Michigan Repeals IBM Three-Factor Apportionment Decision
Published on by Cheryl Ganim in Tax Services
Michigan’s Multistate Tax Compact and the use of the three-factor apportionment formula for purposes of the Michigan Business Tax (MBT) are once again making headlines. Since 1970, Michigan has been a part of the “Compact” – along with multiple other states – that allows a taxpayer to elect a state’s apportionment formula or the Compact’s equally weighted three-factor apportionment formula to pay its taxes. The state has since changed the way they tax businesses implementing the corporate income tax (CIT) method. At that point they expressly made the three-factor apportionment election unavailable beginning January 1, 2011. To some taxpayers, this seemingly implied that the election was available prior to that date.
In a Michigan Supreme Court ruling in 2014, IBM was granted permission to use the Compact’s three-factor apportionment formula for MBT purposes for the 2008 tax year. Other taxpayers followed suit, resulting in $1.1 billion in potential tax refunds. In response, Michigan enacted legislation that retroactively repealed the Compact, effective January 1, 2008. For more on this earlier decision and the Compact, read our state tax apportionment blog.
Since that retroactive legislation was put in place, the Court of Claims decided cases filed by other taxpayers and upheld the legislation in favor of the Michigan Department of Treasury (the Department), disallowing the use of the three-factor apportionment method.
The Latest Court Decision
After multiple appeals to the Michigan Court of Claims (and failed appeals to the Michigan Supreme Court), the Michigan Department of Treasury’s motion to reconsider the IBM case was granted. They stated that the original intent of the 2011 legislature was to eliminate the Compact’s three-factor apportionment election.
The court rejected IBM’s argument that the case would merely present the same issues already ruled on by the Supreme Court – a higher court than the Court of Claims. The change in law that occurred after the Supreme Court’s IBM decision ultimately was the deciding factor in granting the Department’s motion to reconsider. The Court of Claims ruled to uphold the legislation repealing the three-factor apportionment method and prohibited IBM from making the election for 2008. The court explained that IBM was unable to prove why they should be given a unique status among several other similarly situated taxpayers seeking a refund under the three-factor apportionment election argument.
The Impact to Michigan Business Taxpayers
While it’s not a big surprise that the courts reversed its decision regarding IBM to reinforce earlier court decisions, it leaves little hope for Michigan taxpayers on this issue.
This repeal is troubling for taxpayers because it demonstrates that even court cases decided by the highest court in the state can be overruled by retroactive legislature and a lower court ruling on the same issue (in conjunction with the failure of the higher court to intervene).
Obviously, the reason for the retroactive legislation was the $1.1 billion in potential refunds that otherwise would have had to be paid to taxpayers, many of which are primarily headquartered outside Michigan. The repeal effectively mended this issue for the state once they determined that the cost of litigation for the multiple affected taxpayers was deemed to be too great.
There will likely be more controversy on this issue and almost certainly further litigation challenging the retroactive application of the legislation. We will be sure to keep you informed, but for now, it appears that the three-factor apportionment election is “off the table” for taxpayers.
The ruling will have a serious impact on many companies tax situation. If you would like additional information about tax apportionment or to understand how the latest court decision to repeal the will affect your business, Barnes Dennig wants to help! For additional information contact us at 513-241-8313, or click here to email us. We look forward to speaking with you soon.
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