United States

Michigan: Appeals Court Holds Retroactive Repeal of the Multistate Tax Compact did not Violate Due Process

Oct 05, 2015
From KPMG TaxWatch

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Recently, the Michigan Court of Appeals, deciding a number of consolidated cases, ruled that the Michigan Legislature’s retroactive repeal of the Multistate Tax Compact (Compact) did not violate various Michigan and federal constitutional provisions, including the Due Process Clause. 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.  A number of cases were consolidated at the appeals court to address whether the Compact repeal legislation rendered the taxpayers’ refund claims moot. The appeals court first addressed whether the Legislature’s repeal of the Compact violated the state and federal Contract Clauses or the Compact Clause of the U.S. Constitution. The appeals court, agreeing with the trial court, held that the Compact is not akin to a binding contract under Michigan law. First, the court noted that nothing in the express terms of the Compact indicated that a member state intended to be bound when it became a party to the Compact. Second, the court addressed the taxpayers’ claims that Michigan created binding contractual obligations by entering into the Compact and that those obligations were enforceable under the Contract Clause. The appeals court noted that 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 appeals 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 appeals court noted that the member states were free to withdraw from the Compact at any time.  

Having determined that the Compact was not a binding contract, the appeals 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’ generally have no vested right in the continuance of tax laws. Furthermore, federal and state courts have long held that retroactive legislation will not offend due process if there is a legitimate legislative purpose that is furthered by rational means. In the appeals court’s view the Legislature had a legitimate purpose for giving retroactive effect to the Compact repeal—to correct a perceived misinterpretation of the statute and to eliminate significant revenue loss resulting from such misinterpretation—and that the retroactive repeal was a rational means of furthering these legitimate purposes. The appeals court next addressed the taxpayers’ argument that the retroactive repeal violated the separation of powers clause and the Commerce Clause, as well as the Michigan Title-Object Clause, the Five-Day Rule, or the Distinct-Statement Clause. After finding the rest of the taxpayers’ arguments unpersuasive, the court affirmed the trial court’s ruling. 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.