United States

Michigan Supreme Court declines retroactive MTC repeal challenge

Allows Michigan Court of Appeals decision upholding repeal to stand


UPDATE (6/29/16): On June 24, 2016, the Michigan Supreme Court declined to review the Michigan Court of Appeals’ decision in Gillette Commercial Operations v. Department of Treasury, which rejected claims by over 50 taxpayers challenging the constitutionality of the state’s retroactive repeal of the Multistate Tax Compact (MTC). In that decision, the Michigan Court of Appeals held that the MTC was an advisory agreement, not a binding compact or contract, and thus, removal from the agreement was not prohibited. The Michigan Supreme Court’s decision to decline review was accompanied by a dissent opining that the taxpayers’ constitutional issues should be heard by the court. Taxpayers may still file a writ of certiorari with the U.S. Supreme Court.

UPDATE (4/10/15): Michigan's courts are moving full steam ahead on applying the state's retroactive repeal of the Multistate Tax Compact (MTC). On April 7, 2015, the Michigan Court of Claims made short work of Anheuser-Busch, Inc. v. Michigan Department of Treasury, Case No. 11-000085-MT, on remand from the Michigan Court of Appeals, issuing an order dismissing Anheuser-Busch's MTC apportionment election refund claims on the grounds that the election did not exist in the years in question (2008-2010) as a result of the enactment of 2014 PA 282 (SB 156).

In a two-paragraph decision, the Court of Claims referred to its prior decisions in Ingram Micro, Inc v Dep't of Treasury, Case No. 11-000033-MT and Yaskawa America, Inc v Dep't of Treasury, Case No. 11-000077-MT, in which the court dismissed similar suits on the same basis. This decision will likely add to the list of more than 50 consolidated cases challenging the state's retroactive repeal of the MTC that are currently pending before the Court of Appeals.

ORIGINAL (10/3/14) On Sept. 11, 2014, Michigan enacted SB 156, retroactively repealing MCL sections 205.581 to 205.589, Michigan’s Multistate Tax Compact (MTC) provisions, effective Jan. 1, 2008, and adopting various retroactive Michigan Business Tax (MBT) Act amendments effective Jan. 1, 2010.


The MTC is a multistate agreement intended to encourage uniformity in the determination of state business income tax liabilities of multistate taxpayers. To become a member of the MTC, a state must enact the provisions of the MTC in their entirety. Article III of the MTC allows a multistate business income taxpayer to elect to use the MTC’s Article IV apportionment provisions in lieu of state-specific apportionment provisions when calculating its business income tax liability in a member state. Article X of the MTC permits any member state to withdraw from the MTC at any time by repealing its enactment of the MTC. 

Effective July 1, 1970, Michigan adopted the MTC by statute and became a MTC member state, arguably providing Michigan corporate net income taxpayers with the option to make the Article III apportionment election. In 1976, however, Michigan replaced its corporate net income tax with the single business tax (SBT), a value-added tax to which the provisions of Article IV arguably did not apply. Then, effective Jan. 1, 2008, Michigan replaced the SBT with the MBT, a hybrid of the Business Income Tax (BIT), a net income tax, and the Gross Receipts Tax (GRT), a gross receipts tax, both of which were subject to apportionment using a single sales factor formula. Bringing this saga full circle, effective for tax years beginning after Dec. 31, 2011, Michigan repealed the MBT and replaced it with a corporate net income tax (CIT), which was also subject to apportionment using a single sales factor formula.

During this time, Michigan did not repeal by statute its enactment of the MTC in its entirety, as required under Article X of the MTC as a prerequisite for withdrawal, and remained a member state. Effective Jan. 1, 2012, Michigan did repeal Article III of the MTC, stating that the three-factor apportionment election was not available for income recognized after Dec. 31, 2010. However, the effectiveness of this partial repeal is suspect and has not been challenged in Michigan courts.

Retroactive repeal of the MTC

The Michigan Supreme Court on July 14, 2014, held in International Business Machines Corporation v. Michigan Department of Treasury, Mich., that IBM was entitled to elect to utilize the MTC’s three-factor apportionment formula to calculate both the BIT and GRT components of its 2008 MBT liability because Michigan had not repealed its enactment of the MTC’s apportionment election. Following the Michigan Supreme Court decision, the Michigan Department of Treasury estimated that MTC apportionment election refund claims by out-of-state taxpayers would cost the state more than $1 billion in aggregate. Although this aggregate refund amount was unsubstantiated, it was so large that the Michigan legislature rapidly responded by passing SB 156 with few votes in opposition. Not surprisingly, Governor Snyder signed SB 156 into law two days later.

Unlike Michigan’s previous repeal  solely of Article III of the MTC, SB 156 acts to repeal Michigan’s MTC provisions in their entirety, as required for withdrawal under Article X of the MTC. However, the Michigan legislature did not stop with the mere withdrawal from the MTC and specifically provided the following regarding the effective date of SB 156:

Enacting section 1. 1969 PA 343, MCL 205.581 to 205.589, is repealed retroactively and effective beginning January 1, 2008. It is the intent of the legislature that the repeal of 1969 PA 343, MCL 205.581 to 205.589, is to express the original intent of the legislature regarding the application of section 301 of the Michigan business tax act, 2007 PA 36, MCL 208.1301, and the intended effect of that section to eliminate the election provision included within section 1 of 1969 PA 343, MCL 205.581, and that the 2011 amendatory act that amended section 1 of 1969 PA 343, MCL 205.581, was to further express the original intent of the legislature regarding the application of section 301 of the Michigan business tax act, 2007 PA 36, MCL 208.1301, and to clarify that the election provision included within section 1 of 1969 PA 343, MCL 205.581, is not available under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.713.

