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Michigan Supreme Court Issues Decision in IBM Case

State and Local Tax

By Allen Wassel

Only July 14, 2014, the Michigan Supreme Court held that International Business Machines Corporation ("IBM") was entitled to apportion its tax base to Michigan using a three-factor apportionment formula for purposes of the Michigan Business Tax ("MBT").  Following is a brief summary of the arguments and decisions.

IBM argued that because Michigan was a signatory member of the Multistate Tax Compact ("MTC") when the MBT was in effect and because Michigan had not expressly repealed the MTC, IBM was permitted to elect to use the equally weighted, three-factor apportionment method provided under the MTC.  IBM also argued that the three-factor apportionment could be used to calculate its tax base for both the gross receipts tax ("GRT") and business income tax ("BIT") portions of the MBT because both were considered "income taxes".

The Michigan Department of Treasury ("Department") argued that the MTC was repealed by implication because the statutory provisions that governed the MBT instructed taxpayers to calculate their Michigan apportionment using a mandatory single sales factor method.  The Department also argued that the GRT portion of the MBT was a gross receipts tax, as the name implies, and not an income tax.

The Michigan Supreme Court, in a 4-3 decision, ruled in favor of IBM and held that the MTC's elective three-factor apportionment formula was valid for both the GRT and BIT tax components of the MBT because both fit within the broad definition of "income tax" under the MTC.

If you have any questions regarding the implications of this ruling, please contact a member of our State and Local Tax Group.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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