Attorney General Bill Schuette. (Dale G. Young / The Detroit News)
Lansing— A recent state Supreme Court ruling over the way out-of-state businesses previously calculated taxes paid to Michigan could blow a “budget-busting” $1 billion hole in the state budget, Attorney General Bill Schuette warned this week.
Schuette and Solicitor General Aaron Lindstrom asked Michigan Supreme Court justices to reconsider their July 14 ruling in a business tax dispute between the state Treasury Department and IBM.
Initially, the high court’s narrow ruling was believed to be limited to a $5.9 million refund for IBM in the 2008 tax year.
But Treasury officials now project the decision could have sweeping implications for the way out-of-state businesses calculate taxes owed to Michigan under a previous taxing scheme, causing the state to have to shell out up to $1.1 billion in new refunds, plus interest.
“The total cost to the state is likely to exceed $1 billion,” Schuette and Lindstrom wrote in a motion asking the high court to reconsider its decision.
The ruling’s uncertainty has Gov. Rick Snyder’s administration and Republican legislative leaders on edge.
“$1 billion is clearly a lot of money and would represent a significant impact to the state budget, and we are hopeful the Supreme Court will reconsider,” state budget office spokesman Kurt Weiss said Friday.
The IBM ruling applies to the tax years of 2008, 2009 and 2010, when the Michigan Business Tax was in place. In 2011, the Legislature replaced the complicated MBT with a simpler 6 percent corporate income tax.
On Tuesday, Schuette’s office filed motions with the Supreme Court requesting the justices stay their 4-3 ruling in the IBM case and reconsider the decision.
In the decision, the Michigan Supreme Court overturned lower court decisions in favor of the Treasury Department, which argued IBM was only entitled to a $1.2 million refund. The Treasury Department argued IBM had to pay taxes based on solely on its sales through the MBT’s formula.
The Supreme Court agreed with IBM that the New York-based information technology company should be able to spread out its Michigan tax liability through a three-factor formula under the Multistate Tax Compact, a nearly 50-year-old system establishing uniform taxing practices for multi-state businesses.
The three-factor formula takes into account an out-of-state corporation’s property, payroll and sales in Michigan, allowing it to lower its tax liability from a single-factor calculation based on sales, according to one legal analysis of the decision.
Schuette argued the Legislature did not intend to give corporate taxpayers the ability to elect to spread out their tax burden when it repealed the MBT.
“This is a rare case, palpable error or not, in which the court should exercise its discretion to grant rehearing,” Schuette wrote.
House Speaker Jase Bolger, R-Marshall, and Appropriations Chairman Joe Haveman, R-Holland, on Friday joined Schuette and Snyder in calling for the Supreme Court to reconsider its decision.
“The intent of the Legislature was clear back in 2007 when they implemented the Michigan Business Tax and again in 2011 when we repealed the MBT,” Bolger said in a statement. “Out-of-state companies should pay taxes based on their sales in Michigan and not reduce their bill based on having fewer employees in our state as that would give them a tax advantage over our local job providers. Rewarding companies for not hiring Michigan workers is not fair tax policy, does not make sense and clearly was not what was intended when Governor Granholm signed the original law.”
Tax Analysts, a publisher of tax news and analysis, first reported Thursday on the potential impact of the IBM ruling on the state’s budget.
The ruling’s impact on the taxation of out-of-state corporations could reach far beyond Michigan’s borders, as there is similar litigation pending in California, Oregon, Texas, and Minnesota, said Amy Hamilton, senior reporter for Tax Analysts.
“Practitioners, meanwhile, are advising yet more clients they might be owed refunds,” Hamilton wrote.