Michigan Supreme Court Hears Compact Case

Crady deGolian, Director, CSG’s National Center for Interstate Compacts

Rick Masters, Special Counsel, CSG’s National Center for Interstate Compacts


The Michigan Supreme Court heard oral arguments today in the case of IBM v. the Michigan Department of Treasury.  At issue in the case are IBM’s 2008 Michigan tax returns.  IBM, using a formula set forth in the Multi-State Tax Compact, which Michigan joined in 1969, calculated the company was entitled to a tax return of approximately 6 million dollars.  The Dept. of Treasury, using a conflicting formula contained in the Michigan Business Act, determined IBM was only entitled to a refund of approximately 1.3 million.  Two separate lower court rulings sided with the Dept. of Treasury, finding that IBM was required to use the formula established by the Michigan Business Act.  That finding eventually led IMB to appeal the ruling, setting the stage for today’s argument. 


The terms of the Multistate Tax Compact require member states to equally consider a company's sales, property and payroll taxes when determining what percentage of the company’s income is taxable. The compact also allows companies to apportion their taxable income under state laws if those are more generous.  In this instance IBM elected to file based on the terms of compact.


At the heart of IBM’s original argument and eventual appeal is the legal principle that a compact is a binding contract between states.  The initial lower court ruling seems to imply a state may choose which sections of a compact it wishes to comply with and which sections it may choose to ignore, thereby preventing corporations such as IBM from selecting the compact option.  Such a ruling fundamentally calls into question the contractual nature of interstate compacts.  


In July of last year a similar case was heard by a California Appellate Court.  In the case of The Gillette Company v. The Franchise Tax Board California’s method of collecting and allocating tax dollars from companies that do business across state lines was called into question under the terms of the Multi-State Tax Compact.  In a unanimous ruling the appeals court concluded, “The compact is a binding, enforceable agreement that overrides conflicting state laws.”  This case has also been appealed to the California Supreme Court, with oral arguments expected to be heard in the next few months. 


CSG will continue to track the progress of both cases.