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New York: Supreme Court embraces DOMA strike down in estate tax guidance memorandum detailing same-sex spouse equal estate tax treatment

On July 18, 2013, the New York State Department of Taxation and Finance (the “Department”) issued a Technical Memorandum (the Guidance Memo), TSB-M-13(9)M, that provided guidance on the effect of the United States Supreme Court’s decision in United States v. Windsor on New York estate taxes (133 S. Ct. 2675 (2013)). In Windsor, the Supreme Court found Section 3 of the Defense of Marriage Act (DOMA), which barred same-sex couples from being recognized as “spouses” for purposes of federal law, to be unconstitutional. Following the determination by the Supreme Court that Section 3 of DOMA, 1 U.S.C. § 7 (2013), to be unconstitutional, anyone legally married when Section 3 of DOMA was effective, should not have paid estate tax as a single filer. The Guidance Memo is the result of the Supreme Court’s determination and New York’s Marriage Equality Act, N.Y. Dom. Rel. Law §§10-a and 10-b (McKinneys 2011), passed in 2011 (Marriage Equality Act), which legally permitted same-sex couples to marry in New York.

Furthermore, the Marriage Equality Act also provides that estates of individuals legally married to same-sex spouses who died on or after July 24, 2011 are entitled to the same tax treatment as different-sex couples. The Guidance Memo provides, “[a]s a result of the decision, for New York estate tax purposes, estates of individuals legally married to same-sex spouses are entitled to claim the same deductions and elections allowed for estates of individuals legally married to different-sex spouses, including the marital deduction, for all years open under the statute of limitations.” This means that in the wake of the Supreme Court’s decision in Windsor, the Marriage Equality Act can apply retroactively to individuals legally married to same-sex spouses who died before the July 24, 2011 cutoff. Thus, any taxpayer to whom this Guidance Memo applies can now amend any previously filed estate tax return and obtain a credit or refund for any overpayment of estate taxes. The affected taxpayers are only entitled to such amendments for any previously filed estate tax return where the statute of limitations to apply for a refund has not run out. The applicable statute of limitations is the later of: 1) Three years from the date the original return was filed (if the original return was filed before the due date, three years from the due date), or  2) Two years from the date the tax was paid. In order to amend an estate tax return, the taxpayer should file Form ET-706, the New York State Estate Tax Return.

The Internal Revenue Service (IRS) has not yet issued any similar guidance addressing how it will handle federal tax implications from the Windsor decision. However, on June 27, 2013, the IRS issued a statement that the agency “will be working with the Department of Treasury and Department of Justice, and . . . will move swiftly to provide revised guidance in the near future.” The impact of the Windsor decision will vary from each state that has legalized same-sex marriage. We will keep you updated as other states issue guidance in light of the Windsor decision.

Click here to read the Department’s Guidance Memo.

Michigan: State Supreme Court agrees to hear multistate tax compact case

The Michigan Supreme Court recently agreed to hear International Business Machines Corp. v. Department of Treasury to decide if businesses operating in Michigan can choose to use the Multistate Tax Compact formula, rather than a state-issued formula, to determine their apportioned taxable income (494 Mich. 874, 832 N.W.2d 388 (2013)). A Michigan claims court held in favor of the Michigan Department of Treasury (the Department), finding that businesses filing tax returns in Michigan must use the state-issued formula. A Michigan appeals court affirmed that decision. The case now moves to the Michigan Supreme Court.

In 2008, International Business Machines (IBM) used a three-factor formula, which took into account property, payroll and sales to determine its Michigan tax liability. The formula was derived from the Multistate Tax Compact, which was adopted by Michigan and allows a taxpayer to apportion and allocate their tax liability based on the three factors. Using the Multistate Tax Compact formula, IBM determined it was entitled to a tax refund of approximately $6 million. The Department used a different formula, as set out in the Michigan Business Tax Act, and found that IBM was only entitled to a tax refund of approximately $1.2 million. In an effort to save almost $5 million, IBM sued the Department claiming that it was entitled to use the Multistate Tax Compact formula because the Business Tax Act allows businesses the option of which formula to use. In relying on the Business Tax Act’s requirement to receive permission from the Department in order to use a different formula, the Department argued that since IBM did not ask permission to use another formula, IBM was required to use the formula provided in the Business Tax Act.

At trial, the Claims Court found that the Business Tax Act did not give an option and found in favor for the Department; IBM then appealed to the Court of Appeals. The Court of Appeals looked at whether the Business Tax Act’s formula was mandatory or optional for determining the appropriate income reported on a company’s tax return. IBM argued that since the Business Tax Act was amended in 2011 to eliminate the option of using the Multistate Tax Compact formula, this meant that tax returns filed prior to 2011 did have an option. The Court of Appeals disagreed, noting that since the Business Tax Act specifically states that a business wanting to use a different formula must petition the Department, the Business Tax Act formula was not optional. The Court of Appeals further explained that the legislature would not have included the petition process and the requirement to obtain prior approval if the use of the Business Tax Act formula were optional.

In the alternative, IBM argued that the Multistate Tax Compact was a “binding contract” on the state; however the Court of Appeals rejected this argument. IBM attempted to have the Court of Appeals view the Multistate Tax Compact as a contract. Therefore, the Multistate Tax Compact would have survived the Business Tax Act’s 2011 amendment, essentially functioning as an exception to it. The Court of Appeals disagreed, citing as authority the Michigan Supreme Court’s precedent holding that a statute will not be deemed to be a contract unless there is “exceedingly clearly-express intent by the Legislature.” The Court of Appeals did not find evidence of this intent when Michigan adopted the Multistate Tax Compact. Therefore, the lack of intent solidified the Court of Appeals’ ruling that it was not a binding contract.

The Michigan Supreme Court has agreed to hear IBM’s appeal. We will update you as the case develops and the Michigan Supreme Court issues a decision. 

Click here to view the Court of Appeals’ decision.

Illinois: Cook County use tax on non-titled personal property enjoined

On July 24, 2013, the Cook County Circuit Court (the Court) granted a preliminary injunction against enforcement of the controversial Cook County Non-Titled Personal Property Use Tax (the Use Tax), which required taxpayers located in Cook County to pay a use tax on the value of non-titled personal property purchased outside of Cook County when it is first used inside Cook County. Cook County includes the City of Chicago.

Effective April 1, 2012, the amount of use tax imposed was 1.25 percent of the value of such non-titled personal property, which was 0.50 percent higher than the Cook County sales tax. Effective June 1, 2013, the tax rate was reduced by Cook County to 0.75 percent of the value of such non-titled personal property, tax rate equal to the Cook County sales tax rate. The Use Tax was meant to close a budget gap and to stimulate the local economy by discouraging county taxpayers from buying outside Cook County.

In their motion for preliminary injunction, two law firms and the Chicagoland Chamber of Commerce argued to the Court that such Use Tax:

  1. Violated state law disallowing a home-rule unit from imposing a use tax on the selling or purchase price
  2. Violated the Illinois Constitution’s prohibition on ad valorem taxes on personal property
  3. Violated the Dormant Commerce Clause of the United States Constitution

 A preliminary injunction is an unusual remedy in a tax case. The granting of such preliminary injunction indicates that the Court determined Cook County was highly likely to lose after a full trial on the merits of the case and that the Chicago business community was substantially likely to be irreparably harmed from the imposition of such Use Tax.

Cook County has notified the Court that it will be making a motion to reconsider the granting of this preliminary injunction. The matter is set for a hearing on September 10, 2013. We will update you on this case as it progresses.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.