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Michigan Supreme Court’s Decision Order in IBM Must be Followed


Under Michigan's Business Tax Act ("MBT Act"), generally effective from 2008-2011, income was apportioned using a single sales factor. During the same time period, Michigan law included the Multistate Tax Compact, which allowed taxpayers to elect a three-factor apportionment calculation that considered sales, property, and payroll. In its 2008 MBT return, IBM elected three-factor apportionment, which resulted in a tax refund. The Michigan Department of Treasury denied the refund, citing the MBT statute's single sales factor and arguing that the MBT Act implicitly repealed the Multistate Tax Compact.  In 2014, the Michigan Supreme Court ruled in favor of IBM, permitting its 2008 use of the three-factor apportionment formula. International Business Machines Corp. v. Dep't of Treasury, 496 Mich. 642, 852 N.W.2d 865 (2014).  In response to this ruling, Michigan enacted retroactive legislation explicitly repealing the Multistate Tax Compact beginning January 1, 2008.  See 2014 P.A. 282.

In light of this retroactive legislation, the Department of Treasury sought a rehearing of IBM by the Michigan Supreme Court.  Its motion for rehearing was denied, and the case was remanded to the Court of Claims "for entry of an order granting summary disposition in favor of IBM." The Court of Claims, however, granted the Department's motion and held that the retroactive repeal of the Multistate Tax Compact compelled a decision in favor of the Department. IBM appealed. 

Recent Developments

On July 21, 2016, the  Michigan Court of Appeals released a published opinion holding that the Court of Claims exceeded its authority by reconsidering the Michigan Supreme Court's decision in IBM. The Supreme Court's remand specifically ordered entry of judgment in favor of IBM, and the Court of Claims had no authority to act outside the scope of this directive. As a result, IBM must be permitted to elect three-factor apportionment in its 2008 MBT return. International Business Machines Corp. v. Dep't of Treasury, Mich. Ct. of App., Docket No. 327359. 

While this opinion notes that Michigan's retroactive repeal of the Multistate Tax Compact may be validly applied to other tax disputes that were not resolved by the Michigan Supreme Court (e.g., Gillette Commercial Operations North America & Subsidiaries v. Dep't of Treasury, 312 Mich. App. 394, 878 N.W.2d 891 (2015)), its exact implications are not entirely clear.  Taxpayers with cases held in abeyance or otherwise reliant on the outcome of IBM should review their abeyance orders and carefully consider how this decision might be applied to their specific situations. 

© 2020 Varnum LLPNational Law Review, Volume VI, Number 217


About this Author

Wayne D. Roberts, Corporate tax attorney, Varnum

Wayne is a member of Varnum’s Tax Team. His practice includes all aspects of federal and state tax planning and tax litigation. He represents both closely-held and Fortune 100 companies in tax disputes with the IRS, the Michigan Department of Treasury, and revenue departments in Pennsylvania, Indiana, Tennessee, New York, California and numerous other state and local taxing jurisdictions. 

Erin Haney, Tax attorney, Varnum

Erin is a member of Varnum's Tax Practice Team. As a former senior auditor for the Michigan Department of Treasury, she is experienced in Michigan tax compliance and controversy matters. Erin is also a certified public accountant, and she worked as a tax consultant for a major accounting firm prior to pursuing a career in law. During law school she served as a research assistant reviewing updates for the Guidebook to Michigan Taxes and completed an internship with the United States District Court for the Western District of Michigan.