EMC Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas

ACCEPTED

03-15-00113-CV

5110259

THIRD COURT OF APPEALS

AUSTIN, TEXAS

4/30/2015 6:02:54 PM

JEFFREY D. KYLE

CLERK

No. 03-15-00113-CV

__________________________________________________________________

FILED IN

In the Court of Appeals 3rd COURT OF APPEALS

For the Third Judicial District AUSTIN, TEXAS

4/30/2015 6:02:54 PM

Austin, Texas

JEFFREY D. KYLE

__________________________________________________________________

Clerk

EMC CORPORATION

Appellant,

v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF

THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY

GENERAL OF THE STATE OF TEXAS

Appellees.

__________________________________________________________________

ON APPEAL FROM THE 353RD DISTRICT COURT, TRAVIS COUNTY, TEXAS

TRIAL COURT CAUSE NO. D-1-GN-14-000851

__________________________________________________________________

APPELLANT’S BRIEF

__________________________________________________________________

RYAN LAW FIRM, LLP

Doug Sigel

Texas Bar No. 18347650

Doug.Sigel@RyanLawLLP.com

Ryan Cotter

Texas Bar No. 24075969

Ryan.Cotter@RyanLawLLP.com

100 Congress Avenue, Suite 950

Austin, Texas 78701

April 30, 2015 Attorneys for Appellant

ORAL ARGUMENT IS REQUESTED

Identity of the Parties and Counsel

Appellant

EMC Corporation

Counsel for Appellant

Doug Sigel

Ryan Cotter

Ryan Law Firm, LLP

100 Congress Avenue, Suite 950

Austin, Texas 78701

512.459.6600 Telephone

512.459.6601 Facsimile

Doug.Sigel@RyanLawLLP.com

Ryan.Cotter@RyanLawLLP.com

Appellees

Glenn Hegar, Comptroller of Public Accounts of the State of Texas

Ken Paxton, Attorney General of the State of Texas

Counsel for Appellees

Rance Craft

Assistant Solicitor General

Charles K. Eldred

Assistant Attorney General

Office of the Attorney General

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

512.936.2872 Telephone

512.474.2697 Facsimile

rance.craft@texasattorneygeneral.gov

charles.eldred@texasattorneygeneral.gov

Appellant’s Brief – Page i

Table of Contents

Identity of the Parties and Counsel ....................................................................................... i

Table of Contents................................................................................................................. ii

Table of Authorities ............................................................................................................ iii

Appendix ............................................................................................................................ vi

Statement of the Case .......................................................................................................... 1

Statement Regarding Oral Argument .................................................................................. 1

Issues Presented ................................................................................................................... 1

Statement of Facts ............................................................................................................... 2

Summary of the Argument .................................................................................................. 4

Standards of Review ............................................................................................................ 6

Argument ............................................................................................................................. 7

Appellant is entitled to compute its franchise tax using the Multistate

Tax Compact apportionment formula. ....................................................................... 7

The plain language of Texas Tax Code §§ 141.001 and

171.106(a) is unambiguous. ................................................................................ 9

The Legislature did not impliedly repeal the Multistate Tax

Compact when it enacted the revised franchise tax. ......................................... 10

Texas cannot unilaterally repeal selected provisions of the Multistate

Tax Compact because it is a binding interstate compact. ........................................ 11

Texas may not unilaterally modify the terms of a contract. ............................. 12

The Multistate Tax Compact is a valid and binding interstate

compact. ............................................................................................................ 13

Texas did not withdraw from the Multistate Tax Compact. ............................. 14

The Multistate Tax Compact election applies because the Texas

franchise tax is an income tax. ................................................................................. 15

The Michigan Supreme Court, in an identical case, held that

taxpayer was entitled to use the Multistate Tax Compact’s three-

factor apportionment formula. .......................................................................... 16

The Georgia Tax Tribunal held that the Texas Franchise Tax is

an income tax. ................................................................................................... 18

Disallowing taxpayers an election under the Multistate Tax Compact

violates the United States and Texas Constitutions. ................................................ 20

Conclusion ......................................................................................................................... 22

Certificate of Compliance .................................................................................................. 23

Appellant’s Brief – Page ii

Certificate of Service ......................................................................................................... 23

Table of Authorities

CASES

Appraisal Review Bd. v. Spencer Square Ltd.,

252 S.W.3d 842 (Tex. App.—Houston [14th Dist.] 2008, no pet.) .......................7

Combs v. Health Care Serv. Corp,

401 S.W.3d 623 (Tex. 2013) ...........................................................................8

Combs v. Roark Amusement & Vending, L.P.,

422 S.W.3d 632 (Tex. 2013) .......................................................................7, 8

Dodd v. State,

650 S.W.2d 129 (Tex. App.—Houston [14th Dist.] 1983, no writ) ...............10

H. Alan Rosenberg v. Comm'r,

No. 1414626 (GA Nov. 25, 2014) .......................................................... 19, 20

Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell,

283 U.S. 123 (1931).......................................................................................20

Hess v. Port Auth. Trans-Hudson Corp.,

513 U.S. 30 (1994).........................................................................................12

Houston Indep. Sch. Dist. v. S.W. Bell Tel. Co.,

376 S.W.2d 375 (Tex. App.—Austin, 1964),

rev’d on other grounds by 397 S.W.2d 419 (Tex. 1965) ..............................10

In re E.I. du Pont de Nemours and Co.,

92 S.W.3d 517 (Tex. 2002) .............................................................................6

In re Office of the Attorney Gen.,

422 S.W.3d 623 (Tex. 2013) ...........................................................................8

In re VanDeWater,

966 S.W.2d 730 (Tex. App.—San Antonio 1998) (orig. proceeding) ............8

Appellant’s Brief – Page iii

Int’l Serv. Ins. Co. v. Jackson,

335 S.W.2d 420 (Tex. App.—Austin, 1960, writ ref’d n.r.e.) ......................11

Int'l Bus. Machines Corp. v. Dep't of Treasury,

852 N.W.2d 865 (2014) .......................................................................... 16, 17

Jones v. Williams,

45 S.W.2d 130 (Tex. 1931) .............................................................................9

Maverick v. Ruiz,

897 S.W.2d 843 (Tex. App.—San Antonio 1995, no writ).............................9

Mid South Telecomm. Co. v. Best,

184 S.W.3d 386 (Tex. App—Austin 2006, no pet.) ........................................6

Norfolk & W. Ry. Co. v. Missouri State Tax Comm’n,

390 U.S. 317 (1968).......................................................................................21

State ex rel. Dyer v. Sims,

341 U.S. 22 (1951).........................................................................................13

Tex. Adjutant Gen.’s Office v. Ngakoue,

408 S.W.3d 350 (Tex. 2013) ...........................................................................8

TGS-NoPec Geophysical Co. v. Combs,

340 S.W.3d 432 (Tex. 2011) ...........................................................................8

TracFone Wireless, Inc. v. Comm’n on State Emergency Commc’ns,

397 S.W.3d 173 (Tex. 2013) ...........................................................................8

U.S. Steel Corp. v. Multistate Tax Comm’n,

434 U.S. 452 (1978)................................................................................ 13, 14

Valence Operating Co. v. Dorsett,

164 S.W.3d 656 (Tex. 2005) ...........................................................................6

Walker v. Packer,

827 S.W.2d 833 (Tex. 1992) ...........................................................................7

Appellant’s Brief – Page iv

STATUTES

Tex. Tax Code § 141.001 ................................................................................. passim

Tex. Tax Code § 141.001, Art. II, ¶ 4 ..................................................................6, 15

Tex. Tax Code § 141.001, Art. II, ¶ 6 ......................................................................16

Tex. Tax Code § 141.001, Art. III, ¶ 1 ........................................................... 4, 9, 10

Tex. Tax Code § 141.001, Art. IV .................................................................. 7, 9, 21

Tex. Tax Code § 141.001, Art. X ............................................................................14

Tex. Tax Code § 171.106(a) ............................................................................ passim

U.S. Const. art. I, § 8................................................................................................21

U.S. Const. art. I, § 10..........................................................................................5, 14

OTHER

Frederick L. Zimmermann & Mitchell Wendell,

The Law and Use of Interstate Compacts, The Council of

State Governments, January 1976 ...........................................................11, 12

Appellant’s Brief – Page v

Appendix

1. Final Judgment

2. Tex. Tax Code § 141.001 (Vernon 2002).

3. Tex. Tax Code § 171.106 (Vernon 2002).

4. Tex. Tax Code § 112.151 (Vernon 2002).

5. Tex. Const. art. I, §16.

6. U.S. Const. art. I, § 10.

7. Int'l Bus. Machines Corp. v. Dep't of Treasury, 852 N.W.2d 865 (2014).

8. H. Alan Rosenberg v. Douglas J. Macginnittie, Commissioner, Georgia

Department of Revenue, No. 1414626 (GA Nov. 25, 2014).

Appellant’s Brief – Page vi

Statement of the Case

Nature of underlying case: Franchise tax refund suit under Chapters 112, 141,

and 171 of the Texas Tax Code.

Trial court: The 353rd Judicial District Court of Travis County,

Texas, specially assigned to the Honorable Darlene

Byrne

Course of Proceedings: Both Parties filed cross-motions for summary

judgment.

Disposition: The trial court denied Appellant’s motion for

summary judgment and granted Appellees’ cross-

motion for summary judgment on February 18, 2015.

Clerk’s Record (CR) 1172; Appendix, Tab 1.

Statement Regarding Oral Argument

EMC Corporation (“EMC”) requests oral argument. The underlying dispute

involves proper application of the Multistate Tax Compact to the revised Texas

Franchise Tax. Oral argument would aid the Court’s determination of this case.

Issues Presented

The central question in this case is whether, under Chapters 141 and 171 of

the Texas Tax Code, Appellant is entitled to apportion margin using the Multistate

Tax Compact apportionment formula, adopted and codified by Texas, for report

years 2010 through 2012. To resolve this question, the following issues are

presented:

Appellant’s Brief – Page 1

1. Whether the enactment of Section 171.106(a), containing the Texas

apportionment formula, constitutes an implied repeal of the codification of the

Multistate Tax Compact in Sections 141.001, arts. III, IV.

