The state of Michigan will lose at least $1.098 billion immediately and likely “billions” more down the road if the state Supreme Court does not put a hold on a business tax decision it handed down earlier this summer, the Department of Treasury is arguing.
Deputy Treasurer Glenn WHITE used the number in a court document filed this week as the Attorney General’s office asks the Supreme Court to stay its ruling in International Business Machines v Treasury.
The Department of Treasury is arguing 135 business cases involving such non-Michigan based companies as Google, Colgate-Palmolive, Netflix and Anheuser Busch will be impacted by the IBM decision. “Thousands” of potential claims involving the issue being brought up due to the IBM could be expected down the road.
Already, Court of Claims Judge Michael TALBOT is asking attorneys in a similar case, DirectTV v. Treasury to argue why the IBM decision should or shouldn’t be the “controlling case” in its dispute.
“In short, billions of dollars are at stake as a result of the Court’s July 14, 2014 opinion if a stay of the enforcement and precedential effect of the opinion is not granted,” reads the Attorney General office’s argument that was filed Monday.
The Court of Claims and the Court of Appeals had both ruled in the state’s favor. The Department of Treasury could appeal the ruling directly to the U.S. Supreme Court, but IBM’s attorney Gregory NOWAK told MIRS that the case deals with such a “vanilla” statutory reading and may not be sweeping enough to pick up.
“It’s a big deal,” said Kurt WEISS, spokesperson for the Department of Technology, Management and Budget. “We are obviously hoping the Supreme Court will reconsider and take into account that this creates a significant budget problem for the state.”
The legal rub is based on whether the creation of the 2008 Michigan Business Tax repealed a multi-state tax formula set up through a business tax collection compact Michigan joined in 1970 (See “IBM Awarded $6.3M From State In Business Tax Dispute,” 7/14/14).
IBM argued the MBT did not wipe out what is known as the Multistate Tax Compact (MTC) and that it could continue to use its three-factor apportionment formula as opposed to the MBT’s sales-factor apportionment formula. In the IBM decision, the state ordered IBM be paid $6.3 million business tax refund for tax years 2008 and 2009.
According to the publication Tax Analysts, which broke the story this morning, states created the MTC in the last 1960s in response to the then-imminent threat of federal pre-emption of state taxing authority. Federal lawmakers were concerned about the conflicting apportionment formulas used by individual states and applied to out-of-state corporate taxpayers.
Tax Analysts further explains as follows, “In court, taxpayers are arguing that one of the central purposes of the compact was to provide some baseline uniformity by allowing an out-of-state taxpayer to apportion its business income to a member state using either the state’s own apportionment formula or the one provided in the compact. This election provision allows out-of-state taxpayers to avail themselves of uniformity among the taxing schemes of different member states, even when those states adopted alternative apportionment formulas, the taxpayers argue.”
The IBM case is the first MTC election case to be decided by the Michigan Supreme Court.
Senate Appropriations Committee Chair Roger KAHN (R-Saginaw) noted a $1.098 billion hit to a $9 billion General Fund is a significant impact, but it’s highly unlikely the state would be forced to swallow a payment in one gulp.
The state could still re-litigate the matter, he said. Since IBM wasn’t a class action suit, the claims of other companies would take years to work through the system. In the meantime, it’s possible the state could work out a long-term payment arrangement to satisfy claimants.
It’s also possible the Legislature could craft new legislation to craft what it meant when it crafted the Michigan Business Tax (MBT) since “there’s no reason in the world why the Legislature would want to advantage out-of-state companies while disadvantaging in-state companies,” Kahn said.
“In the end, it’s just another thing that makes me scratch my head or some other part of my body,” Kahn said.
Asked about the impact of the case to the state’s $9 billion General Fund budget and roughly $13.5 billion School Aid Fund, House Appropriations Committee Chair Joe HAVEMAN (R-Holland) also declined to push the panic button.
“I think we have to wait to see after the administration gets its final ruling,” he said. “It’s a big issue, but I’d rather wait to see how the court resolves this. I don’t want to speculate on the impact.”