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Michigan Supreme Court Will Hear Mini-Oral Argument on Apportionment Formula Issue

Tax Development Apr 13, 2022

Michigan Supreme Court Will Hear Mini-Oral Argument on Apportionment Formula Issue

The Michigan Supreme Court (“the Court”) has ordered a mini-oral argument to be heard on the application by the Department of Treasury (“the Department”) for a leave to appeal the Vectren1 case regarding the constitutionality of the state’s standard apportionment formula. 

Last fall, the Michigan Court of Appeals reaffirmed its earlier decision that an alternative method of apportionment was appropriate to avoid unconstitutional distortion by including a gain from the sale of a business in the tax base while excluding the gain from the sales factor. The sale of the business in a section 338(h)(10) transaction in 2011 resulted in a large gain, which the company included in both its tax base and the denominator of its sales factor. Upon audit, the department removed the gain from the sales factor, effectively changing the apportionment factor from 15 to 70% and a resulting $3 million tax assessment. The case has subsequently moved through appeals twice, with a conclusion that the statutory formula produced a “grossly distorted result,” and is now being considered for review by the highest state court. 

In an order issued on March 23, 2022, the Court agreed to shorten the briefing and argument timeline by exploring the issues without a full briefing. In its request for briefs from the Department, the Court requests answers to the following questions:

  • Did Vectren provide clear and cogent evidence that “the business activity attributed to [Vectren] in this state is out of all appropriate proportion to the actual business activity transacted in this state and leads to a grossly distorted result” [per MCL 208.1309(3)]?
  • Does implementing the statutory apportionment formula run afoul of the due process and commerce clauses of the U.S. Constitution incorporated into state statutes?
  • Would it violate the authority of the Department to approve alternative apportionment methods if the Court remanded the issue?

The timeline for responses from the parties involved covers approximately three months. We will keep you updated on the progress of this issue in Michigan.

1 Vectren Infrastructure Services Corp. v. Department of Treasury (SC: 163742; COA:344462; Ct od Claims: 17-000107-MT) March 12, 2020.


Mark L. Nachbar

Mary Bernard

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