2. Whether the Multistate Tax Compact is a binding compact on all party

states, including Texas, which may not be unilaterally altered by Texas.

3. Whether the Texas Franchise Tax is an “income tax” as defined by

and within the scope of the Multistate Tax Compact.

4. Whether disallowing Appellant’s election to use the Multistate Tax

Compact apportionment formula violates the United States and Texas

Constitutions.

Statement of Facts

The material facts regarding EMC’s business done in Texas are not in

dispute. EMC is a Massachusetts-based corporation authorized to conduct

business in Texas. (CR 4.) EMC sells information technology hardware and cloud

storage solutions to customers nationwide, including customers in Texas. (CR

715.) EMC only engages in retail and wholesale activities in Texas. (Id.) During

the periods at issue, EMC engaged in a multistate, unitary business and determined

that a portion of its United States income was subject to Texas franchise tax. (CR

716.)

Appellant’s Brief – Page 2

EMC timely filed its franchise tax reports for report years 2010 through

2012. (CR 721-1045.) During the relevant report years, EMC paid the following

amounts in franchise tax:

$2,959,318.74 for 2010 Report Year

$4,982,013.01 for 2011 Report Year

$5,666,394.62 for 2012 Report Year

(CR 717.)

In its original reports, EMC apportioned its margin using the single-factor

apportionment formula in Tex. Tax Code § 171.106(a). (CR 716.) After learning

of the Multistate Tax Compact’s three-factor apportionment formula election,

adopted and codified as Chapter 141 of the Texas Tax Code, EMC amended and

timely filed franchise tax reports and refund claims for report years 2010, 2011,

and 2012 using the three-factor formula. (CR 717.)

The Comptroller audited EMC for these report years and denied EMC’s

refund claims. (CR 718.) The Comptroller issued his final decision upholding the

denial of EMC’s refund claims on January 27, 2014. (Id.) EMC’s motion for

rehearing was also denied, after which EMC filed this refund suit in Travis County

District Court on March 20, 2014. (Id.)

The issues in this case were decided by cross-motions for summary

judgment at the trial court with the Honorable Darlene Byrne presiding. The trial

Appellant’s Brief – Page 3

court issued its final judgment on February 18, 2015, denying EMC’s motion for

summary judgment and granting the Comptroller’s cross-motion for summary

judgment based on the conclusion that EMC was not entitled to apportion its

franchise tax using the Multistate Tax Compact’s three-factor apportionment

formula. (CR 1172; Tab 1.)

Summary of the Argument

EMC properly amended its franchise tax reports electing to compute the tax

using the Multistate Tax Compact apportionment formula for 2010 through 2012

report years. (CR 717-718.) Texas became a party to the Multistate Tax Compact

when it adopted it in 1967 and subsequently codified it in full as Tex. Tax Code

§ 141.001 in 1982. As a party to the Multistate Tax Compact, Texas agreed to be

bound by all of its terms, including the provision permitting taxpayers, such as

EMC, the election to apportion their tax base using either the Multistate Tax

Compact formula or an alternative state formula. Tex. Tax Code § 141.001, Art.

III, ¶ 1. The Texas legislature has not withdrawn from or repealed any part of the

Multistate Tax Compact since it was adopted and codified.

In 2006, the Texas legislature enacted the franchise tax as Chapter 171 of the

Texas Tax Code to replace the existing earned surplus tax. The revised franchise

tax included a single-factor apportionment formula, which differs from the

Multistate Tax Compact’s three-factor formula. The Texas legislature did not

Appellant’s Brief – Page 4

expressly repeal any part of the Multistate Tax Compact when it enacted the

revised franchise tax in 2006.

As a matter of statutory construction, the Multistate Tax Compact election

and formula remain in effect because they do not irreconcilably conflict with the

Texas formula. If a taxpayer elects to use the Multistate Tax Compact formula, the

taxpayer apportions franchise tax using the Multistate Tax Compact formula; if the

taxpayer does not elect to use the Multistate Tax Compact formula, it apportions its

franchise tax using the Texas formula. The plain language of Sections 141.001 and

171.106(a) is unambiguous and the Texas legislature has not expressly repealed

any part of the Multistate Tax Compact. Both statutes remain good law.

Further, the Multistate Tax Compact is a valid and binding interstate

compact, and Texas is prohibited from unilaterally altering its terms without first

withdrawing from the Multistate Tax Compact. The Contracts Clause, Art. I, § 10,

of the United States Constitution protects interstate compacts such as the Multistate

Tax Compact. Under the Contracts Clause, states may not enact any law that

impairs the obligation of contracts. The Appellees’ position mandating application

of the formula in Section 171.106(a) impairs Texas’ contractual obligation to

permit taxpayers an election to apportion franchise tax using the Multistate Tax

Compact formula.

