In 1969, lawmakers enacted the Multistate Compact (Compact), thus providing for the determination of tax liability for taxpayers with business activity or income in multiple states. Originally, the Compact established that if a taxpayer’s income is subject to apportionment and allocation under the laws of a state belonging to the Compact, the taxpayer could elect to apportion and allocate its income under that state’s laws or according to the Compact’s three-factor apportionment formula, based on sales, property, and payroll.
When it was amended in 2011, the rule required a taxpayer that is subject to either the Michigan Business Tax (MBT) or the Income Tax Act to apportion its income by multiplying its tax base by a sales factor.
Repeal of the Compact
In September 2014, Michigan repealed the Compact by way of SB 156. In so doing, lawmakers eliminated the election provision pertaining to a taxpayer’s apportionment of taxes to the state of Michigan, retroactive to January 1, 2008.
The Compact’s repeal stemmed from the 2014 case IBM v Dep’t of Treasury. There, the Michigan Supreme Court addressed the question of whether IBM could elect to use the Compact’s three-factor apportionment formula for its 2008 Michigan taxes, or whether it was required to use the sales-factor apportionment formula under the Business Tax Act of 2008 (BTA). At issue was a refund of almost $6 million.
The Supreme Court concluded that IBM was entitled to use the Compact’s three-factor formula. It reasoned that the Michigan Department of Treasury’s argument that the legislature had repealed the Compact’s election provision by implication when it enacted the BTA was erroneous.
The lawsuits challenging the repeal
After the enactment of SB 156 in 2014, many corporations incorporated outside of Michigan filed suit, asserting that the Compact’s repeal violated state and federal constitutional provisions. Among the provisions plaintiffs identified were:
- State and federal contracts clauses prohibiting interference with contractual relationships;
- State and federal due process clauses prohibiting deprivations of liberty and property interests without due process;
- Separation of power protections, pursuant to which plaintiffs had argued that the legislature lacked the authority to retroactively repeal the election provision of the Compact;
- The federal Constitution’s commerce clause prohibiting actions that interfere with interstate commerce; and
- The First Amendment of the U.S. Constitution protecting a citizen’s right to petition the government for redress of grievances.
The trial court rejected the plaintiffs’ challenges and, in September 2015, the Court of Appeals affirmed. The plaintiffs sought review of the Court of Appeals’ decision in the Michigan Supreme Court. In a series of decisions released on June 24, 2016, including Gillette Commercial Operations North America & Subsidiaries, et al. v. Dept. Treasury, Sonoco Products Co., et al. v. Dept. Treasury, International Business Machines Corp. v. Dept. Treasury, and Lubrizol Corp. v. Dept. Treasury, the court denied review because it was “not persuaded” that it should review the questions presented.
However, one justice, Justice Markman, dissented on the grounds that the issues raised are “of considerable constitutional significance as to matters affecting the tax policy and procedures, the fiscal and business environments, and the jurisprudence of this state…”
Justice Markman took issue with the Appellate Court’s decision with respect to both the state and federal due process claims; the state and federal contract clause protections; and the separation of powers theories.
Quoting the seminal U.S. Supreme Court decision in McCulloch v. Maryland (1819) that recognizes that “the power to tax involves the power to destroy,” the dissenting Justice opined that “before retroactive tax burdens such as those set forth in this law are imposed, the arguments of affected taxpayers deserve consideration by the highest court of this state.”