DirecTV joined Goodyear, IBM, T-Mobile and numerous other companies in seeking U.S. Supreme Court review of their challenge to a Michigan Court of Appeals ruling, affirmed by the Michigan Supreme Court, that allowed the state to retroactively withdraw from MTC Compact (“Compact”), in DirecTV Group Holdings LLC v. Michigan Department of Treasury, U.S. Sup. Ct., 16-736.
Michigan legislature’s unilateral repeal of the MTC Compact and retroactively rescind the compact provisions to 2008, also included a repeal of an election to allow taxpayers to use a specified formula when apportioning their income for state income tax purposes. As a result, interstate businesses in Michigan were subject to retroactive taxes on business activities for a period of almost seven years.
The Michigan Court of Appeals surprisingly ruled earlier that the State’s retroactive legislation is consistent with both the Compact and the Due Process Clause of the U.S. Constitution, stating that Michigan’s 2014 withdrawal from the multistate tax compact that became effective going back to 2008 is not unconstitutional as the means for calculating corporate franchise taxes, and was not a binding contract.
DirecTV and dozens of other companies finding this result absurd, argued that the state’s action was both unconstitutional and broke a binding contract (i.e., the Compact) from which taxpayer’s relied upon at the time. DirecTV in its SCOTUS Petition, filed on Dec. 5, 2016, noted that the Appeals Court decision at issue is “substantively identical” to the Petition filed in November by Goodyear Tire and Rubber Company and others; and that the decision challenged rests “in relevant part” on the related Gillette decision.
In addition to Goodyear, other companies including IBM Corp. and T-Mobile USA Inc. are also challenging the Michigan Court of Appeals rulings. Goodyear’s petition raised issues similar to those in a separate November Petition submitted by Nintendo of America Inc. In that petition, the companies argued that the Compact is a binding contract and that Michigan could only withdraw prospectively. As a result, they correctly argued, the that state’s attempted to retroactive withdrawal in 2014 would be invalid.
Michigan is not alone in MTC retroactivity legislation. We can only hope The U.S. Supreme Court takes Cert and puts a stop these egregious state tax practices. Taxpayers need certainly in annual return filing positions, and cannot be surprised years later that the formula apportionment in effect at the time was changed retroactively.