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Multistate Tax Alert: Michigan Supreme Court Grants Taxpayer’s Application for Appeal in IBM


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Overview

On July 3, 2013, the Michigan Supreme Court1 granted IBM’s petition for review of the November 20, 2012 Michigan Court of Appeals decision in International Business Machines Corp., v. Michigan Department of Treasury (“IBM”). In that decision, the Michigan Court of Appeals held that the enactment of the Michigan Business Tax Act “repealed by implication” the election provision of the Multistate Tax Compact (“Compact”) codified in the Michigan Revenue Act, MCL Section 205.581, §1 Article III(1).2

In this External Tax Alert we summarize the IBM decision and a more recent decision from the Michigan Court of Claims regarding the Compact election, and provide relevant taxpayer considerations.

Summary of IBM court of appeal’s decision

A two-judge majority held in an unpublished Court of Appeal’s opinion that the taxpayer was required to compute its Michigan Business Tax (“MBT”) liability pursuant to the MBT Act’s 100% sales-weighted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.”)3

In finding for Treasury, the Michigan Court of Appeals stated that the MBT Act and Compact cannot be harmonized and are in “irreconcilable conflict”. In light of this purported conflict (and without analysis of the history of MTC or its goal to promote uniformity), the Court of Appeals concluded that the latter-enacted MBT statutory provision “repeals by implication” the election provisions in the MTC.

The court also hinted at the logic of the recent California Court of Appeal decision in Gillette4 (albeit without direct reference to the California decision itself) holding that the MTC is not a binding compact.5 The Michigan Court of Appeals stated:

Our Supreme Court has indicated that this would essentially require the Legislature to specifically use the words ‘contract’ or ‘covenant’ or to otherwise explicitly surrender its power to make such changes . . . . . . Nowhere in MCL 205.581 is it specified that the Compact is a binding contract.

Recent Michigan court of claims decision reached a different outcome regarding availability of compact election

It should be noted that the Michigan Court of Claims recently reached a different conclusion regarding the availability of the Compact election for MBT purposes in Anheuser-Busch, Inc. v. Michigan Department of Treasury.6 The Court of Claims held that the MTC is a compact that is binding on its members, the language of the Compact plainly demonstrated an intent to bind future Legislatures and the MTC cannot be repealed by a conflicting statute.

While the Court of Claims agreed with the Michigan Court of Appeal’s holding in IBM that the MBT Act and the apportionment election provisions of the Compact could not be harmonized, the Court of Claims held that the enactment of the MBT cannot impair the MTC election provision.7

This split in authority may have been a factor in the Michigan Supreme Court’s decision to accept the IBM appeal.

Considerations

Taxpayers that have previously-filed MBT returns seeking to make the Compact election have likely received notices from Treasury disallowing that election and have had their MBT liability recomputed based on a 100% sales-weighted apportionment formula. For those taxpayers that have timely protested these notices (e.g., through a request for an Informal Conference per MCL § 205.21(2)(b)) it is unclear how the recent litigation developments will affect these pending protests though a communication from Treasury may be forthcoming in this regard.

We recommend that companies consult with applicable advisors for further guidance regarding the impact of the Michigan Supreme Court decision to accept the IBM appeal.

Contacts

If you have questions regarding the availability of the Compact election for Michigan Business Tax or Corporate Income Tax purposes, please contact any of the following Deloitte Tax professionals or the Multistate Tax Professional Team providing services to your account.

Tom Cornett
Senior Manager
Deloitte Tax LLP, Detroit
tcornett@deloitte.com
(313) 396-5808
Charles Wright
Senior Manager
Deloitte Tax, LLP, Detroit
charleswright@deloitte.com
(313) 396-5801

Pat Fitzgerald
Director
Deloitte Tax LLP, Detroit
pfitzgerald@deloitte.com
(313) 396-3913

Mike O’Brien
Partner
Deloitte Tax LLP, Detroit
mobrien@deloitte.com
(313) 396-2820


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1 IBM v. Michigan Department of Treasury (July 3, 2013), application for leave to appeal granted, available at
http://publicdocs.courts.mi.gov:81/sct/public/orders/20130703_s146440_102_146440_2013-07-03_or.pdf
2 IBM v. Michigan Department of Treasury, Michigan Court of Appeals (Unpublished Per Curiam Decision, Docket No. 306618. November 20, 2012).
3 As an “unpublished” decision, the Michigan Court of Appeals’ decision in IBM is not controlling upon another Michigan court. (Rule 7.215, Michigan Court Rules of 1985).
For a summary of the Court of Appeals’ IBM decision, please see our External Tax Alert dated November 26, 2012, accessible at:
http//taxshare/tax/serviceline/multistatensf/AllByDocumentId/0F5F3867A23ED4B086257
AC3000AC373/$FILE/IBM Case MBT Repeals by Implication MTC Election Deloitte Tax Multistate External Alert 11-26-2012.pdf 
4 The Gillette Company, et. al. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012.) Unlike the Gillette decision, the majority opinion in IBM did not address the historical context leading to the enactment of the MTC, something the Gillette court took effort to analyze. Gilllette, pgs 3-7.
For a summary of the Gillette decision, please see our External Tax Alert dated January 22, 2013, accessible at: http://taxshare/TAX/SERVICELINE/Multistate.nsf/vwAlias/MultistateTaxAlert-CaliforniaSupremeCourtGrantsReviewinGillette?OpenDocument&menuL=Multistate:MultistateTaxMenu|Multistate Tax
5 IBM at pg. 4. See the Gillette decision, pgs 12-15, for a contrary conclusion based on the California Court of Appeals’ analysis of how the MTC operates in practice and why the MTC is a valid, enforceable interstate compact.
6 Anheuser-Busch, Inc. v. Michigan Dep’t of Treasury, Case No. 11-85-MT (Order and Opinion, Mich. Ct. of Claims June 6, 2013)
7 The Court of Claims was free to reach its own conclusion on the merits because the Court of Appeal’s decision in IBM was unpublished and thus not controlling on other Michigan courts. It is also worth noting that the Court of Claims held that the Modified Gross Receipts Tax (“MGRT”) component of the MBT is not an income tax and thus the Compact election was not available to apportion the taxpayer’s MGRT base.

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