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A Better Partnership
September 15, 2016

COA: Calculate renaissance zone tax credit by following Department of Treasury’s interpretation of renaissance zone business activity factor

In Andersons Albion Ethanol, LLC v. Department of Treasury, No. 327855, the Michigan Court of Appeals held that the Tax Tribunal erred when it failed to apply the Department’s interpretation of a portion of the Michigan Business Tax Act regarding the calculation of a renaissance zone tax credit.  The amount of a taxpayer’s renaissance zone tax credit depends on the taxpayer’s renaissance zone business activity factor.  The following formula illustrates the factor as an equation, where X represents the renaissance zone business activity factor under MCL 208.1433(9)(f):
 

 
Andersons filed for a $514,579 renaissance zone tax credit for 2010.  Because Andersons did not have any payroll attributable to services performed in a renaissance zone or in Michigan, its payroll ratio was 0/0, which is an undefined number.  Andersons, relying on guidance from the now repealed Single Business Tax Act, failed to divide the combined averages in the numerator by two.  The Department concluded that Andersons had failed to properly divide by two and granted Andersons a $257,290 credit for 2010.  Andersons appealed before the Tax Tribunal.
 
Before the Tribunal, the Department asserted that Andersons should simply remove the undefined number from the formula.  Andersons contended that it should not have to divide the numerator by two because one of the two factors in the numerator (the ratio regarding the taxpayer’s payroll) did not exist.  The Tribunal granted summary disposition to Andersons, reasoning that applying the formula as written would lead to an “absurd result” because “adding one factor to an undefined number and then dividing that sum by two leads to a result not quantifiable under the laws of mathematics; neutral laws that determine values.”  The Tribunal concluded that no reasonable lawmaker could have intended a tax credit that is an indefinite number.  Further, it noted that in such circumstances under the repealed Single Business Tax Act, the Department had previously applied the interpretation advanced by Andersons—that the taxpayer need not apply the denominator.
 
Reviewing the Tribunal decision de novo, the Court of Appeals concluded that the Tribunal should have granted summary disposition to the Department rather than Andersons because the Department’s interpretation of MCL 208.1433(9)(f) was not contrary to the statute, and the Tribunal lacked cogent reasons to overturn it.  Specifically, the Tribunal rejected the Department’s interpretation of the renaissance zone business activity factor because its interpretation was inconsistent with its interpretation of an analogous provision in the repealed Single Business Tax Act.  The Court of Appeals reasoned that although a longstanding, consistent interpretation of a statute is entitled to more deference than a recent interpretation, courts may not entirely disregard a new interpretation, particularly when the “longstanding” interpretation applies to a previous version of a statute.  Therefore, the Department’s changed interpretation was not in and of itself a cogent reason to reject the Department’s new interpretation.  Further, the Court of Appeals noted the lack of other cogent reasons to reject the Department’s interpretation:
(1) In a similar statute, MCL 141.624, the Legislature indicated when the denominator should change in response to a missing factor in the numerator, demonstrating the Legislature’s awareness of a method to alter a tax formula’s denominator in response to missing factors in the formula’s numerator.  The Legislature could have added similar language to provision at issue and did not. 
(2) The statutory language indicates that the Legislature wished to provide a tax benefit to businesses that both own property in a renaissance zone, and invest payroll in the renaissance zone. It is sensible that if the taxpayer only does half these things, it would receive half a credit.
(3) The Department’s interpretation seems more consistent with rewarding investment in renaissance zones than Andersons’ interpretation because Andersons’ interpretation results in windfalls to companies who keep their entire payrolls out of Michigan versus companies who invest payroll in a Michigan renaissance zone.

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