Appellant’s Brief – Page 5

The Multistate Tax Compact applies to all “income taxes,” which is broadly

defined to include tax on “an amount arrived at by deducting expenses from gross

income, one or more forms of which expenses are not specifically and directly

related to particular transactions.” Tex. Tax Code § 141.001, Art. II, ¶ 4. The

Texas franchise tax is an income tax under the Multistate Tax Compact because its

computation allows for the deduction of expenses that are not specifically and

directly related to particular transactions (e.g. compensation) from gross income

reported on the taxpayer’s federal income tax return. The Multistate Tax Compact

definition of income tax is broader than the common definition, and the Texas

franchise tax fits squarely within it.

Standards of Review

This Court reviews a trial court’s summary judgment de novo. Valence

Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). When both parties

move for summary judgment and the trial court grants one motion and denies the

other, this Court must review the summary judgment evidence presented by both

parties, determine all questions of law presented, and render the judgment the trial

court should have rendered. Mid South Telecomm. Co. v. Best, 184 S.W.3d 386,

389-90 Tex. App—Austin 2006, no pet.).

Statutory construction is a question of law on which the trial court’s views

are not entitled to deference. In re E.I. du Pont de Nemours and Co., 92 S.W.3d

Appellant’s Brief – Page 6

517, 522 (Tex. 2002); see also Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992)

(trial court’s reasoning is not entitled to deference because it has no discretion in

deciding what the law is or its proper application). Further, a de novo review is

generally “conducted as if there had been no trial in the first instance.” Appraisal

Review Bd. v. Spencer Square Ltd., 252 S.W.3d 842, 845 (Tex. App.—Houston

[14th Dist.] 2008, no pet.).

Argument

This Court should reverse the trial court’s judgment denying Appellant’s

motion for summary judgment granting Appellees’ cross-motion for summary

judgment, and render judgment in favor of Appellant that it properly apportioned

its Texas franchise tax pursuant to the Multistate Tax Compact for report years

2010 through 2012.

Appellant is entitled to compute its franchise tax using the Multistate

Tax Compact apportionment formula.

As a matter of statutory construction, Texas taxpayers are entitled to elect to

use the Multistate Tax Compact formula provided in Section 141.001, Art. IV, to

compute their franchise tax, and the apportionment formula provided in Section

171.106(a) is the alternative to the Multistate Tax Compact formula.

The primary objective in interpreting a statute is to ascertain the legislature’s

intent. Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex.

2013). Ordinarily, the truest manifestation of what lawmakers intended is what

Appellant’s Brief – Page 7

they enacted. Id. Statutes must be viewed as a whole and read “contextually,

giving effect to every word, clause, and sentence.” Tex. Adjutant Gen.’s Office v.

Ngakoue, 408 S.W.3d 350, 354 (Tex. 2013) (citations omitted) (quoting In re

Office of the Attorney Gen., 422 S.W.3d 623, 629 (Tex. 2013)). If a statute is

unambiguous, the court must adopt the interpretation supported by the plain

language, unless such an interpretation would lead to absurd results. TGS-NoPec

Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). In addition, the

Texas Supreme Court held that “we read unambiguous statutes as they are written,

not as they make the most policy sense.” Combs v. Health Care Serv. Corp, 401

S.W.3d 623, 629 (Tex. 2013).

In a similar vein, “[t]ax policy gap-filling–specifically, deciding who is

taxed–is best left to legislators, not courts or agencies.” TracFone Wireless, Inc. v.

Comm’n on State Emergency Commc’ns, 397 S.W.3d 173, 176 (Tex. 2013). Any

ambiguity in the Tax Code regarding the scope of taxation must be resolved in

favor of taxpayers. Id. at 182.

When two statutes address the same subject, they should be read together

and harmonized with each other, regardless of whether they refer to one another.

See In re VanDeWater, 966 S.W.2d 730, 732-34 (Tex. App.—San Antonio 1998)

(orig. proceeding). Courts must harmonize apparent conflicts between different

portions of statutes, if practicable, and must favor a construction that renders each

Appellant’s Brief – Page 8

word operative. Maverick v. Ruiz, 897 S.W.2d 843, 846 (Tex. App.—San Antonio

1995, no writ); see also Jones v. Williams, 45 S.W.2d 130, 137 (Tex. 1931).

The plain language of Texas Tax Code §§ 141.001 and 171.106(a) is

unambiguous.

Sections 141.001 and 171.106(a) are unambiguous and both stand separately

as equally enforceable alternative methods of apportionment. Section 141.001,

Art. III, ¶ 1, provides that the taxpayer “may elect to apportion and allocate his

income in the manner provided by the laws of such states and subdivisions without

reference to this compact, or may elect to apportion or allocate in accordance with

Article IV.” Thus, a taxpayer may elect to apportion its franchise tax using the

Multistate Tax Compact formula or forgo the Multistate Tax Compact election and

apportion its franchise tax using the Texas formula.

There is no overriding mandate in Section 171.106(a) that taxpayers must

use the Texas formula instead of the Multistate Tax Compact formula. Section

171.106 makes no mention of the Multistate Tax Compact or any of its provisions.

