test) and relieves the Department of Treasury from having to pay an estimated $1.1. billion in refunds to taxpayers.  While many commentators have rightfully focused on the constitutional validity of retroactively repealing the Compact in Michigan in such a manner (including our own Mary Kay Martire in her recent blog post), we think it is equally as important to consider whether the repeal compromises the validity of prior interstate audit assessments authorized pursuant to the Compact.


Article VIII of the Compact provides the specific rules governing participation in interstate audits conducted by the Multistate Tax Commission (MTC) via their Joint Audit Program (Program).  Unlike other provisions of the Compact, Article VIII is “in force only in those party states that specifically provide therefore by statute.”  Section 8 of the Compact provides this authority, simply stating “Article VIII [of the Compact] shall be in force in and with respect to this state.” See MCL § 205.588 (repealed by SB 156).  This threshold matter must be satisfied before the MTC is authorized to audit and assess businesses and review their books and records on behalf of any particular state.

The MTC and its participating audit states have taken the controversial position that membership and participation in the Program is independent from a state’s Compact status (e.g. Massachusetts, Nebraska, Tennessee, and Wisconsin have not adopted the Compact, yet participate in the Program).  Further, even when authorized, states have the discretion to elect not to participate in the Program by simply opting out for one or both of the taxes audited (income and franchise, or sales and use).

Minnesota offers an example of a state that may have withdrawn from the Compact correctly while maintaining the State’s ability to participate in MTC audits.  In May 2013, the legislature enacted legislation repealing the Compact (H.F. 677, repealing Minn. Stat. § 290.171) (this legislation does not appear to be retroactive).  In doing so, the legislature included a separate provision authorizing continued participation in audits performed by the MTC. See Minn. Stat. § 270C.03 subd. 1(9), amended by H.F. 677.  While Minnesota ultimately opted not to participate in these audits, they have statutory authority if they so choose (but as noted above, the Compact itself may not allow for this).


Unlike Minnesota, the recent repeal in Michigan failed to reserve the right to participate in the Program and made the repeal retroactive to Jan. 1, 2008.  These significant differences likely mean that Michigan taxpayers audited pursuant to an interstate audit conducted by the MTC were subject to now-unauthorized audits.  The implications of this retroactive invalidity are not entirely clear, but there are several interesting issues.  For example, taxpayers audited by the MTC on behalf of Michigan may have a breach of taxpayer confidentiality claim based on the lack of audit authority during their audits conducted after 2007.  There may be refund opportunities based on due process or other procedural violations as well (subject to statute of limitations and similar hurdles).

If Michigan’s retroactive repeal of the Compact is declared to be invalid —which we firmly believe it should be—the interstate audit provision is itself elective for the State and not subject to the same due process and compact law restrictions.  As previously discussed, the status of the Compact in a state does not govern participation in the Program and the state can opt out (at any time, for any reason).  Thus, it is possible that by enacting SB 156 Michigan legislators failed to properly retroactively repeal the Compact itself (e.g. the three-factor election) due to constitutional and compact law limits on retroactivity, while manifesting an unambiguous election to not participate in the Program (retroactive to Jan. 1, 2008).  Therefore, Michigan taxpayers audited pursuant the MTC Joint Audit Program should be entitled to some type of relief—regardless of the outcome of the inevitable Compact litigation on the horizon.

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.