Jan 26, 2015
From KPMG TaxWatch
Recently, the Michigan court of Claims issued two decisions addressing the validity of the Multistate Tax Compact (Compact) repeal legislation enacted last year. Recall, on July 14, 2014, the Michigan Supreme Court ruled that a taxpayer could make the Multistate Tax Compact election on its original 2008 Michigan Business Tax (MBT) return. In the court’s view, because the Compact was part of Michigan law and could be read in conjunction with the MBT provision mandating use of a single-sales factor apportionment formula, the state was required to offer the election. Just weeks later, legislation (Senate Bill 156) was signed into law repealing the Compact retroactively to 2008.
There are dozens of cases pending in Michigan’s court system over the availability of the Compact election. Recently, two cases came before the court of claims. In both cases, the issue before the court was whether the Compact repeal legislation rendered the taxpayers’ claims moot. To resolve these issues, the court first addressed whether the Compact repeal legislation was a permissible exercise of the Legislature’s authority. The court held that it was. First, in its view, the Compact was not akin to a binding contract because it lacked the “indicia” of a binding contract required under federal compact law. The three “classic indicia” of a binding interstate compact are: (1) the establishment of a joint regulatory body, (2) the requirement of reciprocal action for effectiveness, and (3) the prohibition of unilateral modification or repeal. Although the Compact essentially “created” the Multistate Tax Commission, the court noted that no governing or regulatory powers were ceded to or conferred upon the Commission—a conclusion that was expressly acknowledged by the U.S. Supreme Court in US Steel Corp. Furthermore, in the court’s view there was no reciprocity required of the Compact member states. Each state’s tax regime operated independently of the others. Finally, the court noted that the member states were free to withdraw from the Compact at any time. Although it was less clear whether unilateral modification of the Compact was allowed, the court noted that the member states had consistently modified the Compact without objection from other member states. Thus, the court concluded that rather than a binding interstate contract, the Compact was an advisory compact that did not act to bind future legislatures or create a binding contract under federal law.
Having determined that the Compact was not a binding contract under federal compact law, the court next held that the Compact was likewise not a binding contract under Michigan law, as there was no evidence that the Michigan legislature intended to be bound by the Compact when it was adopted in 1969. Next, the court addressed a number of constitutional arguments raised by the taxpayers—notably, whether the retroactive repeal of the Compact violated the Due Process Clause. The court observed that taxpayers have no vested interests in tax laws. Therefore, the taxpayers could not claim that an interest in “life, liberty, or property” had been deprived due to the retroactivity of the Compact repeal legislation. Furthermore, in the court’s view the Legislature had a legitimate purpose for giving retroactive effect to the Compact repeal (to protect the state’s fisc) and the period of retroactivity was “modest,” similar to periods previously found to be within the bounds of due process, and was rationally related to the Legislature’s stated purpose for repealing the Compact. After finding the rest of the taxpayers’ constitutional arguments unpersuasive, the court held that there were no procedural infirmities associated with the enactment of the Compact repeal legislation that rendered it invalid. Please contact Dale Kim at (212) 954-3920 with questions on these cases and the status of Compact election claims.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.