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A Better Partnership


Sep 2014
September 18, 2014

Legislation Clarifies Tax Apportionment Based on Sales

A recent legislative fix could eliminate income tax refunds totaling $1 billion for some companies doing business in Michigan – unless they decide to challenge a recently enacted law.
Earlier this month, Gov. Rick Snyder signed Senate Bill 0156, which retroactively repeals a three-factor formula that the Multistate Tax Compact used to apportion income for companies doing business in our state that were headquartered elsewhere.  Concerned about a potentially significant loss of revenue, the Michigan Legislature adopted a fix to stop 135 pending business cases citing the MTC three-factor formula and requesting a refund of taxes paid.
Here’s the background:  In July, the Michigan Supreme Court reversed a Michigan Court of Appeals ruling and held that IBM could use a three-factor formula to compute its 2008 Michigan Business Tax.  The result?  IBM was eligible for a $6.3 million refund, which caused a fair measure of heartburn among state officials.
The Supreme Court ruled that the three-factor formula – which looks at sales, payroll and property factors to determine Michigan tax – was permitted under the Multistate Tax Compact.  The Michigan Department of Treasury begged to differ, arguing that the MBT superseded the MTC and required businesses to calculate taxes based solely on sales.  In its ruling, the Supreme Court held that the MBT Business Income Tax and the MBT Gross Receipts Tax were both “income taxes” eligible to use the MTC three-factor formula.  Treasury has already asked for a rehearing of the matter.
The three-factor formula generally favors companies with relatively small capital investments and payroll in Michigan.  Companies such as Google, Colgate-Palmolive, Netflix, Anheuser Busch and other large non-Michigan companies have already filed requests for MBT refunds.  With 135 active cases still pending, the Department of Treasury warns that these and cases as yet unfiled could cost Michigan more than $1 billion.
Enter the Michigan Legislature, with its recent fix designed to “express the Legislature’s original intent” that sales – and only sales – should be considered when apportioning income to Michigan under both the MBT and the Michigan Corporate Income Tax.
Companies that would benefit from using the three-factor formula election for the 2009 and 2010 tax years may want to consider challenging this retroactive legislation if the Supreme Court does not reverse itself in the proposed rehearing.  Any challenge would need to be made within the four-year statute of limitations.
Please contact any of our other tax professionals if you have questions regarding this new legislation or would like assistance in filing a challenge.

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