Michigan Court of Appeals Held Retroactive Repeal of MTC Was Valid
October 23, 2015
The Michigan Court of Appeals held that S.B. 156 (P.A. 282), which retroactively repealed the state’s Multistate Tax Compact (MTC) provisions, was a valid act by the state Legislature. The repeal of the MTC, which included a three-factor apportionment formula, was considered valid and did not violate U.S. or Michigan Constitution because it clarified to the taxpayers the legislature’s original intent of the Michigan Business Tax Act (MBT) to require the use of the single sales-factor apportionment.
The case provides a short timeline from when Michigan joined the MTC to the repeal of the MTC below.
- Michigan became a member state to the MTC in 1970
- In 2007, the Michigan Business Tax Act was enacted into law and effective January 1, 2008 which required business taxpayers to use a single sales-factor apportionment.
- In 2011, the legislature repealed the apportionment provision of the MTC (three-factor apportionment).
- Later in IBM Corp v. Department of Treasury, the Supreme Court held that through the repeal of the MTC, a refund window was created from January 1, 2008 until January 1, 2011. During this time period, taxpayers were still allowed to utilize the apportionment option under the MTC. It was noted during this decision that the legislature “could have – but did not – extend this retroactive repeal to the start date of the [MBT].”
- In response to IBM, on September 11, 2014 the Legislature retroactively repealed the Compact to the start date of the MBT, January 1, 2008 by enacting SB 156.
The court determined that the repeal did not violate the contract clauses of the state and federal constitutions. It was determined by the court that the MTC lacked the three indications of a binding interstate compact under federal law. It does not:
- Establish a joint regulatory body;
- Require reciprocal action for effectiveness; or
- Prohibit unilateral modification or repeal
The court therefore interpreted it to be more of an advisory agreement and stated that removal of a state from the Compact was not prohibited. Also, the court stated that it was not a binding contract under state law because the Michigan law that enacted the MTC did not clearly indicate that Michigan contracted away its ability to select an apportionment formula that differed from the MTC or repeal the MTC altogether.
In addition, the Court of Appeals also stated that the legislation did not violate the due process clause because the taxpayers had no vested rights in a tax refund based on the continuation of the MTC, state revenue protections provide the SB 156 with a legitimate purpose for the retroactive repeal, and the retroactive repeal was a sensible means of furthering this legitimate purpose. Further, the legislation did not violate the commerce clause because the MBT’s single-sales factor apportionment formula was not facially discriminatory and did not discriminate against an out-of-state taxpayer. The legislation prevents both in-state and out-of-state taxpayers from making an election to use a three-factor apportionment formula for the purpose of MBT.