Michigan Supreme Court Approves MBT Refunds Based on MTC Election

July 16, 2014

On July 14, 2014, the Michigan Supreme Court issued its opinion in International Business Machines v Michigan Dep’t of Treasury and, in a 4-3 decision, approved the taxpayer’s Michigan Business Tax (the “MBT”) refund claims based on the Multistate Tax Compact (the “MTC”) election to use a three-factor apportionment methodology.

The MTC Election Made by IBM

IBM filed its original MBT return in 2008 using the three-factor apportionment method provided pursuant to the MTC, which is based on an average of sales, payroll and property factors. Michigan had adopted the MTC in the late 1960’s, and it has been a part of Michigan law since that time.

With respect to its MBT returns, IBM took the position that the MTC election was applicable to both the net income base and the modified gross receipts base of the MBT. Because IBM has a significant portion of its property and payroll outside of Michigan, this election materially reduced the company’s MBT liability over what it would have been under the MBT’s more general, single sales factor. The Michigan Department of Treasury rejected IBM’s MBT returns and litigation followed.

The IBM Decision: The MTC Election Held Applicable to Both the MBT Business Income Tax and the MBT Modified Gross Receipts Tax

The MTC generally provides that a taxpayer may elect to calculate its Michigan tax liability using a three-factor, equally weighted apportionment formula with respect to any tax that is an income tax or a tax based on net income. In its decision in IBM, the Michigan Supreme Court specifically held that, for the limited purpose of determining whether an MTC election can be made, both the MBT Business Income and Modified Gross Receipts taxes can be considered taxes that qualify. The Michigan Supreme Court held that IBM could elect to calculate its full MBT liability using the three-factor apportionment methodology provided for under the MTC.

MTC Election Provisions Not at Issue in IBM

One notable MTC provision that was not at issue in IBM is the MTC election to source services and intangible income based on a costs-of-performance methodology. For a taxpayer that has its operations outside of Michigan, and has material sales from transactions other than sales of tangible personal property (service revenue, royalties, and other intangible income), it would appear that electing the costs-of-performance method for sourcing sales also could result in material tax reductions in certain instances.

Tax Years at Issue and Michigan’s Legislative Enactment Regarding the MTC

The dispute in IBM arose from an election made for the 2008 tax year. Subsequently, in 2011, the Michigan Legislature amended the MTC to clarify that no MTC apportionment elections could be made effective January 1, 2011. Therefore, the IBM decision arguably had direct application only to the MBT years that end prior to January 1, 2011.

However, although there was a Legislative amendment, the validity of this statutory change was not directly addressed in the IBM decision; specifically, the Michigan Supreme Court decision did not address the questions regarding whether revocation of the MTC violated a contract, or contracts clauses of either the Michigan or United States Constitution. Therefore it is not entirely clear whether 2011 MBT, or subsequent Michigan Corporate Income Tax (“CIT”) elections can be made.

Original Versus Amended Return Issue

Because IBM effectively made the MTC election with its original MBT return filings for 2008, the IBM Court did not specifically address the question whether taxpayers can make the MTC election on an amended return as opposed to an original return. However, there is no statutory or regulatory requirement that an MTC election must be made with an original return.

Protective Measures for Taxpayers

Taxpayers would be well served to carefully review the potential impact of using MTC election provisions with respect to their MBT and CIT returns. Taxpayers should also note that the deadline for filing amended returns attempting to elect the MTC apportionment provisions generally will be based on the Michigan four-year limitations period. For the tax years that appear to be directly impacted by the IBM decision, 2008 through 2010, the considerations vary. For 2008, unless there has been an extension or audit, the limitations period normally will have expired (a 2008 return would have been due December 31, 2009, which means that the limitations period would have expired December 31, 2013). For 2009 and 2010, many taxpayers will be eligible to file an amended MBT return. In addition, taxpayers should consider consulting with experienced tax counsel to review whether there are MTC election opportunities with respect to 2011 and subsequent years.

For further information about this case, your MBT or other Michigan tax matters, please contact the authors of this alert, Bill Lentine ( or 313-568-5371) or Mike Cumming ( or 248-203-0740).

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2021 Dykema Gossett PLLC.