The Michigan court, in stark contrast to the Gillette court in California, held that entering into the compact was not akin to entering into a contract and the adoption of the MBT allocation and apportionment provisions implicitly repealed the compact election. International Business Machines Corp. v. Dep’t of Treasury, No. 306618 (Mich. Ct. App. November 20, 2012)
Michigan enacted the Multistate Tax Compact in 1969, which was effective in 1970.
In 1976, Michigan replaced its net income tax with the Single Business Tax (SBT)—a value-added tax. However, the compact remained part of Michigan’s law. Specifically, Mich. Comp. Laws § 205.581(1)(Art III)(1) historically provided that taxpayers “may elect to apportion and allocate” their tax liability in accordance with a three-factor formula specified in the compact.
The Multistate Tax Compact, however, only applies to income taxes; thus, for many years it had no application because the SBT was a value-added tax.
Effective January 1, 2008, Michigan lawmakers repealed the SBT and replaced it with the MBT. [Note that effective January 1, 2012, the MBT was repealed and replaced with a corporate income tax.]
The MBT was composed of four separate taxes:
- A business income tax (BIT)
- A modified gross receipts tax (GRT)
- A financial institutions franchise tax
- An insurance company premiums tax.
Mich. Comp. Laws Ann. § 208.1301(1) specifically provided that taxpayers must use the apportionment provisions in the MBT Act “except as otherwise provided in this act.”
Facts of the case
The taxpayer was subject to the BIT and GRT components of the MBT.
Taking the position that the BIT and GRT were income taxes, the taxpayer filed its 2008 MBT return using the allocation and apportionment provisions set forth in the compact. [Effective January 1, 2011, the compact was amended to provide that taxpayers must use the allocation and apportionment provisions set forth in the MBT Act.]
After auditing the taxpayer’s 2008 return, the Michigan Department of Treasury adjusted the return by applying the MBT Act’s apportionment provisions. The taxpayer protested the adjustment, and the issue went before the Michigan Court of Claims, which held that the taxpayer was required to use the MBT allocation and apportionment provisions, or petition Treasury for permission to use an alternative method.
The taxpayer appealed.
Michigan Court of Appeals decision
Before the appeals court, the taxpayer’s position was that the Multistate Tax Compact election was available in filing its 2008 MBT return. In the taxpayer’s view, the fact that the compact was amended to provide that no election was available after January 1, 2011, evidenced that the election was available in earlier tax years.
The appeals court declined to attach any meaning to the compact amendment, noting that statutory changes merely clarifying existing law can be made prospectively.
The court next tried to reconcile the seemingly contradictory provisions in the compact and the MBT Act. Although “repeals by implication” are generally disfavored, the court “reluctantly” concluded that there was no way to harmonize the compact election with the provisions mandating use of the MBT Act’s apportionment provisions. In the court’s view, the later and more specific MBT statute, which precluded any other apportionment methodology except by petition, must prevail.
The court next rejected the taxpayer’s argument that the compact was essentially a binding contract that remained operative even after the enactment of the MBT Act. The court noted that the Michigan Supreme Court had previously explained that a statute cannot be deemed a “contract” unless explicitly expressed as such.
The appeals court found it significant that no provision of the compact indicated that it was intended to be a binding contract or expressed that the legislature specifically surrendered its power to make changes to the compact’s provisions. Although a certain provision of the compact appeared to bind future legislatures, there was no specific provision precluding lawmakers from making changes to the compact’s allocation and apportionment provisions.
Furthermore, although the compact set forth a means of withdrawing from the compact—by means of enacting repealing legislation—the appeals court concluded that adopting a conflicting statute was an arguably improper, but not impermissible, means of repealing the compact.
It remains to be seen whether the taxpayer will appeal to the Michigan Supreme Court.
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