Recent Case: IBM v. Michigan Department of Treasury (Michigan Supreme Court)

On Monday July 14th, the Michigan Supreme Court held in a split decision that IBM had the right to elect to use the evenly weighted three-factor formula from the Multistate Tax Compact (“MTC”) to apportion its income in calculating its 2008 Michigan taxes. The Michigan Department of Treasury argued that the Michigan legislature’s enactment of the Michigan Business Tax Act (“BTA”)(2008) had repealed, by implication, Michigan’s enactment of the MTC (1970). At the lower level, the Michigan Court of Appeals agreed with the Michigan Depart of Treasury. However, the Michigan Supreme Court did not.

In 2011, the Michigan legislature expressly repealed Michigan’s enacting statutory provision for the MTC. In overturning the Michigan Court of Appeals decision, the Michigan Supreme Court reasoned that the 2011 repeal of the enacting provision for the MTC was evidence that the MTC was still in place in 2008. As a result, the Michigan Supreme Court determined that the taxpayer had the ability to use either the MTC’s even three-factor formula or BTA’s sales-factor formula.

While the result is helpful for taxpayers, the majority opinion did not analyze in detail the issue that many observers are interested in: does a state that has enacted the MTC have unilateral authority to override portions of the MTC by statute (i.e., is the MTC a binding contract that cannot be superseded piecemeal by subsequent laws) or must the state repeal the entire compact (i.e., withdraw from the MTC)? Rather than finding that one provision overrode the other,the majority held that the seemingly conflicting statutory apportionment provisions in the MTC and BTA could be “harmonized” under the doctrine of  in pari materia.

For more whether the MTC is an overriding-binding contract, observers will have to wait until the California Supreme Court makes its decision in Gillette v. California Franchise Tax Board case.

For brief background on MTC, Gillette, and similar litigation, see the Forbes article When State Taxes And Interstate Compacts Collide by Cara Griffith.