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

David Repp, Iowa Table Salt Law, Iowa Taxation Law, Des Moines Iowa, Dickinson Law Firm

Posted on 06/06/2017 at 12:00 AM by David Repp

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)

ALABAMA *

Double wtd Sales

NEBRASKA

Sales

ALASKA*

3 Factor

NEVADA

No State Income Tax

ARIZONA *

Sales/Double wtd Sales

NEW HAMPSHIRE

Double wtd Sales

ARKANSAS *

Double wtd Sales

NEW JERSEY

Sales

CALIFORNIA *

Sales

NEW MEXICO * (3)

80% Sales, 10% Property & Payroll

COLORADO *

Sales

NEW YORK

Sales

CONNECTICUT

Sales

NORTH CAROLINA * (3)

Quadruple wtd Sales

DELAWARE (4)

Double wtd Sales

NORTH DAKOTA *

3 Factor

FLORIDA

Double wtd Sales

OHIO

N/A (2)

GEORGIA

Sales

OKLAHOMA

3 Factor

HAWAII *

3 Factor

OREGON

Sales

IDAHO *

Double wtd Sales

PENNSYLVANIA

Sales

ILLINOIS *

Sales

RHODE ISLAND

Sales

INDIANA

Sales

SOUTH CAROLINA

Sales

IOWA

Sales

SOUTH DAKOTA

No State Income Tax

KANSAS *

3 Factor

TENNESSEE

Triple wtd Sales

KENTUCKY *

Double wtd Sales

TEXAS

Sales

LOUISIANA

3 Factor

UTAH

Sales

MAINE *

Sales

VERMONT

Double wtd Sales

MARYLAND

Sales/Double wtd Sales

VIRGINIA

Double wtd Sales/Sales

MASSACHUSETTS

Sales/Double wtd Sales

WASHINGTON

No State Income Tax

MICHIGAN

Sales

WEST VIRGINIA *

Double wtd Sales

MINNESOTA

Sales

WISCONSIN *

Sales

MISSISSIPPI

Sales/Other (1)

WYOMING

No State Income Tax

MISSOURI *

3 Factor

DIST. OF COLUMBIA

Sales

MONTANA *

3 Factor

   

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

 

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