Michigan passes law to collect from 2008 - Can they do that?

States cannot tax a multi-state business on its entire income. The states must share. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).  How they share has been a bone of contention for decades. Some states allocate using a weighted average of three factors: sales, property and payroll of the multi-state business taking place in the state compared to everywhere.   Some states use two factors and other states use only one factor. The state of Michigan incorporated a three-factor test which became famous by the United Supreme Court case of Trinova v. Michigan, 498 U.S. 358 (1991). 

An apportionment factor may have an impact on economic development within a state. For example, a change from the traditional three-factor formula to a sales-only formula tends to cut the corporate tax payment of any corporation that is producing goods in a state but selling most of them outside the state where the production occurs. This may encourage businesses that export many of their products outside of the state to locate there because the tax would be nominal or nonexistent. This is exactly what the Michigan legislature thought when it abandoned the three-factor test to a single-factor sales test in 2008. However, the Michigan legislature apparently didn’t make a clean cut from the three-factor apportionment factor because on July 14, 2014, the Michigan Supreme Court held that IBM and other nonresident, multi-state corporations had the option to elect to use the three factor test. 

The Michigan Department of the Treasury estimated that a billion dollars would need to be refunded to taxpayer going back to 2008. The Michigan legislature intervened quickly on September 11, 2014, and retroactively passed legislation that conclusively terminated the three-factor test effective beginning in 2008. In response, the businesses filed another suit claiming the legislature did not have authority to pass retroactive tax legislation. Retroactive effect of tax laws was discussed generally by the U.S. Supreme Court in United States v. Carlton, 512 U.S. 26, 30 (1994). It held that retroactive changes to tax laws can 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. 

The businesses lost their appeal in Michigan. The Michigan Court of Appeals held that the retroactive tax law change was an advisory agreement, not a binding compact or contract, and thus, removal of the three-factor test from the statute was allowed.  The businesses appealed to the United States Supreme Court but were denied on May 22, 2017. 

David M. Repp

Following is a compilation of state apportionment factors:

STATE APPORTIONMENT OF CORPORATE INCOME

(Formulas for tax year 2017 -- as of January 1, 2017)

Source: Compiled by FTA from state sources.

The formulas listed are for general manufacturing businesses. Some industries have a special formula different from the one shown.

* State has adopted substantial portions of the UDITPA (Uniform Division of Income Tax Purposes Act). Slash (/) separating two formulas indicates taxpayer option or specified by state rules.

3 Factor = sales, property, and payroll equally weighted. Double wtd Sales = 3 factors with sales double-weighted Sales = single sales factor

(1) Mississippi provides different apportionment formulas based on specific type of business. A single sales factor formula is required if no specific business formula is specified.

(2) Ohio Tax Department publishes specific rules for situs of receipts under the CAT tax.

(3) New Mexcio and North Carolina are phasing in a single sales factor for manufacture business through 1/1/2018.

(4) Delaware are phasing in a single sales factor for businesses through 1/1/2020.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- David Repp