Close this search box.
Home / Articles / A look at the Michigan Supreme Court ruling in IBM v. Department of Treasury

A look at the Michigan Supreme Court ruling in IBM v. Department of Treasury

July 18, 2014


On July 14, the Michigan Supreme Court released its long awaited decision in International Business Machines Corp. v. Department of Treasury, Docket No. 146440, July 14, 2014. The decision reached two primary conclusions. First, IBM was entitled to use the Multistate Tax Commission (“MTC”) equally weighted three – factor apportionment formula in lieu of the Michigan Business Tax Act single – factor sales apportionment formula. Second, the Modified Gross Receipts Tax component of the Michigan Business Tax fits within the Compact’s definition of an income tax.

Although the decision applied to IBM’s 2008 tax year, the decision has implications for future years including years still open under Michigan’s statute of limitations. Taxpayers should review returns for 2009 and 2010 for possible refund claim opportunities. For years subsequent to 2010, taxpayers should consult with a tax professional concerning specific actions to take.

Specifics of the Decision

I.) Overview of the Michigan Business Tax

The Michigan Business Tax (“MBT”) took effect January 1, 2008 and replaced the Single Business Tax (“SBT”). The MBT was subsequently replaced by the Corporate Income Tax effective January 1, 2012, so the MBTs existence in Michigan was short lived. The MBT consisted of two components: 1.) a business income tax based on modified federal taxable income and 2.) a modified gross receipts tax based on gross receipts less certain subtractions (“purchases from other firms”). Both tax amounts are aggregated; the total (plus a surcharge) represented the taxpayer’s MBT liability.

II.) IBM’s Claim

The case evolved from IBM’s 2008 MBT filing where IBM elected to apportion income using the MTC’s equally weighted three-factor apportionment formula. The Department of Treasury determined that IBM could not use the three-factor apportionment formula and instead was required to use the single sales factor apportionment formula prescribed by the Michigan Business Tax Act. IBM brought suit in the Court of Claims, arguing that it was entitled to apportion its business income and modified gross receipts tax base using the three factor apportionment formula codified in MCL 205.581, et seq. rather than using the single sales factor formula codified in MCL 208.1101, et seq. The Court of Claims granted summary disposition in favor of the Department of Treasury, holding that the Business Tax Act required the use of the single sales factor formula. The Court of Appeals affirmed the Court of Claims; the Michigan Supreme Court granted IBM’s motion for leave of appeal and heard the case on a de novo basis.

III.) The Court’s Decision 

a.) MTC Three – Factor Election was Not Implicitly Repealed

The Court first noted the Compact language at issue has historically been a part of the Michigan tax system including the SBT and MBT regimes. The Court also noted that in May 2011, the Michigan Legislature added language to the election provision:

except that beginning January 1, 2011 any taxpayer subject to the Michigan business tax act . . . or the income tax act of 1967 . . . shall, for purposes of that act, apportion and allocate in accordance with the provisions of that act and shall not apportion or allocate in accordance with [the Compact].’

The Court stressed that while the legislature could have retroactively precluded the election to January 1, 2008 (start date for the Michigan MBT) it chose not to do so. Hence, earlier years could not be considered precluded under the legislature’s modification. A concurring opinion concluded that since the legislature did not expressly prohibit the election for tax year 2008 – 2010, the legislature was clear with its intent that the modification to the Compact’s election provision did not apply to these years.

The Court also determined that enactment of the MBT (which contains the single sales factor apportionment formula) could not repeal the Compact election by implication because the MTC election provision considers existence of a tax system containing an apportionment formula provision differing from the Compact formula. The Court considered the two apportionment provisions in pari materia and concluded the provisions could simultaneously exist.

b.) Three Factor Election applicable to Modified Gross Receipts Tax Component of MBT

The Court also noted the MTC election is available to taxpayers subject to an income tax and concluded the Modified Gross Receipts Tax component of the MBT is in fact an income tax. The Department of Treasury tried to argue that the Modified Gross Receipts Tax is a pure gross receipts tax and not an income tax. The Court disagreed, noting that the Modified Gross Receipts Tax met the broad MTC Compact definition of an income tax since it contemplates an entire amount received by the taxpayer less certain deductions from such activity to derive a tax base.

Other Considerations

Note the Court’s decision was based on statutory grounds, so it fundamentally differs from MTC apportionment formula litigation in other states such as the ongoing California litigation in Gillette. The taxpayer’s argument in Gillette is premised on whether the MTC election was promised under a contractual commitment made when California became a Compact member and whether California violated the Contracts Clause of the Constitution when it unilaterally repealed the election. Since the IBM decision was based on statutory interpretation, an open question remains as to whether prevailing on a contractual basis would impact Michigan taxpayers for years subsequent to 2010.

Applicability to Taxpayers

Recall that Michigan’s election statute was modified for 2011, so the IBM decision is directly applicable to tax years 2009 and 2010; opportunities to file claims might exist. Note the Court was silent on whether the election must be taken on an originally filed return so this is an open issue. Michigan has a four year statute of limitations so 2008 is now closed. Claims for 2011 might also be available, but could not be based on the IBM argument since the MTC election was modified applicable to 2011. Rather, a 2011 claim would need to rely on a contractual argument similar to the Gillette California matter. The outcome of Gillette in California could thus impact the viability of future Michigan claims. The IBM decision has certain other implications that should be discussed with a State and Local tax specialist.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


Related Articles


2 Min Read

Navigating Taxable Gains and Losses When Selling Assets


2 Min Read

Seven Red Flags of Form 990: Avoid an Audit


2 Min Read

Business Vehicle Deductions: Understanding the Latest Methods and Rules


2 Min Read

Invest in Your Financial Success With Smart Tax Planning


2 Min Read

Governmental Accounting Standards Board (GASB) 101: Understanding Compensated Absences


2 Min Read

CSH Names 4 New Shareholders and Promotes Over 90 Professionals

Get in Touch.

What service are you looking for? We'll match you with an experienced advisor, who will help you find an effective and sustainable solution.

  • Hidden
  • This field is for validation purposes and should be left unchanged.