Michigan: Retroactive repeal of tax compacts stands
Last week, the United States Supreme Court declined to hear the cases of several petitioners that wanted the court to consider whether their states’ repeals of the Multistate Tax Compact, which had the effect of expanding tax liability, were lawful. Six of these cases focused on Michigan’s 2014 retroactive repeal and one on Washington’s 2010 retroactive repeal.
The six Michigan cases are:
- IBM Corp. v. Mich. Dep’t of Treasury, Case No. 16-698;
- Gillette Commercial Ops. N. Amer. v. Mich. Dep’t of Treasury, Case No. 16-697;
- Goodyear Tire & Rubber Co. v. Mich. Dep’t of Treasury, Case No. 16-699;
- DirecTV Grp. Holdings, LLC v. Mich. Dep’t of Treasury, Case No. 16-736;
- Skadden, Arps, Slate Meagher & Flom LLP v. Mich. Dep’t of Treasury, Case No. 16-688; and
- Sonoco Prods. Co. v. Mich. Dep’t of Treasury, Case No. 16-687.
The Washington case is Dot Foods, Inc. v. Wash. Dep’t of Revenue, Case No. 16-308.
When we last addressed this topic, we explained the ins and outs of the Michigan lawsuits challenging the repeal. The crux of the issue was whether SB 156, which took effect on Sept. 12, 2014, was constitutional. Among other things, SB 156 repealed the 1969 law enacting the Multistate Tax Compact and explicitly made that repeal retroactive to Jan. 1, 2008.
The 1969 law provided for the determination of tax liability of taxpayers with business activity or income in multiple state jurisdictions; under certain circumstances, a taxpayer was permitted to apportion income according to a three-factor formula, based on sales, property, and payroll.
But effective on Jan. 1, 2011, lawmakers passed a competing law that required taxpayers to apportion income according to different rules, using just the sales factor. Because SB 156 made the repeal retroactive all the way back to 2008, petitioners were subject to what they considered to be unlawful tax liability.
For example, in Gillette’s cert petition, the firm argued that the “retroactive effect of almost seven years” meant there were aggregate liabilities in an amount of over $1 billion, “upset[ting] settled expectations and reasonable reliance interests” in violation of the Due Process Clause. Additionally, Gillette asked the court to examine whether the Multistate Tax Compact was a contract, such that Michigan should be bound by its terms. The other Michigan cases involved similar matters.
Correspondingly, in its cert petition, Dot Foods, Inc. contended that “a law enlarging tax liability may be applied retroactively only insofar as it rationally furthers a legitimate legislative objective.” However, it pointed out, the court has “never endorsed a retroactive period of more than a year or two—that is, a period covering the year preceding the legislative session in which the law was enacted—as a legitimate means of furthering revenue goals or correcting asserted legislative mistakes in drafting tax laws.” On this rationale, the question put to the Court was “whether, or under what circumstances, imposing additional tax beyond the year preceding the legislative session in which the law was enacted violates due process.’
In declining to hear all of these cases, the court left the tax liabilities intact. For IBM, this meant an amount of $7.2 million for 2009 and 2010.
Gillette, Goodyear, DirecTV and Sonoco all pointed to an aggregate amount for all affected taxpayers of $1 billion.
For petitioner Skadden, Arps, Slate Meagher & Flom, $1.66 million was at stake, for the tax years 2008, 2009, and 2010.
Finally, Dot Foods’ cert petition acknowledged that although the Washington Department of Revenue projected a total revenue loss of more than $150 million during the period at issue, Dot Foods’ refund request was for just over $500,000.
The Tax Foundation characterized the Supreme Court’s denial as “unfortunate.” Its view, on record by way of an amicus brief filed in the Skadden case, is that “[m]any courts are upholding state laws with increasingly long periods of retroactivity, stretching the bounds of ‘legitimate purpose’ and a ‘modest’ period of retroactivity to the point where states can essentially do whatever they please…saddling taxpayers with years of unanticipated tax obligations.”Like many others, the Tax Foundation wanted the Supreme Court to clarify the extent to which retroactive tax legislation is constitutional, because such laws play “a vital role in defining the scope of state tax authority.” Ultimately, the group opined, the retroactive state tax law trend comports with neither the Due Process clause nor the court’s own decisions.