In Gillette, the Michigan Court of Appeals upholds retroactive repeal of the Multistate Tax Compact

October 7, 2015

On September 29, 2015, a three-judge panel of the Michigan Court of Appeals unanimously affirmed a lower court decision upholding Michigan’s retroactive repeal of the Multistate Tax Compact (MTC). The taxpayers in Gillette and 49 related cases were seeking the right to elect three-factor apportionment (based on property, payroll and sales) permitted under the MTC for purposes of the Michigan Business Tax (MBT) instead of the sales-only apportionment required under the MBT. Michigan adopted the MTC effective in 1970. When the MBT was enacted effective January 1, 2008, there was no express statutory provision reconciling conflicts between the MTC and the MBT.

The Court of Appeals ruled that the Michigan legislature’s retroactive repeal of the MTC did not violate the Contract Clauses, Due Process Clauses or other provisions of the Michigan and federal Constitutions, including the Commerce Clause of the federal Constitution, and the Separation of Powers Clause in the Michigan Constitution.

Gillette and other taxpayers in the consolidated appeals had challenged 2014 PA 282, which retroactively repealed the MTC effective January 1, 2008. That legislation was enacted promptly after the Michigan Supreme Court’s 2014 decision permitting IBM to use the MTC three-factor apportionment for tax year 2008 despite Michigan legislation that repealed the MTC effective January 1, 2011. For an extended discussion of this topic, see Dykema’s prior alert. Following the IBM decision, the Department of Treasury estimated that if other taxpayers were allowed to use the MTC three-factor apportionment, it would cost Michigan approximately $1 billion in lost tax revenue.

The Court of Appeals rejected arguments by the taxpayers based on the Contract Clauses of the Michigan and federal Constitutions because the MTC was not a binding contract that gave the taxpayers contractual rights. Further, the Court of Appeals concluded that even if the MTC were a binding contract, repealing the MTC did not violate the Contract Clause because there was no interference with “reasonably expected contractual benefits.”

Similarly, the Court of Appeals found there was no violation of the taxpayers’ Due Process rights. Citing earlier U.S. Supreme Court and Michigan case law, the Court of Appeals ruled that the taxpayers did not have a vested right in using the MTC’s three-factor apportionment and that the Michigan Legislature had a legitimate purpose for retroactively repealing the MTC. The approximately six and one-half year retroactive period was held to be “sufficiently modest” relative to time frames of other retroactive legislation upheld by state and federal courts. The Court of Appeals rejected all other arguments made by the taxpayers.

One or more of the taxpayers in these Court of Appeals decisions may seek leave to appeal from the Michigan Supreme Court. For further information about this case, your MBT or other Michigan tax matters, please contact Steven Grob ( or 313-568-6582), Mary Hennessey ( or 313-568-5310), or Mike Cumming ( or 248-203-0740).

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