In International Business Machines Corp. v. Department of Treasury, the Michigan Supreme Court ruled that IBM was entitled to apportion its business income for purposes of the Michigan Business Tax (“MBT”) using the Multistate Tax Compact’s Article III election (“the Compact”). This decision is the first of several similar state court challenges to be decided by a state’s highest court. The Supreme Court specifically held that IBM was entitled to use the Compact’s equally-weighted, three-factor formula to calculate its 2008 Michigan taxes because (1) the modified gross receipts portion of the MBT was an income tax for purposes of the Compact, and (2) the Compact’s apportionment formula election provision was not repealed by a state law passed in 2007.
The problem before the Court was one created by the Michigan Legislature when it left two conflicting statutes on the books until 2011. The Michigan Department of Treasury argued that the Michigan Legislature repealed the Compact’s election by implication in 2007, even though the Legislature did not explicitly repeal the election until 2011.
The Court noted that each of the five business tax regimes utilized in that state over the years required formulary apportionment of income to determine what portion of a taxpayer’s income was subject to tax in Michigan. Absent clear legislative intent, the Court found it was required to assume that the Michigan Legislature desired both statutes to continue in effect. Looking at the statutes together, the Court held that the Compact’s election provision and the MBT’s special apportionment provision share the common purpose of “setting forth the methods of apportionment of a taxpayer’s multistate business income.” Thus, the two must be read together or in pari materia.
All past business tax statutes in Michigan mandated that taxpayers apportion their multistate income using specific formulas, and the MBT apportionment language was nearly identical to the language of past business taxes. Although the MBT, for the first time, mandated a formula different from the one provided for in the Compact, the Court said the Compact anticipated conflicts and provided taxpayers an optional formula when such a conflict arose. The statutes could be read in harmony, the Court stated, to allow a taxpayer to either use the default MBT formula or elect the Compact’s formula.
Even though this potentially landmark ruling was decided on state-specific statutory interpretation grounds, Alabama multistate taxpayers should study this decision and consider whether protective refund claims should be filed with the Alabama Department of Revenue using the Compact’s elective apportionment formula. Alabama is a full member of the Multistate Tax Compact, but the state legislature repealed the Compact’s equally-weighted three factor formula for tax years beginning after December 31, 2010. It replaced that formula with a double-weighted sales factor and market-based sourcing, but retained the Compact’s elective apportionment provision. If you have any questions regarding the possible filing of protective refund claims in these circumstances, please contact any Alabama member of our SALT Practice Team.