• Court of Appeals Hears Michigan’s Compact Election Cases
  • September 4, 2015 | Authors: Michele Borens; Jonathan A. Feldman; Jeffrey A. Friedman; Todd A. Lard; Carley A. Roberts
  • Law Firms: Sutherland Asbill & Brennan LLP - Washington Office ; Sutherland Asbill & Brennan LLP - Atlanta Office ; Sutherland Asbill & Brennan LLP - Washington Office ; Sutherland Asbill & Brennan LLP - Sacramento Office
  • The long saga of Michigan's Multistate Tax Compact election continued on Wednesday with oral argument before the Michigan Court of Appeals. A packed courtroom witnessed a 1.5 hour proceeding before an active three-judge panel. The arguments focused primarily on: (1) whether legislation can retroactively repeal the state’s adoption of the Multistate Tax Compact (Compact); (2) whether a retroactive repeal violates due process; (3) whether the contractual terms of the Compact require only prospective repeal; and (4) whether the legislation violated separation of powers.


    The case is an appeal from the Court of Claims that validated the Michigan Legislature’s retroactive repeal of the state’s adoption of the Multistate Tax Compact (and hence the Compact election). The Court of Claims summarily dismissed the refund claims of over fifty taxpayers whose appeals are now consolidated before the Court of Appeals. See Sutherland’s previous coverage: Legal Alert: Michigan Court of Claims Upholds Retroactive Compact Repeal Legislation and Michigan Supreme Court Upholds the Compact Election.

    The legislation at issue (2014 PA 282, Sept. 11, 2014) purportedly repeals the Compact’s election retroactive to 2008, thereby blocking taxpayers’ three-factor apportionment election mainly for tax years 2008 to 2010. The state’s proffered purpose for retroactive application of the Compact withdrawal legislation was to protect Michigan’s financial coffers and clarify the intent of prior legislatures. The legislation was passed just two months after the Michigan Supreme Court’s ruling in IBM pertaining only to the 2008 tax year.1 While taxpayers continue to litigate similar Compact election issues in Texas, California, Oregon, Minnesota and other states, the Michigan litigation involves the unique question of the validity of the retroactive repeal.


    1. Practicality of Retroactive Repeal

    Counsel for taxpayers began by arguing that PA 282 did not retroactively repeal Michigan’s adoption of the Compact because by its nature, retroactive repeal of a state’s participation in the Compact is an illusory concept since legislation cannot erase the state’s prior participation in the Multistate Tax Commission (MTC). Michigan paid MTC dues, attended meetings, exchanged confidential information with other states, and voted on MTC proposals, and no retroactive repeal would satisfactorily erase those actions.

    2. Due Process

    The parties addressed whether the retroactive withdrawal violated federal and state due process. In addition to exceeding a modest period of retroactivity, taxpayers argued that the retroactive application of PA 282 violated the taxpayers’ vested rights in the refund claims. The parties addressed whether taxpayers can have a vested right in a tax law, whether such vested right represents a property interest, and if taxpayers had such a vested property right, when the right vested (when applicable tax year ended, when the original or amended return was filed, when the litigation commenced, or when the Supreme Court ruled in the taxpayer’s favor in IBM). In addition to arguing that taxpayers had no vested rights in the refund, the Department argued that the retroactivity period was modest and the legislation met the due process standards for retroactive application as it was a rational means to further the legitimate public purpose of preventing a significant and unanticipated revenue loss.

    3. Compact’s Terms of Repeal

    The parties addressed whether the terms of the Compact prohibit retroactive withdrawal.2 In addition to discussing whether the Compact was binding among the member states, the parties focused on the withdrawal language of Article X(2) of the Compact, which states:

    Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal...

    In particular, the parties and the court discussed whether the “liability” addressed in the second sentence refers to the tax liability of taxpayers or the financial obligations of the member states to the MTC (such as dues).

    4. Separation of Powers

    The parties addressed whether the legislature’s retroactive action violated principles of separation of powers. Taxpayers contend that the legislative action purports to impermissibly reverse a judicial decision (the Michigan Supreme Court’s decision in IBM) that should apply to all of the consolidated taxpayers. The Department argued that the Legislature is permitted to retroactively change legislation, so long as it does not reverse a judicial decision or repeal a final judgment and that the legislation did neither. The Department argued that the legislation does not reverse the judicial decision but merely cures the Supreme Court’s misinterpretation of the law.

    1 Int’l Bus. Machines. Corp. v. Dep’t of Treasury, 496 Mich. 642, 852 N.W.2d 865 (2014). On remand at the Court of Claims (but after passage of PA 282), Judge Talbot initially entered an order in favor of IBM based on the Supreme Court’s decision. However, Judge Talbot subsequently granted the Treasury’s subsequent motion for reconsideration and granted summary disposition of IBM’s 2008 refund claim in favor of the Treasury. Whether PA 282 applies to IBM for the 2008 tax year is not part of the consolidated appeals. The Michigan Supreme Court has obtained superintending control of IBM’s 2008 matter.
    2 See The Gillette Co. v. Franchise Tax Bd., 209 Cal.App.4th 938, 147 Cal.Rptr.3d 603 (Cal. Ct. App. 4th. 2012) review granted, 291 P.3d 327 (Cal. 2013) (ruling that as a binding compact, repeal of the MTC must be prospective only).