Multistate Tax Alert: Later-Enacted Michigan Business Tax Act Repealed the Multistate Tax Compact Election Provision
On November 20, 2012, the Michigan Court of Appeals held in International Business Machines Corp., v. Michigan Department of Treasury (“IBM”) that the enactment of the Michigan Business Tax Act “repealed by implication” the election provision of the Multistate Tax Compact (“Compact”) codified in the Michigan Revenue Act, MCL Section 205.581, §1 Article III(1).1 Stating that the two statutes cannot be harmonized and are in “irreconcilable conflict,” a two-judge majority held in an unpublished opinion that the taxpayer was required to compute its Michigan Business Tax (“MBT”) liability pursuant to the Michigan Business Tax Act’s 100% sales-weighted apportionment formula and was not permitted to apportion pursuant to the equally-weighted, three-factor apportionment formula (property, payroll and sales) provided by the Compact election provision (“Compact Election”).2
The Compact Election and its Interplay with the Michigan Business Tax
The Multistate Tax Commission (“MTC”)3 drafted the Compact in 1966, which became effective in 1967. The MTC was created by the states, in part, in response to federal proposals to regulate state taxation by adopting a uniform method of apportioning net income taxes imposed by the states. Among the Compact’s provisions, states adopting the Compact were required to adopt the Uniform Division of Income for Tax Purposes Act (“UDITPA”) and taxpayers were given the option to elect to use the income apportionment provisions of UDITPA in lieu of other apportionment rules that may be adopted by the member states in the case of net income taxes.
In 1969, Michigan enacted and codified the Compact, including UDITPA, in MCL § 205.581, including the operative provisions providing that a taxpayer subject to an income tax “may elect” to apportion income using the UDITPA equally-weighted, three factor formula consisting of a property, payroll and sales factor.4 In 2007, Michigan adopted the Michigan Business Tax Act (“MBT Act”), enacting the MBT effective January 1, 2008, which requires a 100% sales-weighted apportionment formula for purposes of apportioning both the Business Income Tax (“BIT”) and Modified Gross Receipts Tax (“MGRT”) bases of the MBT.5 Prior to 20116 no explicit limitation appeared to exist on a MBT taxpayer’s ability to apportion using the Compact Election.
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1 IBM v. Michigan Department of Treasury, Michigan Court of Appeals (Unpublished Per Curiam Decision, Docket No. 306618. November 20, 2012), available at http://publicdocs.courts.mi.gov:81/opinions/final/coa/20121120_c306618_72_306618.opn.pdf (Concurring Opinion , Issued by Judge Riordan), available at http://publicdocs.courts.mi.gov:81/opinions/final/coa/20121120_c306618_73_306618c.opn.pdf
2 As an “unpublished” decision (versus a “published” decision), the Michigan Court of Appeals’ decision in IBM is persuasive, though not controlling upon another Michigan court. Rule 7.215, Michigan Court Rules of 1985.
3 The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to administer, equitably and efficiently, tax laws that apply to multistate and multinational enterprises.
4 Public Act 343 of 1969, effective July 1, 1970.
5 Public Act 36 of 2007, effective January 1, 2008. See MCL § 208.1301(2).
6 In May of 2011, Michigan amended Article III(1) of the Compact to provide that “[B]eginning January 1, 2011 . . . a taxpayer subject to the Michigan Business Tax Act . . . . shall not apportion or allocate” in accordance with the Compact. Public Act 40 of 2011.