Editorial: Court should reconsider costly tax tax ruling
Michigan’s Supreme Court doesn’t have to say it got it wrong in a business tax case decision that could ultimately cost the state $1 billion. It only has to acknowledge that, given the complex nature of the argument and the conflicting opinions among the justices, that it might get it better on a second look.
It is rare for the court to reconsider a ruling, and it should be. Credibility and stability demand it make its decisions on the basis of the law, without regard to the consequences. To do otherwise would mire the justices in a constant political tug-of-war.
But that doesn’t mean it should never reconsider. This case is one that could benefit from additional deliberation.
That’s what Attorney General Bill Schuette has requested of the court, and the justices should grant the reconsideration.
When the Michigan Business Tax (MBT) was enacted by the Legislature in 2007, it replaced the Single Business Tax (SBT). Unlike its predecessor, the MBT required business taxpayers to calculate the portion of their overall net income taxable to Michigan — a process known as “apportionment” — by only taking into consideration the business’s sales.
The more sales that a business did in Michigan (as a percentage of its sales nationwide), the higher the percentage of its total income that was subject to the MBT. In contrast, apportionment under the Single Business Tax also took into account other, non-sales-related factors. As a practical matter, this change meant that businesses with sales in Michigan but little-to-no physical presence, such as IBM, would pay more taxes, while businesses located in Michigan would see a reduction in their tax liability.
IBM argued it should be allowed to use the old formula because in adopting the MBT, lawmakers did not specifically replace a 50-year-old multi-state tax compact that was included in the Single Business Tax. They didn’t get around to doing that until 2011.
Because of that oversight, IBM contends it should be able to assess its pre-2011 Michigan tax burden under the previous formula.
The Michigan Tax Tribunal and the court of appeals sided with the state, but those rulings were overturned by the high court.
The cost difference for IBM is a $5.9 million refund, instead of the $1.2 million it would receive under the newer law. Multiplied across the hundreds of businesses affected by the change and the hit to the state treasury is estimated at $1 billion.
Schuette, in his request for reconsideration, says lawmakers did not intend to allow companies to use the old formula after the 2008 tax change was adopted. And that was at the heart of the Supreme Court debate.
Three justices — Bridget McCormack, Bob Young and Mary Beth Kelly — agreed with the state that the intent to replace the multi-state compact was clearly implied. Justices Stephen Markman, David Viviano and Michael Cavanagh disagreed, as did Brian Zahra, but for different reasons, giving the ruling in favor of IBM a 4-3 majority.
Zahra called it a “very close question” but said he believed the Legislature in 2011 intended to give taxpayers the three preceding years to choose either option.
That sort of 3-1-3 split on the court is unusual, and opens the door for a reconsideration.
Again, the Supreme Court should uphold the law, regardless of the consequences. But the impact of this ruling will be so great on taxpayers, and the decision was so narrowly divided, the court should pause and make sure it got it right. The court should grant the reconsideration.