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Michigan Alternative Apportionment Formula Victory for Taxpayer

iStock-119662314-michigan-300x222A very interesting and heartening decision was just handed down by the Michigan Court of Appeals in Vectren Infrastructure Services Corp. v. Department of Treasury in connection with a sale of an out-of-state business. Copy attached. In Vectren, the Court of Appeals held that the Department of Treasury’s (DOT) removal of the gain from the sale of the business from the denominator of the sales factor, while including the gain in the income base, violated the Due Process and Commerce Clauses. Notably, during the year in question, Michigan used a single sales factor apportionment formula. The decision underscores the potential unfair apportionment inherent in a single sales factor apportionment formula.

The Court carefully analyzed the facts and concluded that the DOT’s action which resulted in 70 percent of the gain being taxed by Michigan, whereas historically the taxpayer’s sales factor had been seven percent, was distortive and that alternative apportionment was appropriate. The Court relied upon Hans Rees and held that the taxpayer had sustained its burden of proving the distortion. The Court distinguished Trinova, which was three-factor apportionment case, on the basis that in Vectren the DOT’s application of the single sales factor apportionment formula resulted in unconstitutional distortion.

The Court did not mandate any particular alternative apportionment method, but remanded the case and noted that “this matter must be returned to the Department for the determination of the appropriate alternate method to be used. We encourage the parties to engage in a good faith collaboration to arrive at such a method. Ultimately, just as the Department may not rely on the statutory formula in this case, neither can it insist on an alternate method that does not cure the constitutional defect by continuing to attribute out-of-state revenue to Michigan. And if plaintiff believes that the method ultimately adopted by the Department is constitutionally flawed, it may renew its challenges.”

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