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146440 - IBM v Dept of Treasury

International Business Machines Corporation,
Clifford W. Taylor
(Appeal from Ct of Appeals)
(Ct. Claims – Draganchuk,J.)
Department of Treasury,
Michael R. Bell


International Business Machines claimed a tax refund of $5,955,218 in its 2008 Michigan Business Tax return. IBM calculated its Business Income Tax and Modified Gross Receipts Tax, both part of the Michigan Business Tax Act, MCL 208.1101 et seq. But in calculating its overall tax liability, IBM used a three-factor apportionment formula set forth in the Multistate Tax Compact, MCL 205.581 et seq., taking into consideration property, payroll, and sales.

The Michigan Department of Treasury rejected IBM’s calculations. Instead of relying on the Multistate Tax Compact formula, the department based its tax liability calculations on the single-factor apportionment formula in the Michigan Business Tax Act and concluded that IBM was only entitled to a refund of $1,253,609.

IBM sued in the Court of Claims, arguing that it had properly based its tax liability on the Tax Compact formula. Both the BIT and the MGRT are income taxes; therefore, the Tax Compact’s terms entitle IBM to choose the compact’s three-factor approach, IBM contended. The Business Tax Act formula is optional and IBM could elect to use the Tax Compact formula, IBM maintained. The Department of Treasury argued that IBM was required to use the Business Tax Act formula or to petition for approval for an alternate formula pursuant to MCL 208.1309.

The Court of Claims agreed with the department and granted its motion for summary disposition, finding that the department was entitled to judgment in its favor as a matter of law. IBM appealed to the Court of Appeals – but in an unpublished per curiam opinion, the appellate court upheld the Court of Claims’ ruling.

“This case involves questions of statutory interpretation,” the Court of Appeals observed.

“Neither party disputes that the Business Tax Act sets forth an apportionment method for taxpayers to calculate tax liability, the details of which are not pertinent to the instant appeal. Rather, the parties disagree about the permissive or mandatory nature of the calculation. IBM argues that the calculation formula in the Business Tax Act is optional and that IBM was permitted to calculate its 2008 tax liability pursuant to a different statute, namely, the Compact.”

MCL 205.581(1)(Art III)(1) provides that taxpayers “may elect to apportion and allocate” their tax liability in accordance with a three-factor formula specified in the Tax Compact, the panel explained. 

“However, pursuant to MCL 208.1301(1) and (2), ‘[e]xcept as otherwise provided in this act, each tax base established under this act shall be apportioned in accordance with this chapter’ and the ‘tax base of a taxpayer . . . shall be apportioned’ in accordance with a single-factor formula specified in the Business Tax Act. Consequently, there is a facial conflict between the two provisions: the Business Tax Act mandates that taxpayers’ tax liability be apportioned in one way, but the Compact mandates that taxpayers have the option of electing a different apportionment.”

The Tax Act allows taxpayers to petition for an alternative apportionment method “[i]f the apportionment provisions of this act do not fairly represent the extent of the taxpayer’s business activity in this state,” but that section of the statute does not refer to the Tax Compact, the appellate panel noted. MCL 208.1309(1). The “plain language” of the Tax Act allows taxpayers to seek another apportionment only by petition, the panel said. By contrast, the Tax Compact allows a taxpayer to elect another formula, not by petition, but by “pure whim,” the Court of Appeals said. “[W]e reluctantly conclude that there is no way to harmonize MCL 205.581 and MCL 208.1301.”

Where two statutes are genuinely and irreconcilably conflict, “the later-enacted statute” – in this case, the Business Tax Act – controls, the Court of Appeals explained. “We are compelled to conclude that the Business Tax Act repealed by implication the election provision found in the Compact.”

The Court of Appeals rejected IBM’s contention that the Tax Compact amounted to a “binding contract” that the Business Tax Act could not overturn: “Pursuant to Const 1963, Art 9, § 2, ‘[t]he power of taxation shall never be surrendered, suspended or contracted away,’” the appellate panel said.

“Nowhere in MCL 205.581 is it specified that the Compact is a binding contract. Notably, pursuant to MCL 205.581(1)(Art XI)(a), the Compact shall not be construed to ‘[a]ffect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement article III(2) of this compact.’ This provision does at least superficially appear to bind future Legislatures. However, Article III(2) is not the election provision at issue in the case at bar. Otherwise, the Compact provides that any portion found in conflict with a state’s constitution is severable, Article XII, and that party states may withdraw at any time by enacting a repealing statute. Article X(2).”

But for MCL 208.1301, “at least one of the tax liabilities here at issue would … be amenable to the Compact’s election,” the panel added, noting that the Department of Treasury had conceded that “business income tax” is an “income tax.” The Court of Appeals said it would not decide the question whether “modified gross receipts tax” constitutes an “income tax.”

In a separate concurrence, one judge disagreed that the Business Tax Act had repealed by implication the Tax Compact provision: “The Business Tax Act, MCL 208.1309(1), provides that a taxpayer may use a different method of calculation if the taxpayer petitions for an alternate method of calculation. This is harmonious with the provision in the Compact, MCL 205.581, which allows for different methods of calculation. While the Business Tax Act certainly makes it more difficult for a taxpayer to use a different method of calculation, that difficulty does not render it irreconcilably inconsistent with the Compact.”

But the concurring judge concluded that IBM was still required to calculate its tax liability based on the Business Tax Act: “[T]he plain language of the Business Tax Act states that ‘[e]xcept as otherwise provided in this act, each tax base established under this act shall be apportioned in accordance with this chapter,” the judge noted. “Since ‘shall’ is a mandatory term … the plain language of the Business Tax Act requires apportionment to be based on the method set forth in the Business Tax Act. Thus, as the majority recognizes, IBM was required to compute its tax liability based on the formula set forth in the Business Tax Act.”
IBM appealed. In an order dated July 3, 2013, the Supreme Court granted leave to appeal. The Court directed the parties to address “(1) whether the plaintiff could elect to use the apportionment formula provided in the Multistate Tax Compact, MCL 205.581, in calculating its 2008 tax liability to the State of Michigan, or whether it was required to use the apportionment formula provided in the Michigan Business Tax Act, MCL 208.1101 et seq.; (2) whether § 301 of the Michigan Business Tax Act, MCL 208.1301, repealed by implication Article III(1) of the Multistate Tax Compact; (3) whether the Multistate Tax Compact constitutes a contract that cannot be unilaterally altered or amended by a member state; and (4) whether the modified gross receipts tax component of the Michigan Business Tax Act constitutes an income tax under the Multistate Tax Compact.”