Accordingly, the only way in which Sections 171.106 and 141.001 compete or

conflict is that they contain different formulas. However, the fact that two statutes

apparently conflict or compete does not mean an apparent conflict is always

irreconcilable. See Maverick, 897 S.W.2d at 846.

Rather, permitting taxpayers the option of making an election under Section

141.001 to apportion using the Multistate Tax Compact formula shows that Section

Appellant’s Brief – Page 9

171.106(a) is the alternative method of apportionment. This interpretation

harmonizes the apparent conflict because a taxpayer that does not elect to use the

Multistate Tax Compact formula effectively elects to use the Texas formula. In

other words, both provisions provide equally enforceable alternative calculation

methods depending on the election the taxpayer makes.

The Legislature did not impliedly repeal the Multistate Tax Compact

when it enacted the revised franchise tax.

The only argument to support the Comptroller’s claim that Section

171.106(a) provides a mandatory and exclusive apportionment formula in Texas is

that the Texas legislature impliedly repealed the permissive election contained in

Section 141.001, Art. III, ¶ 1.

Courts are hesitant to find implied repeal when two statutes can reasonably

be given effect. Houston Indep. Sch. Dist. v. S.W. Bell Tel. Co., 376 S.W.2d 375,

380 (Tex. App.—Austin, 1964), rev’d on other grounds by, 397 S.W.2d 419, 420-

421 (Tex. 1965). “[I]t may be presumed that laws are passed with deliberation,

and with full knowledge of existing ones on the subject.” Id. The presumption

disfavoring implied repeal where express terms are not used is based on the

probability that the legislature would have used express language clearly indicating

the intent to repeal an existing statute. Id.

Courts only find implied repeal when two statutes at issue are “directly and

irreconcilably in conflict.” Dodd v. State, 650 S.W.2d 129, 130 (Tex. App.—

Appellant’s Brief – Page 10

Houston [14th Dist.] 1983, no writ). “[T]he court will endeavor to harmonize and

reconcile the various provisions and if both acts can stand together, the rule is to let

them stand. The implication must be clear, necessary, irresistible, and free from

reasonable doubt.” Int’l Serv. Ins. Co. v. Jackson, 335 S.W.2d 420, 424 (Tex.

App.—Austin, 1960, writ ref’d n.r.e.).

The enactment of Section 171.106 did not repeal the Multistate Tax

Compact or any provision thereof. First, Section 171.106 makes no reference to

Section 141.001 or any provision in chapter 141. Second, Section 171.106(a)’s use

of the phrase “Except as provided by this section” is not a clear indication of the

legislature’s implication and is far from reasonable doubt. In addition, Sections

141.001 and 171.106 can be harmonized to reconcile the various provisions and

stand together. This Court should construe the two statutes in favor of the taxpayer

and conclude that Section 171.106(a) did not impliedly repeal Section 141.001.

Texas cannot unilaterally repeal selected provisions of the Multistate

Tax Compact because it is a binding interstate compact.

The “interstate compact is the most binding legal instrument to provide

formal cooperation between the States.” Frederick L. Zimmermann & Mitchell

Wendell, The Law and Use of Interstate Compacts, The Council of State

Governments, at ix, January 1976. Thus, the Multistate Tax Compact is a binding

legal instrument on the State of Texas.

Appellant’s Brief – Page 11

Not only is the Multistate Tax Compact a statute, it is also a binding

contract:

Interstate compacts are not only statutes; they also are contracts. This

means that the substantive law of contracts is applicable to them. This

is certainly true of the vast body of case law and of the general

characteristics of contracts which are recognized throughout the

common law world.

Id. at 2.

In any event, it should be noted that the compact itself has the force of

statute and, in case of conflict, its provisions would supersede any general statutes

relating to contracts. Id. at 3. Texas is a signing compact member of and party to

the Multistate Tax Compact. (CR 668.) The Multistate Tax Compact is an

interstate compact that is not only law, but is also a contract that cannot be

amended, modified, or otherwise altered without consent of all parties. Hess v.

Port Auth. Trans-Hudson Corp., 513 U.S. 30, 42 (1994). “If it has been enacted by

statute, legislative alteration or repeal is necessary.” Zimmermann & Wendell,

supra, at 3.

Texas may not unilaterally modify the terms of a contract.

EMC properly elected the Multistate Tax Compact’s three-factor

apportionment formula because Texas is contractually obligated to offer taxpayers

the election.

Appellant’s Brief – Page 12

Signing compact members of the Multistate Tax Compact, such as the state

of Texas, are contractually obligated to offer taxpayers the option to use the three-

factor apportionment formula. “It requires no elaborate argument to reject the

suggestion that an agreement solemnly entered into between States by those who

alone have political authority to speak for a State can be unilaterally nullified, or

given final meaning by an organ of one of the contracting States.” State ex rel.

Dyer v. Sims, 341 U.S. 22, 28 (1951). Members may not unilaterally ignore or

repeal specific portions of the Multistate Tax Compact without first withdrawing

from the Multistate Tax Compact. Texas has neither withdrawn from the

Multistate Tax Compact nor repealed its enacting legislation in Section 141.001.

