United States

Michigan court allows MTC apportionment election for SBT years

No end in sight for Multistate Tax Compact litigation


On Feb. 25, 2016, the Michigan Court of Appeals issued its consolidated decision in AK Steel Holding Corp., et al. v. Department of Treasury, holding that taxpayers were allowed to elect to apportion their single business tax (SBT) base using the equally weighted, 3-factor formula set forth in the Multistate Tax Compact because Michigan’s enactment of the apportionment provisions of the Michigan Single Business Tax Act did not impliedly repeal the elective apportionment method provided for in Michigan's enactment of the Compact.

The Multistate Tax Compact was established to provide for a uniform body of laws intended to equitably facilitate the determination of state and local tax liabilities of multistate taxpayers. To become a member of the Compact, a state must enact the provisions of the Compact in their entirety. Article III of the Compact allows a multistate corporate taxpayer to elect whether to use the Compact rules or member state-specific rules, if they differ, to apportion or allocate income for the purpose of calculating its corporate income tax liability. Article IV of the Compact provides that business income for income tax purposes must be apportioned using an equally weighted, three-factor apportionment formula consisting of a taxpayer’s property, payroll and sales within the member state over its total property, payroll and sales, respectively. Article X of the Compact permits any member state to withdraw from the Compact at any time by enacting a statute repealing its enactment of the Compact in its entirety.

Michigan adopted the Multistate Tax Compact by statute effective July 1, 1970, thereby providing corporate taxpayers with the option to make the Article III apportionment election and use the provisions of Article IV to apportion income for purposes of Michigan’s then-existing corporate net income tax. In 1976, however, Michigan replaced its corporate net income tax with the SBT, a value-added tax to which the provisions of Article IV arguably would not apply.  Originally, the applicability of the Compact apportionment election to the SBT was irrelevant, as apportionment of the SBT base was accomplished by the application of an equally-weighted, 3-factor formula substantially similar to the apportionment formula provided in the Compact.  However, starting in 1991, Michigan enacted a series of amendments to the SBT apportionment formula that created distinct differences, including changes in the weight of the sales factor in relation to the property and payroll factors. For the three years prior to the repeal of the SBT at the end of tax year 2007, the sales factor was weighted 90 percent for 2005 and 92.5 percent for 2006 and 2007.

A variety of taxpayers, including AK Steel Holding Corp., filed SBT refund claims for tax years 2005 through 2007, arguing that the SBT was an income tax for the purposes of the Compact and that they could utilize the elective apportionment formula provided by the Compact. The Michigan Department of Treasury denied these claims, and the taxpayers appealed.  At the trial level, the Michigan Court of Claims granted summary judgment in favor of the Department, ruling that, while the SBT was an income tax within the meaning of the Compact, the enactment of SBT-specific apportionment provisions implicitly repealed the state’s prior enactment of the Compact’s elective apportionment provisions.

The taxpayers appealed, arguing that the Compact apportionment election and formula had not been impliedly repealed by the enactment of separate SBT apportionment provisions. The Department cross appealed, arguing that the SBT was a tax on the privilege of doing business, and was not, as such, an income tax, and that the express retroactive repeal of the Compact for tax years starting on or after Jan. 1, 2008, under 2014 Public Act 282 also applied to tax years 2005 through 2007. The Michigan Court of Appeals consolidated the cases, and ruled in favor of the taxpayers.

In making its determinations, the Michigan Court of Appeals followed in the footsteps of Justice Viviano’s opinion in International Business Machines Corporation v. Michigan Department of Treasury, and found that Michigan’s enactment of SBT-specific apportionment provisions did not impliedly repeal the state’s enactment of the Compact apportionment provisions because the two apportionment formulas could be harmonized by making the SBT-specific apportionment formula the standard approach with elective relief through the Compact formula.  Accordingly, the court reversed the Michigan Court of Claims’ grant of summary judgement and remanded the consolidated cases with instructions that (1) the SBT was an income tax for Compact apportionment election purposes, (2) the Compact apportionment election and formula had not been repealed by the enactment of SBT-specific apportionment provisions, and (3) the retroactive repeal of the Compact extended back only to tax years beginning on or after Jan. 1, 2008. Thus, the retroactive appeal had no effect on the years where the SBT was in force.

Given the large amount of prior and ongoing litigation in Michigan regarding the applicability of the Multistate Tax Compact apportionment election and formula, it is likely that the Department will continue to contest this position and will either seek a rehearing, appeal to the Michigan Supreme Court, or wait to appeal until the Michigan Court of Claims issues an opinion in line with this decision. Additionally, there is always the possibility that the Department will go to the legislature to get the retroactive repeal of the Compact extended back to 2005. Taxpayers with outstanding SBT refund claims should continue to monitor this matter, as it is far from over.  Taxpayers with open SBT years should explore the benefit of making the Compact apportionment election, and should consider filing protective refund claims.


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