As CCH’s Jennifer Troyer has reported, the Michigan Supreme Court has held that (1) a taxpayer was allowed to elect to use the three-factor apportionment formula under the Multistate Tax Compact (MTC) for the 2008 Michigan business tax (MBT) year, and (2) the MTC’s apportionment formula could be used to apportion the MBT base subject to the modified gross receipts tax because the modified gross receipts tax qualified as an "income tax" for purposes of the MTC. (International Business Machines Corp. v. Department of Treasury, Michigan Supreme Court, No. 146440, July 14, 2014)
Implied Repeal of MTC in Michigan
First, the court considered whether the Legislature repealed the MTC’s election provision by implication when the MBT was enacted. The court concluded that the MTC’s election provision was not repealed by implication. Repeals by implication are disfavored. If the Legislature had intended to repeal the law, it could have been explicit. The court noted that statutes claimed to be in conflict should be construed harmoniously to find any other reasonable construction other than a repeal by implication. Thus, the MTC’s three-factor apportionment formula election and the MBT’s single-sales factor apportionment formula laws were in pari materia and had to be construed together.
The court reasoned that the MTC’s election provision ("may elect") contemplated a divergence between the party state’s mandated apportionment formula and the MTC’s own formula, either at the time of the MTC’s adoption by the party state or at some point in the future. Accordingly, the taxpayer could choose (1) the MTC and use the three-factor apportionment formula or (2) Michigan tax law and use the single-sales factor apportionment formula. By subsequently repealing the MTC’s election provision starting January 1, 2011, the Legislature created a window in which it did not expressly preclude the use of the MTC’s election provision.
Modified Gross Receipts Tax Portion of MBT
Second, the court considered, for purposes of the MTC, whether the modified gross receipts tax portion of the MBT was an "income tax." The court concluded that the modified gross receipts tax portion of the MBT was an income tax. The MTC election is available to any taxpayer subject to an income tax. Under the MTC’s broad definition of "income tax," a tax is an income tax if the tax measures net income by subtracting expenses from gross income, with at least one of the expense deductions not being specifically and directly related to a particular transaction. After examining how the modified gross receipts tax portion of the MBT was calculated, the court determined that the term "gross receipts" in Michigan was similar to "gross income" under the federal income tax law. There was at least one expense deduction allowed under the MBT that was not specifically and directly related to a particular transaction. As such, the modified gross receipts tax portion of the MBT qualified as an income tax for the MTC. This allowed the three-factor apportionment formula election to be applied to this portion of the MBT as well as the income tax portion of the MBT.