Michigan Supreme Court to Clarify Alternate Income Tax Allocation for Out-of-State Corporations | Miller Canfield
The Michigan Supreme Court has agreed to hear one of the nation’s most important cases to consider the question of when the due process and commerce clauses of the US Constitution require the application of an alternative apportionment method. , Vectren Infrastructure Services Corp. vs. Treasury Department.
The Court will consider whether the amount of tax the Michigan Department of the Treasury assessed due to the sale of a business was so misaligned with the taxpayer’s actual business structure that it led to “a grossly skewed result “. The determination of a distorted result is important because the Court would then have to consider whether the statutory formula (which resulted in such a distorted result) violates the Commerce Clause and the Due Process Clause as applied. to the taxpayer. Additionally, if the apportionment violates any of the constitutional clauses, then the Michigan Supreme Court will review the procedure for determining an alternate method of apportionment. The court’s decision on the latter two issues could change how Michigan assesses taxes on sold businesses that have minor operations or no permanent business locations in Michigan.
The issues arose when the taxpayer, a Minnesota company with no permanent place of business or permanent employees in Michigan, sold its business in 2011. Although the taxpayer had a contract to provide oil spill cleanup services in Michigan when the business was sold, the Michigan Treasury Department ruled that approximately 70% of the taxpayer’s business should be attributed to Michigan for tax purposes.
After a preliminary reference from the Michigan Supreme Court, the trial court and the Court of Appeals concluded that the legal method resulted in a violation of the Constitution. In response, the Michigan Treasury Department requested leave to appeal, resulting in this order.
Michigan taxpayers may have new options for allocating their income in Michigan depending on how the Michigan Supreme Court decides these three issues:
- if the distribution is distorted in this case,
- if a distorted allocation violates the terms of the trade and due process, and
- whether the taxpayer must request in advance an alternative distribution when the legal distribution goes against the constitutional clauses.
Out-of-state employers with operations in Michigan will want to keep up to date with Vectren developments.