News and Insights

Michigan Court of Appeals Upholds Repeal of Multistate Tax Compact

Tax Development Mar 22, 2016

The Michigan Court of Appeals (“Court”) dismissed 20 consolidated appeals from taxpayers challenging the constitutionality of Michigan’s 2014 Public Act 282 (“PA 282”) and seeking refunds of the Michigan Business Tax (MBT). PA 282 retroactively repealed the Multistate Tax Compact (MTC) and its three-factor-apportionment-formula election.

The MTC allowed taxpayers to use a three-factor-apportionment formula to compute state income tax, but MBT required taxpayers to a single-sales-factor-apportionment formula. The taxpayers claimed refunds of the MBT using the MTC’s three-factor-apportionment formula, instead of the single-factor formula required by the MBT.

In 2014, the Michigan Supreme Court approved the use of the three-factor-formula method in International Business Machines Corp. v. Department of Treasury, No. 146440, July 14, 2014. In response, the Michigan Legislature adopted PA 282, repealing the MTC and taxpayers’ ability to use the three-factor-formula method. Taxpayers argued that PA 282 violated the MTC, due process, separation of powers, commerce, and title-object clauses of the Michigan and federal constitutions.

Dismissing the claims, the Court stated that the arguments raised by the taxpayers were identical to the arguments raised in Gillette Commercial Operations North America & Subsidiaries, et al. v. Department of Treasury, where this Court upheld the constitutionality of PA 282. The Appellate Court in Gillette held that the MTC was neither a binding interstate compact under federal law nor a binding contract under state law. The MTC did not establish a joint regulatory body, require reciprocal action for effectiveness, or prohibit unilateral modification or repeal. In addition, there was no clear indication that Michigan contracted away its ability to either select a different apportionment formula or to repeal the MTC altogether. In fact, the MTC expressly provided that members could withdraw unilaterally without notice to other states.

Further, the Appellate Court found that PA 282 did not violate due process because taxpayers had no vested rights in tax refunds based on the continuation of the MTC three-factor formula, and that protection of state revenues provided the Legislature with a legitimate purpose for giving retroactive effect to PA 282. Moreover, the Appellate Court ruled that PA 282 did not violate the Commerce Clause because the MBT single-factor apportionment formula did not discriminate against an out-of-state taxpayer. The Gillette decision is currently on appeal before the Michigan Supreme Court.  That Court will ultimately determine the constitutionality of PA 282.

In December 2015, the California Supreme Court ruled that California was not barred from disabling the MTC apportionment election and could require taxpayers to apportion their income to California by double-weighing the sales factor. In addition, tax courts in Oregon and Minnesota reached similar conclusions. These decisions are also on appeal to their respective Supreme Courts.


Mark L. Nachbar

Robert A. Sheehan