The Multistate Tax Compact is a valid and binding interstate

compact.

In U.S. Steel Corp. v. Multistate Tax Commission, the U.S. Supreme Court

stated:

The Multistate Tax Compact was entered into by a number of States

for the stated purposes of (1) facilitating proper determination of state

and local tax liability of multistate taxpayers; (2) promoting

uniformity and compatibility in state tax systems; (3) facilitating

taxpayer convenience and compliance in the filing of tax returns and

in other phases of tax administration; and (4) avoiding duplicative

taxation.

U.S. Steel Corp. v. Multistate Tax Comm’n, 434 U.S. 452, 452 (1978).

Appellant’s Brief – Page 13

Further, the Supreme Court held that the Multistate Tax Compact was valid despite

the lack of Congressional consent. Id. at 469-71. Consent is not required unless

the compact is subject to the Supremacy Clause.

The Multistate Tax Compact is an interstate compact protected by the

Contracts Clause, Art. I, § 10, of the United States Constitution. The Contracts

Clause states that “[n]o state shall . . . pass any . . . law impairing the obligation of

contracts.” The Comptroller’s interpretation and application of chapter 171 of the

Tax Code impairs Texas’s contractual obligation to allow taxpayers the three-

factor apportionment formula election under the Multistate Tax Compact. Texas

must abide by the terms of the Multistate Tax Compact and allow taxpayers the

option of apportioning income under the Multistate Tax Compact. Because Texas

is contractually and legally obligated to offer taxpayers the three-factor

apportionment formula election under the Multistate Tax Compact, EMC properly

made that election on its amended franchise tax return.

Texas did not withdraw from the Multistate Tax Compact.

The Multistate Tax Compact specifies the only way in which Texas could

withdraw:

Any party State may withdraw from this compact by enacting a statute

repealing the same. No withdrawal shall affect any liability already

incurred by or chargeable to a party State prior to the time of such

withdrawal.

Tex. Tax Code § 141.001, Art. X.

Appellant’s Brief – Page 14

No such statute repealing the Multistate Tax Compact was enacted by

the Texas Legislature.

The Multistate Tax Compact election applies because the Texas

franchise tax is an income tax.

The Multistate Tax Compact defines an “income tax” as “a tax imposed on

or measured by net income including any tax imposed on or measured by an

amount arrived at by deducting expenses from gross income, one or more forms of

which expenses are not specifically and directly related to particular transactions.”

Tex. Tax Code § 141.001, Art. II, ¶ 4.

In 2006, the Texas Legislature enacted the franchise tax and replaced the

earned surplus tax. To determine tax liability under the Texas franchise tax, each

taxpayer multiplies their total revenue less the greater of four deductions ($1

million, cost of goods sold, compensation, or 30% of total revenue) by their Texas

apportionment factor. The Texas apportionment factor is a “fraction, the

numerator of which is the taxable entity’s gross receipts from business done in this

state . . . and the denominator of which is the taxable entity’s gross receipts from

its entire business.” Tex. Tax Code § 171.106(a).

The Texas franchise tax is an income tax as defined in Article II, ¶ 4,

because, as demonstrated above, its computation allows for the subtraction of

many indirect expenses or overhead—i.e., expenses that are not specifically and

Appellant’s Brief – Page 15

directly related to particular transactions—from gross income reported on the

taxpayer’s federal return.

Further, “gross receipts tax” is defined by the Multistate Tax Compact as

“[a] tax, other than a sales tax, which is imposed on or measured by the gross

volume of business, in terms of gross receipts or in other terms, and in the

determination of which no deduction is allowed which would constitute the tax an

income tax.” Tex. Tax Code § 141.001, Art. II, ¶ 6.

The Michigan Supreme Court, in an identical case, held that

taxpayer was entitled to use the Multistate Tax Compact’s three-

factor apportionment formula.

Other jurisdictions provide helpful guidance on this topic. In a 2014 case,

the Michigan Supreme Court examined the issue of whether a taxpayer (IBM)

could elect to use the three-factor apportionment formula under the Multistate Tax

Compact for its taxes or whether it was required to use the sales-factor

apportionment under the Michigan Business Tax Act (“BTA”). Int'l Bus.

Machines Corp. v. Dep't of Treasury, 852 N.W.2d 865, 868 (2014). It found that

IBM was “entitled to use the Compact’s apportionment formula for its 2008

Michigan taxes1 and that the Court of Appeals erred by holding otherwise on the

1

The IBM court determined that the apportionment formula was applicable to both components

of the taxpayer’s BTA tax base: business income and modified gross receipts. While the latter

was not technically an “income tax” in name, the court held that modified gross receipts fit

within the broad definition of “income tax” under the Compact by taxing a variation of net

income. Id. at 880.

Appellant’s Brief – Page 16

basis of its erroneous conclusion that the Legislature had repealed the Compact’s

election provision by implication when it enacted the BTA.” Id.

