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Two States, One Compact: Michigan Joins California in Reviewing the Multistate Tax Compact

By Todd Betor and Pilar Mata

On July 3, 2013, the Michigan Supreme Court granted International Business Machines Cor

July 26, 2013

By Todd Betor and Pilar Mata

On July 3, 2013, the Michigan Supreme Court granted International Business Machines Corporation’s (IBM) motion for leave to appeal the Court of Appeals’ November 20, 2012, judgment in favor of Michigan in International Business Machines v. Department of Treasury, Michigan Supreme Ct., Case No. 146440. Consequently, the highest courts in Michigan and California are now both poised to decide whether taxpayers in those states have the right to elect to apportion their business income using the Multistate Tax Compact’s (Compact) apportionment formula. The California Supreme Court is reviewing the California Court of Appeal’s decision in Gillette Co. v. Franchise Tax Board, Cal. Supreme Ct., Case No. S206587, with briefing already under way.

The Michigan Supreme Court’s order granting IBM’s appeal provided that the parties shall brief whether:

  1. IBM could elect to use the Compact’s apportionment formula in calculating its 2008 tax liability to Michigan, or whether IBM was required to use the Michigan Business Tax (MBT) Act’s single-sales factor apportionment formula;
  2. The MBT repealed, by implication, the Compact’s apportionment formula;
  3. The Compact is a contract that cannot be unilaterally altered or amended by a member state; and
  4. The MBT’s modified gross receipts tax component constitutes an income tax under the Compact, thus subjecting it to the Compact’s election and apportionment provisions.

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