Accordingly, Michigan’s MTC repeal is retroactive to tax years beginning on or after Jan. 1, 2008, notwithstanding the fact that Michigan was a full MTC member in good standing with all rights and responsibilities attendant thereto during those years. Interestingly, given that Michigan participated in Multistate Tax Commission committees, actions, and audit activities over that time, it is arguable that, pursuant to SB 156, those activities were invalid under both Michigan law and the terms of the MTC. It is uncertain whether Michigan’s legislature considered the potential impact of the potential retroactive invalidation of its participation in Multistate Tax Commission activities.

There is little doubt that the retroactivity of SB 156’s MTC repeal will be subject to challenge under the Due Process Clause of the U. S. Constitution and that the state will bear a heavy burden in proving the reasonableness of reaching back more than six years in this manner. In McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990), the U.S. Supreme Court determined that, because taxes deprive taxpayers of their property, the Due Process Clause requires a state to provide procedural safeguards sufficient to ensure that the state collects only the amount of tax to which it is legally entitled and that this requirement extends to a taxpayer’s right to a refund or other relief. In relation to the application of these principles to retroactive amendments to existing tax statutes, the U.S. Supreme Court found in United States v. Carlton, 512 U.S. 26, 30 (1994) that such retroactive changes could be upheld only if “supported by a legitimate legislative purpose furthered by rational means” and that retroactive application of a change was permissible when the amendment was proposed within months of the provision’s original enactment and the period of retroactivity was a modest one year. It remains to be seen how the Michigan courts will work within this analytical framework to address a six-year period of retroactivity enacted for the sole purpose of extinguishing an untold number of refund claims held in abeyance for years.

However, SB 156 did provide some clarity. Even if the retroactivity of Michigan’s repeal of the MTC is successfully challenged, it is highly likely that the repeal will be applied on a prospective basis. Accordingly, while it was arguable that, in light of the questionable validity of Michigan’s partial repeal of the MTC, taxpayers could make the MTC apportionment election going forward on their original CIT returns, the full repeal of the MTC closes off this option.

Other retroactive changes to the MBT

In addition to the repeal of the MTC, SB 156 makes the following amendments to the MBT:

  • The addition of an exclusion from the definition of “gross receipts” for discharge of indebtedness described under IRC section 61(a)(12), including forgiveness of nonrecourse debt.
  • The addition of language to the Investment Tax Credit recapture provisions applicable to the disposition of Michigan assets acquired during MBT tax years.
  • The revision of how a taxpayer located and conducting business in a Renaissance Zone prior to Dec. 1, 2010, computes the Renaissance Zone Credit.

These changes are effective retroactively to Jan. 1, 2010, and may also be subject to challenge on due process grounds.

The statute of limitations issue

However, there is a lurking issue in challenging the constitutionality of SB 156–Michigan’s applicable statute of limitations. Under MCL section 205.27a(7), refund claims challenging the constitutionality of tax laws must be filed within 90 days from the date set for filing the original return. While an MTC apportionment election refund claim is not inherently a constitutional challenge impacted by this rule, a challenge to the constitutionality of the retroactivity of SB 156 arguably would be and could, therefore, arguably be barred for all years other than 2013. Tax year 2013 was a CIT year, and the CIT was not considered in the IBM decision other than implicitly by reference to Michigan’s repeal of Article III of the MTC for tax years beginning after Dec. 31, 2010. For more information regarding the IBM decision and making the MTC apportionment election on CIT returns, read our alert.

This does not mean that taxpayers cannot pursue MTC apportionment election refunds; however, in order to do so, it may first be necessary to successfully challenge the application of the statute of limitations on procedural due process grounds. Such a challenge would require a showing that the statute of limitations made it unreasonably difficult, or in this case practically impossible, to access the courts to challenge the application of SB 156 on constitutional grounds because the statute was already closed when SB 156 was enacted.

Going forward

In rendering its decision in IBM, one of the key findings of the Michigan Supreme Court was that the taxpayer could make the MTC apportionment election because the MTC had not been repealed either explicitly or implicitly. It is arguable that SB 156 would retroactively invalidate that finding, rendering the IBM decision invalid and inapplicable to other taxpayers. This could potentially have a substantial impact on outstanding litigation such as Anheuser-Busch, Inc. v. Michigan Department of Treasury, Case No. 11-85-MT (June 6, 2013), as well as claims held in abeyance and new refund claims that were, and are being, filed in response to the IBM decision.

However, just five days after the passage of SB 156, the Michigan Court of Appeals issued its decision in Lorillard Tobacco Co. v. Michigan Dept. of Treas., Mich. Ct. App., No. 313256 (unpublished opinion Sept. 16, 2014), holding that, like IBM, Lorillard was entitled to make the MTC apportionment election on its 2008 MBT return. In rendering this decision, the court stated that it was bound by the IBM decision. Interestingly, no mention was made in the opinion of SB 156’s retroactive repeal of the MTC apportionment election. Accordingly, if the Lorillard decision is an indicator, Michigan’s courts appear likely to follow the IBM decision for outstanding litigation regardless of the enactment of SB 156.

Refund claims held in abeyance at the Michigan Department of Treasury and new refund claims are unlikely to go as easily and are likely to be denied en masse citing SB 156. Impacted taxpayers will need to challenge any denials in court and will likely be required to sustain a challenge to both the applicable statute of limitations and the retroactivity of SB 156. A claim will likely require years of litigation and may require appeal to the U.S. Supreme Court.

Even in light of SB 156, it is advisable for Michigan taxpayers to review all open years and consider whether making the MTC apportionment election on an amended return would be beneficial. While taxpayers should consider the potential costs of litigation when filing a claim, there is reason to believe that the Michigan Department of Treasury is in the process of issuing denials under SB 156 on already filed claims and that such denials will shortly spawn litigation on point.


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