Michigan joined the Multistate Tax Compact in 1970. Id. at 870. In 1976,

the Michigan Legislature replaced a corporate income tax with a single business

tax. Id. “The Legislature, however, did not expressly repeal the Compact.” Id. In

2008, the Michigan Legislature enacted the BTA, which imposed two main taxes:

“the business income tax and the modified gross receipts tax.” Id. In so doing, the

Michigan Legislature expressly repealed the single business tax that had been in

effect since 1976, “but again did not expressly repeal the Compact.” Id. The

Michigan Supreme Court summarized the treatment of the Compact by noting that

“[t]hroughout the evolution of our state’s method of business taxation, the

Compact has remained in effect.” Id. at 871. The Texas Legislature’s treatment of

the Compact has been identical: each time the franchise tax was changed or

amended, the Compact stayed in place in the Tax Code and was not amended.

The Michigan Supreme Court next examined whether the “Legislature

repealed the Compact’s election provision by implication when it enacted the

BTA.” Id. The Court noted that “repeals by implication are disfavored” and there

is a presumption that if the Legislature intended to repeal a statute, it would have

done so explicitly. Id. Thus, repeal by implication can occur by the enactment of a

subsequent inconsistent act or of an act that occupies the entire field. However,

Appellant’s Brief – Page 17

there must be clear legislative intent. This was not clear legislative intent by the

Michigan Legislature.

Further, there is a higher level of scrutiny than usual because implicit repeal

is disfavored (plain meaning of one of the provisions is not enough). The BTA

required use of sales-factor for apportionment—this was mandatory. The Court

refused to interpret the requirement in a vacuum because it was not the only tax

law pertaining to income apportionment. Michigan business tax law has always

required use of a particular apportionment formula.

Finally, statutes must be read in pari materia. The election cannot have

been a dead letter when enacted. Looking at the election as forward-looking—as

contemplating the enactment of a mandatory apportionment formula—is the only

way to give it meaning when enacted.

The Michigan Legislature expressly repealed inconsistent provisions as the

business taxes changed. In addition, the Legislature retroactively banned use of

the election on May 25, 2011, beginning January 1, 2011. It could have

retroactively repealed the election beginning on an earlier date. The express repeal

indicates there was no implicit repeal earlier. The above-described situation in

Michigan is directly analogous to the issue before this Court.

The Georgia Tax Tribunal held that the Texas Franchise Tax is an

income tax.

Although a Texas court has not yet addressed this issue, at least one other

Appellant’s Brief – Page 18

jurisdiction has construed the Texas franchise as an “income tax,” to which the

Multistate Tax Compact election is applicable. In a November 25, 2014 decision

by the Georgia Tax Tribunal, examining “the plain language of the statute, the

policy underlying its enactment, the applicable rules of statutory construction, and

the substantial weight of judicial, administrative and financial authority both in

Georgia and other jurisdictions,” it held that the “Texas Franchise Tax is indeed a

tax ‘measured on or with respect to income.’” H. Alan Rosenberg v. Douglas J.

Macginnittie, Commissioner, Georgia Department of Revenue, No. 1414626 (GA

Nov. 25, 2014). The Georgia Tax Tribunal concluded:

[T]he Texas Franchise Tax is a tax based on or measured by “income”

or “gross income” whether one uses (i) the broad and ordinary

definition of “income” or (ii) one of the technical definitions of “gross

income” in conducting the analysis.

First, the concept of “total revenue” that serves as the initial basis for

computing the Texas Franchise Tax base is based on or measured by

“income” or “gross income,” as those terms are broadly defined,

because “total revenue” is computed by adding up all of the specified

line items of “income” used in computing a pass-through entity’s

federal income tax base. . . .

Alternatively, the Texas Franchise Tax is also based on or measured

by “income” when focusing on the “taxable margin.” The first option

for computing the “taxable margin” is simply to take 70 percent of the

“total revenue” base that is comprised of items form the entity’s

federal income tax base. See Tex. Tax Code Ann. § 171.101(a)(1).

Using this method, a taxpayer’s “taxable margin” would still be on or

measured by “income,” because it is comprised exclusively of the

items used to compute the taxpayer’s “income” on a federal return,

before deductions. Alternatively, taxpayers may elect to compute

their “taxable margin” by deducting the “cost of goods sold” from

Appellant’s Brief – Page 19

their “total revenue.” See Tex. Tax Code Ann. § 171.101(a)(1). . . .

[T]his method of computation of the Texas Franchise Tax is also one

that is on or measured by “income” because [the reporting entity]’s

tax base beg[ins] with the taxpayer’s “total revenue” – which, as

described above, is based on “income” or “gross income” – and then

was further computed using a deduction for “cost of goods sold.” . . .

The Texas Franchise Tax is thus on or measured by “income,”

whether the focus is on the “total revenue” base or the “taxable

margin” base.

Id. at 23-24 (emphasis added).

The reasoning used by the Georgia Tax Tribunal is apt and should be applied

by this Court. It follows that, because the Texas Franchise Tax is an income tax,

the Multistate Tax Compact election applies and EMC properly sought refunds for

Report Years 2010, 2011, and 2012.

