Court of Appeals Requires Taxpayer to Use the MBT Single factor Apportionment Formula, Multistate Tax Compact Three Factor Apportionment Not Applicable
In International Business Machines Corp. v. Department of Treasury, Michigan Court of Appeals, No. 306618, November 20, 2012, affirming the lower court, the Michigan Court of Appeals held that a Michigan taxpayer was required to use the Michigan Business Tax (MBT) apportionment formula (100% sales) and that the taxpayer was not permitted to elect to use the Multistate Tax Compact’s apportionment formula (equally-weighted property, payroll, and sales).
The taxpayer argued that the MBT apportionment formula was optional, and the Department of Treasury argued that the MBT apportionment formula was mandatory. The court noted that the MBT statute allowed taxpayers to request permission to use an alternate apportionment method so that unusual situations where the default formula caused distortion would not occur. However, the Compact allowed an election of right, presumably exercised in order to obtain a lower tax liability. Examining the statutory language, the court noted that the applicable provision (M.C.L. 208.1301) absolutely precluded any other apportionment formula except by petition.
The taxpayer next argued that the Compact was a contract. However, the court noted that statutes were not deemed to be contracts in the absence of an exceedingly clearly-expressed intent by the Legislature. Essentially, for the Legislature to express such an intent, it would have had to use the word "contract" or "covenant," or otherwise explicitly "surrender its power to make changes." In addition, the Compact language did not specify that it was a contract. As such, the court reasoned that enacting a conflicting statute might be an improper way to repeal the Compact, but not necessarily impermissible. Accordingly, the MBT law repealed by implication the apportionment election provision in the Compact.
Court of Claims Allows MBT Apportionment Under Multistate Tax Compact
In Anheuser-Busch, Inc. v. Department of Treasury, Michigan Court of Claims, Docket No. 11-86-MT, June 6, 2013, the Court of Claims held the Multistate Tax Compact (MTC) is a binding contract that cannot be repealed by another law, the Michigan Court of Claims permitted a taxpayer to apportion the "income tax" portion of the Michigan business tax (MBT) under the MTC’s three-factor formula, but not the "modified gross receipts tax" portion of the MBT.
The MTC allows taxpayers to elect to apportion "income taxes" according to the member state's laws or according to an equally weighted, three-factor formula in Art. IV of the MTC (Michigan adopted the MTC in 1970). However, under the MBT statutes, only a single-factor sales apportionment formula is permitted. The taxpayer elected to apportion its income under the MTC formula, but the Michigan Department of Treasury recalculated the taxpayer’s tax liability using the MBT formula. According to the Department of Treasury, allowing the option to apportion taxes under the MTC rendered part of the MBT statutory language irrelevant.
In order to resolve this question, the court had to determine whether the MTC is a binding compact upon the state of Michigan, thereby surviving the enactment of conflicting MBT apportionment statutes.
According to the court, the MTC is a binding contract because it plainly states its intent to enter a binding contractual relationship. For example, the text of the MTC states that "the multistate tax compact is enacted into law and entered into with all jurisdictions legally joining therein."
Furthermore, the court noted that the MTC intended to limit the Legislature’s power. Ultimately, the court reasoned that, because the MTC could not be repealed in part by the MBT statute and it could not be harmonized with the provision allowing taxpayers to request an alternative apportionment formula, the MTC controlled and functioned as an exception to the mandatory language of the MBT.
The court also agreed with the taxpayer that the business income tax portion of the MBT was an "income tax" and, thus, was subject to the election provision. However, the court disagreed with the taxpayer that the modified gross receipts tax portion of the MBT was an "income tax." This portion of the MBT is determined by the taxpayer’s gross receipts less purchases from other firms. It is not imposed on or measured by net income. In addition, expenses deducted are related to particular transactions in order to arrive at the value added. The court noted that this is contrary to an income tax, which uses deductions in order to tax the value a taxpayer derives from the economy.
Michigan Supreme Court Grants Application for Leave to Appeal MTC Apportionment in IBM Case
In International Business Machines Corp. v. Department of Treasury, Michigan Supreme Court, No. 146440, July 3, 2013, the Michigan Supreme Court issued an order granting the application for leave to appeal the Court of Appeals judgment holding that a taxpayer was required to use the Michigan Business Tax (MBT) apportionment formula (100% sales) and could not elect to use the Multistate Tax Compact’s apportionment formula (equally-weighted property, payroll, and sales).
The Michigan Supreme Court ordered that the following issues be briefed:
- whether the taxpayer could elect to use the MTC’s apportionment formula or was required to use the MBT apportionment formula;
- whether the MBT repealed by implication Article III(1) of the MTC;
- whether the MTC constitutes a contract that cannot be unilaterally altered or amended by a member state; and
- whether the modified gross receipts tax component constitutes an income tax under the MTC.
Michigan Supreme Court Denies Application for Leave to Appeal MTC Apportionment in Anheuser-Busch Case
In an order issued on August 2, 2013 [Anheuser-Busch, Inc. v. Department of Treasury, Michigan Supreme Court, No. 147438-9 & 10] the Michigan Supreme Court has denied an application for leave to appeal because the court is not persuaded that the questions presented should be reviewed before consideration by the Court of Appeals in the Michigan Business Tax (MBT) case. The Court of Claims held that the Multistate Tax Compact (MTC) was a binding contract that cannot be repealed by another law, so that the taxpayer was permitted to apportion the "income tax" portion of the MBT under the MTC’s three-factor formula, but not the "modified gross receipts tax" portion of the MBT. The taxpayer’s attorney filed a bypass application with the Michigan Supreme Court. The order issued was in response to that bypass application.