Michigan owes $1.09 billion in tax refunds plus interest to out-of-state corporate taxpayers as a result of the Michigan Supreme Court's July 14 decision in favor of IBM in International Business Machines Corp. v. Dep't of Treasury , according to estimates prepared by the Michigan Department of Treasury's Office of Revenue and Tax Analysis.
Michigan Attorney General Bill Schuette (R) and Solicitor General Aaron Lindstrom provided Treasury's estimate to the Michigan Supreme Court in a motion seeking a stay of enforcement of the decision as it relates to the multitude of lower-court cases following behind IBM. Schuette and Lindstrom attached to the motion eight pages listing the out-of-state corporate taxpayers that as of July 31 were claiming refunds in 134 similar lawsuits in the lower courts or at the administrative level.
"In short, billions of dollars are at stake as a result of the Court's July 14, 2014 Opinion if a stay of the enforcement and precedential effect of the Opinion is not granted," Schuette and Lindstrom wrote.
Pending is a separate Treasury motion for rehearing of IBM. However, according to Schuette and Lindstrom, that earlier motion operates as an automatic stay only regarding the parties directly involved in IBM.
The $1.1 billion figure is a figure on par with the annual revenue impact of the biggest tax packages drafted by Republican Gov. Rick Snyder's administration. Since the ruling on July 14, Snyder's office has referred questions about the fiscal impact of the decision and the administration's plans to Treasury, which has not responded to requests from Tax Analysts for comment on either matter.
States created the Multistate Tax Compact in the late 1960s in response to the then-imminent threat of federal preemption of state taxing authority. One of the issues attracting the attention of federal lawmakers at that time had been the conflicting apportionment formulas used by individual states and applied to out-of-state corporate taxpayers. In court, taxpayers are arguing that one of the central purposes of the compact was to provide some baseline uniformity by allowing an out-of-state taxpayer to apportion its business income to a member state using either the state's own apportionment formula or the one provided in the compact. This election provision allows out-of-state taxpayers to avail themselves of uniformity among the taxing schemes of different member states, even when those states adopted alternative apportionment formulas, the taxpayers argue.
IBM is the first Multistate Tax Compact Article III election case to be decided by a state's highest court. At issue in the case is whether IBM was entitled to elect to apportion its business income and modified gross receipts tax bases to the state using the evenly weighted three-factor formula provided in the Multistate Tax Compact or whether IBM was required to use the single-sales-factor apportionment formula provided for in the Michigan Business Tax Act. In a 3-1-3 decision, the Michigan Supreme Court on July 14 ruled that IBM was entitled to use the compact formula and that the compact's election provision was not repealed by implication by passage of the Michigan Business Tax Act.
The subject matter, while of keen interest in the fields of both state taxation and interstate compact law, until now has barely registered beyond those discrete areas. In Michigan, the IBM decision received scant attention; to the extent any numbers were cited, they focused on IBM's $6 million in refund claims. There is similar pending litigation in California, Oregon, Texas, and Minnesota.
Practitioners, meanwhile, are advising yet more clients they might be owed refunds. The IBM decision is directly applicable only to Michigan business tax years 2008-2010 and involved the taxpayer taking the compact election on the original return; the court also did not discuss whether taxpayers can take the election on an amended return. Claims are not necessarily precluded for those years after Michigan amended the compact in its code, but would rely on arguments not considered by the Michigan Supreme Court in IBM.