Press Room: Tax Release

July 25, 2014

Michigan Supreme Court Allows Taxpayer to Elect MTC Three-Factor Apportionment on MBT Return

On July 14, 2014, the Michigan Supreme Court ruled that International Business Machine Corp. (IBM) was entitled to use the Multistate Tax Compact’s (MTC) elective three-factor apportionment formula to calculate its 2008 Michigan Business Tax (MBT) liability and that the Modified Gross Receipts Tax (MGRT) was an income tax under the MTC. The Michigan Supreme Court’s decision reversed the Court of Appeals decision that the legislature repealed the MTC’s election provision by implication due to the mandatory language of the MBT.

Michigan joined the MTC in 1970 with the enactment of MCL 205.581. During that time period, a number of other states also joined the MTC. The MTC’s purpose is to facilitate proper determination of state and local tax liability of multistate taxpayers, promote uniformity and compatibility in significant components of tax systems, facilitate taxpayer convenience and compliance in filing of tax returns, and avoid duplicative taxation. Of relevance, one section of the MTC allows a taxpayer to elect to apportion its income as provided in the MTC, using an equally weighted three-factor apportionment of property, payroll and sales.

The Court addressed four questions: (1) whether the plaintiff (IBM) could elect to use the apportionment formula provided in the MTC in calculating its 2008 tax liability or instead of the apportionment formula provided in the MBT; (2) whether Sec. 301 of the MBT (MCL 208.1301) repealed by implication Article III of the MTC; (3) whether the MTC constitutes a contract that cannot be unilaterally altered or amended by a member state; and (4) whether the MGRT constitutes an income tax under the MTC.

The Michigan Supreme Court answered the first and second questions by holding the two statutes could be read harmoniously, the MBT did not repeal by implication Article III of the MTC and that IBM could elect to use the MTC to apportion its income. The Court noted that repeal by implication is disfavored in Michigan and that courts should strive to read conflicting statues harmoniously. The Court reasoned that the MTC Article III provides that a taxpayer may elect the State’s formula or the MTC’s formula.  Therefore, the MTC contemplates a divergence in apportionment formulas and simply allows the taxpayer to choose one. In addition, the Court noted that the mandatory language in the MBT was nearly identical to Michigan’s former tax regimes, none of which repealed the MTC despite each new tax regime repealing the prior tax regime.  Last, the Court concluded that the legislature intended for the MTC and MBT to exist side by side in 2008 because on May 25, 2011 the legislature repealed Article III and made the repeal retroactive to January 1, 2011 not January 1, 2008. Therefore, the MBT did not repeal the MTC in 2008 and IBM could elect to use the MTC formula to determine its 2008 tax liability.

The Court also answered the fourth question, holding the MGRT was an income tax under the MTC. The Court noted the MTC’s definition of an income tax was broad; it included any tax measuring net income arrived at by subtracting expenses from gross income with at least one of the expense deductions not being specifically and directly related to a particular transaction. The Court then examined how the MGRT worked, noting that the gross receipt amount was reduced by numerous exclusions including bad debts and purchases from other firms. Therefore, the MGRT fit the MTC’s definition of an income tax because gross income was reduced by expenses not related to a specific transaction. 

The decision, however, did not address the third question, whether the MTC constitutes a contract that cannot be unilaterally altered or amended by a member state. But, since the legislature’s amendment to the MTC statute occurred during 2011, retroactive to January 1, 2011, the Court did not need to address the question in order to render its decision for IBM’s 2008 MBT return. MTC Article X (2) states [a]ny party State may withdraw from this compact by enacting a statute repealing the same. The MTC does not provide for states to amend the MTC unilaterally, but rather to withdraw completely. 

Taxpayers should evaluate their prior year Michigan filings to determine if there are tax savings by electing MTC three-factor apportionment. WTAS can assist taxpayers with determining whether there is an opportunity for tax savings by electing MTC three-factor apportionment.