This article first appeared in the October 28, 2014 edition of State Tax Today.
While no one has directly challenged the validity of Michigan's retroactive repeal of the Multistate Tax Compact in a complaint -- and the question isn't the primary focus of any of the compact apportionment cases in the state -- the Michigan Department of Treasury has now raised the issue as an intervening event at three court levels.
One upshot of Treasury trying to get the issue addressed in the Michigan Supreme Court, the court of appeals, and the court of claims is that several challenges to Michigan's retroactive law are now being pursued concurrently. This is happening indirectly, through the replies to Treasury that the taxpayers are filing.
Also, with so many variables involved, it's now impossible to tell which, if any, of the more than 100 pending compact cases in the state would become the lead case on the retroactivity question in Michigan.
"We are in a unique procedural situation with the Multistate Tax Compact three-factor issue before all three court levels, intervening legislation that was enacted prior to the finality of the supreme court decision, and an upcoming election to seat three supreme court judges," said Lynn Gandhi of Honigman Miller Schwartz and Cohn LLP. "Interesting times in Michigan, and everyone is watching."
Stephen Kranz and Diann Smith of McDermott Will & Emery said it's probably most efficient for taxpayers if the Michigan courts address the retroactivity question in the pending cases rather than waiting for another round of litigation separate from the compact question.
"The retroactive repeal implicates taxpayers already in litigation, so we would expect it to be addressed there," Kranz said. "The retroactive repeal also implicates taxpayers who are not yet in litigation, and we would expect to see other lawsuits filed challenging the repeal by those taxpayers."
Michigan Supreme Court
Treasury first asked a Michigan court to address the new law (SB 156; Public Act 282) in September, when Michigan Attorney General Bill Schuette (R) asked the Michigan Supreme Court to apply the state's retroactive repeal of the compact to IBM Corp. itself.
In a statement of supplemental authority filed in International Business Machines Corp. v. Dep't of Treasury, Treasury asserted that the new law governs the IBM case and overrides the court's July decision in favor of the taxpayer.
In its reply, IBM informed the state supreme court that it's contesting the validity of the legislation. The company asked that the court ignore the legislation and let the decision stand; remand the case so that facts relevant to the validity of the legislation can be developed in the record; or, failing either of those options, order supplemental briefing.
Jamie Yesnowitz of Grant Thornton LLP said it would make sense for the supreme court to consider whether the retroactive law is constitutional or not. "I actually think this sets up an opportunity for the court to analyze and address all issues related to the compact that have arisen in the lower courts as well," he said.
Ideally, the supreme court would "address the ability to use the compact election on an amended as well as an original return, opine on the retroactivity provision and look at it from a constitutional perspective, and decide on anything else with respect to the compact that is currently in controversy in the lower Michigan courts to date," Yesnowitz said.
If the supreme court decides to address the retroactive legislation, IBM will remain the lead compact case in Michigan. But the court has yet to rule on the state's motion to even reconsider IBM. And it would be unusual for the high court to address an issue that had never been considered by any lower court.
Timing is another variable in the equation. "Interestingly, given that the Michigan election is less than two weeks away, it is possible that the next time the court speaks to these issues, there may be a different composition of judges on the court than the judges that originally ruled in IBM," Yesnowitz said.
Three seats on the Michigan Supreme Court are up for election on November 4, and all are held by justices who sided with IBM: Justices Michael Cavanagh and David Viviano sided with the majority, while Justice Brian Zahra wrote the concurring opinion.
Court of Appeals
At the Michigan Court of Appeals level, Treasury has introduced the state's retroactive repeal of the compact in different ways in the cases involving Lorillard Tobacco Co. and Anheuser-Busch.
In a September 16 unpublished opinion in Lorillard Tobacco Co. v. Dep't of Treasury, an appellate panel in Detroit held that the supreme court's ruling in IBM is controlling, and reversed and remanded Lorillard for proceedings consistent with IBM.
The Detroit appellate panel heard oral arguments in Lorillard on September 4 -- the week before the Legislature returned for a short session and swiftly passed the retroactive legislation, signed by Gov. Rick Snyder (R) on September 11. On October 7 Treasury filed a motion for reconsideration of Lorillard with the court of appeals and raised the issue of the new law clarifying the Legislature's intent.
While the Legislature's attempt to override the Michigan Supreme Court's decision in IBM wasn't on the Lorillard appellate panel's radar, it was in the news on September 9 when a Lansing panel heard arguments in Anheuser-Busch Inc. v. Dep't of Treasury.
One week after Snyder signed the new law, Treasury on September 17 filed a statement of supplemental authority raising the issue in Anheuser-Busch. On its own motion, the appellate panel two days later directed Anheuser-Busch to respond to Treasury's arguments concerning the new law's effect on the case. Anheuser-Busch filed its response challenging the validity of the legislation on October 10.
In Anheuser-Busch, a lower court judge in June 2013 found that the Multistate Tax Compact is binding, as it "plainly states an intent to enter into a binding contractual relationship." At least one amicus brief is expected to be filed in support of the taxpayer and assert that factual issues need to be developed before the legislation's validity can be considered. Treasury's reply was filed October 24; in it, the attorney general also argues the constitutionality of the state's retroactive repeal of the compact.
Depending on whether and how the state supreme court and court of appeals respond to taxpayers' assertions that there are factual issues precluding the courts from ruling on the legislation, it's possible that IBM, Lorillard, or Anheuser-Busch could wind up as the vehicle for forwarding questions regarding retroactivity. Lorillard conceivably could be a second vehicle that brings the question before the supreme court.
If the supreme court declines to address the retroactive legislation but the court of appeals decides to take up the issues in Anheuser-Busch, that could become the new lead case in Michigan. If neither court addresses the issues, and IBM, Anheuser-Busch, and Lorillard are remanded to the Michigan Court of Claims, it would be up to Chief Judge Michael Talbot to decide how to handle those issues and which case would take the lead.
That could mean the lead compact case to move the retroactivity questions forward could be any one of the "big three" compact cases in the state or any one of the more than 100 other cases pending in the Michigan Court of Claims.
"It does raise all sorts of weird procedural questions," said Smith, adding, "There are definitely issues with the Legislature trying to retroactively change an existing judgment specifically for the parties before the court."
Court of Claims
While the Michigan Court of Appeals in Anheuser-Busch has asked for briefing on the new law's applicability, Talbot is the one who keeps things moving and might be the first to act on the matter. Talbot, just two days after the Michigan Supreme Court issued its decision in IBM, issued orders asking Treasury to explain why IBM would not control in all of the pending compact refund claim cases at that level.
Treasury filed its replies in the court of claims, and taxpayers responded -- and in a number of those responses, attorneys representing the taxpayers also filed motions for summary disposition in an attempt to finalize as many of the cases as possible.
At that point, Treasury's responsive pleadings raised the state's retroactive repeal of the compact and said the new law cuts off relief to the taxpayers at issue. On October 7 Talbot issued orders striking Treasury's responsive pleadings, saying the way the state raised the issue was incorrect procedurally. Talbot said the proper way for Treasury to bring the issue before him was to raise it in a motion for reconsideration.
Treasury has since raised the issue in motions for reconsideration, and Talbot has since issued "show cause" orders in some of the pending cases regarding the applicability of the legislation.
The first taxpayer replies challenging the validity of the retroactive legislation were due October 27. Talbot could rule on the matter within three weeks.