Judge: Michigan can keep $1B in business tax refunds

Lauren Abdel-Razzaq
The Detroit News

A judge has shot down an effort to force Michigan to refund more than $1 billion in taxes to out-of-state companies doing business here.

Judge Michael Talbot of the Court of Claims ruled that the state never intended to give non-Michigan companies a tax break when it overhauled the tax code in 2007. Therefore, Talbot said, the state Legislature was entitled to correct the mistake through retroactive legislation it passed in September. Gov. Rick Snyder signed it into law.

The controversy involves 134 out-of-state companies doing business in Michigan. They sued to collect $1.1 billion in refunds they believed they were due under the 2007 law. If they prevailed, the loss would have created a large hole in the state budget.

The Michigan Supreme Court ruled in July that IBM could receive tax credits under the old law. State officials feared that decision would affect other cases from the 2008, 2009 and 2010 tax years, so they quickly enacted the legislation to amend it and make it retroactive.

In a 35-page opinion Talbot said the state had the right to prevent “a catastrophic fiscal shortfall” by retroactively applying the law enacted in September.

His decision drew the ire of some in the business community.

Tricia Kinley, senior director of Tax & Regulatory Policy for the Michigan Chamber of Commerce, said she had not reviewed Talbot’s decision, but the chamber believed the Supreme Court decision on the IBM case should have settled the issue. She said the chamber found it “utterly disappointing and stunning” when the Legislature and Snyder signed the law to “undermine” the high court’s decision.

“That sends a chilling message to job providers,” said Kinley. “You can try to have your day in court, but even if you go through the great pains of litigating and you win, the Legislature might pull the rug out from under you.”

A spokeswoman for Attorney General Bill Schuette, who defended the state in the case, referred questions to the state Treasury Department, where no one could be reached for comment Monday afternoon.

In his ruling, Talbot issued opinions and orders favoring the state in 99 cases. Fifty-four cases were dismissed, 21 were partially tossed and 25 remain open, said John Nevin, spokesman for the high court.

Talbot’s decision comes at a time when the state is making strides in attracting new business.

Since 1969, Michigan law has allowed out-of-state businesses to determine their tax rate based on three factors: sales, property and payroll. For non-Michigan-based companies, the formula meant they would pay lower business taxes than in-state companies. During the 2007 tax overhaul, the Legislature never addressed this part of the tax code when it scrapped the so-called Single Business Tax in favor of the Michigan Business Tax.

The Michigan Business Tax was unpopular and was replaced in 2011 by a simple 6 percent corporate income tax.

Because of that decision, the corporate tax climate in Michigan is now the ninth best in the country, up from last place, according to a report released by the business advocacy group Business Leaders for Michigan.

Nate Pilon, spokesman for the Michigan Economic Development Corporation, said getting rid of the “nonsensical” Michigan Business Tax has made it so businesses “aren’t being penalized” for coming to the state.

“Since the governor’s first term in 2011, we’ve already seen a lot of out-of-state and global companies come to Michigan and invest here,” he said, “either in existing operations or brand new operations.”


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Associated Press contributed.