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Michigan Refund Opportunity

Michigan Supreme Court holds in favor of Taxpayer’s use of the MTC’s equally weighted, three-factor apportionment formula.

On July 14, 2014, the Michigan Supreme Court issued its decision in International Business Machines Corp. (“Taxpayer” or “IBM”) v. Department of Treasury, and decided in favor of the Taxpayer’s election to use the Multistate Tax Compact (“MTC”) equally weighted, three-factor apportionment method for the Michigan Business Tax including both the income tax and the modified gross receipts tax. The Court is not anticipated to accept the request for reconsideration, should there be one. 

This decision in Michigan follows the most recent decision in California’s The Gillette Company, et al. v. California Franchise Tax Board Case.  In California, the Court of Appeals also held in favor of the taxpayer’s use of the equally weighted, three-factor apportionment formula.  The decision in Gillette was appealed to the California Supreme Court and a decision is expected before the end of the calendar year.

 The Issue:

Today there are seventeen Member States of the Multistate Tax Compact.  The MTC default apportionment method is an equally weighted, three-factor apportionment formula of property, payroll and sales.  Over time, most of the MTC Member States have enacted apportionment formulas that are more heavily weighted to the sales factor, if not a 100% sales factor.  Both taxpayers in IBM and Gillette argued that the taxpayer was entitled to elect to use the MTC equally weighted, three-factor apportionment formula instead of the state’s default apportionment formula.  Since the taxpayers in these cases had lower percentages of property and payroll as compared to its sales in the state, the MTC apportionment formula resulted in a lower state tax liability. 

The Opportunity: 

Clients that have significant Michigan liabilities for the years the MBT was in effect (2008-2011) should analyze whether the use of the MTC’s equally weighted, three-factor apportionment formula would be beneficial and, if so, pursue claims for refunds.  The Michigan Supreme Court did not address whether the MTC is applicable to the new Michigan Corporate Income Tax, and thus there may be an opportunity to claim refunds for more recent tax years. 

In addition to California and Michigan, refund opportunities may also exist in other states.  Although the California and Michigan cases are not precedential in other states, they are persuasive evidence of the legal issues.  Therefore, there are opportunities in many of the MTC Member States to take the position that the MTC’s equally weighted apportionment formula is available for use. 

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Gary Bingel's expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

William Gentilesco is a State and Local Tax Group Director focusing on state and local income taxation and sales and use tax consulting.