Disallowing taxpayers an election under the Multistate Tax Compact

violates the United States and Texas Constitutions.

Requiring EMC to use the single-factor apportionment formula in

Section 171.006(a) violates the Due Process, Commerce, and Contract Clauses of

the United States Constitution and violates the Equal and Uniform Clause of the

Texas Constitution.

State apportionment formulas violate the Due Process Clause of the

Fourteenth Amendment of the U.S. Constitution when they attribute to the state “a

percentage of income out of all appropriate proportion to the business transacted

by [a taxpayer] in that state.” Hans Rees’ Sons, Inc. v. North Carolina ex rel.

Appellant’s Brief – Page 20

Maxwell, 283 U.S. 123, 135 (1931). Further, state apportionment formulas that

lead to a “grossly distorted result” violate the Commerce Clause, Art. I, § 8, of the

U.S. Constitution because such formulas burden interstate commerce. Norfolk &

W. Ry. Co. v. Missouri State Tax Comm’n, 390 U.S. 317, 329 (1968).

The Comptroller’s single-factor apportionment formula, as applied to EMC,

violates both the Due Process and Commerce Clauses because it attributes to Texas

a percentage of income that is disproportionate to the business EMC transacts in

Texas and leads to a grossly distorted result. EMC initially calculated its tax

base—i.e. net income or margin—prior to apportionment by deducting

compensation from total revenue. (CR 716.) EMC apportioned its margin to

Texas using the single-factor apportionment formula in Section 171.106(a). (Id.)

After EMC learned of the Multistate Tax Compact’s three-factor apportionment

formula, it amended its returns for 2010 through 2012 report years. (CR 717.) The

Multistate Tax Compact formula apportions margin based on property, payroll, and

sales factors. Tex. Tax Code § 141.001, Art. IV. EMC elected to apply the

Multistate Tax Compact formula because it apportions income based on the

average ratio of Texas property, payroll, and sales to everywhere property, payroll

and sales. For the 2010 through 2012 report years, EMC’s apportionment factor

using the Multistate Tax Compact formula was less than five percent. (CR 717-

718.) The Texas apportionment formula for the same report years ranged from six

Appellant’s Brief – Page 21

to eight percent. (Id.) The result of applying Texas’ single-factor apportionment

formula nearly doubled EMC’s franchise tax liability and is grossly

disproportionate representation of its business done in Texas.

EMC was entitled to elect to use the Multistate Tax Compact’s three-factor

apportionment formula in its amended franchise tax returns. Denying EMC the

Multistate Tax Compact election and requiring EMC to use the single-factor

formula is an unconstitutional burden on interstate commerce.

Conclusion

For the reasons set forth above, EMC respectfully asks this Court to reverse

the district court’s judgment and render judgment that EMC properly elected to

apportion its franchise tax under the Multistate Tax Compact.

Respectfully submitted,

/s/ Doug Sigel

Doug Sigel

Texas Bar No. 18347650

Doug.Sigel@RyanLawLLP.com

Ryan Cotter

Texas Bar No. 24075969

Ryan.Cotter@RyanLawLLP.com

RYAN LAW FIRM, LLP

100 Congress Avenue, Suite 950

Austin, Texas 78701

Telephone: (512) 459-6600

Facsimile: (512) 459-6601

Attorneys for Appellant

Appellant’s Brief – Page 22

Certificate of Compliance

This computer-generated document created in Microsoft Word complies

with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been

prepared in a conventional typeface no smaller than 14-point for text and 12-point

for footnotes. This document also complies with the word-count limitations of

Tex. R. App. P. 9.4(i), if applicable, because it contains 4344 words, excluding any

parts exempted by Tex. R. App. P. 9.4(i)(1). In making this certificate of

compliance, I am relying on the word count provided by the software used to

prepare the document.

/s/ Doug Sigel

Doug Sigel

Certificate of Service

I certify that a copy of the foregoing Appellant’s Brief was served on

Appellees, Glenn Hegar and Ken Paxton, through counsel of record, Rance Craft and

Charles Eldred, Office of the Attorney General, P.O. Box 12548 (MC 59), Austin,

Texas, 78711-2548, rance.craft@texasattorneygeneral.gov,

charles.eldred@texasattorneygeneral.gov, by electronic service through

eFile.TXCourts.gov on April 30, 2015.

/s/ Doug Sigel

Doug Sigel

Appellant’s Brief – Page 23

Tab 1

Final Judgment

DC BK15051 PG1221

Cause No. D-1-GN-14-000851

EMC CORPORATION, § IN THE DISTRICT COURT

§

Plaintiff, §

§

V. §

§ TRAVIS COUNTY, TEXAS

GLENN HEGAR, COMPTROLLER OF §

PUBLIC ACCOUNTS OF THE STATE OF §

TEXAS, AND KEN PAXTON, ATTORNEY §

GENERAL OF THE STATE OF TEXAS §

§ 353RD JUDICIAL DISTRICT

Defendants. §

FINAL JUDGMENT

On February 18, 2015, the cross motions for summary judgment of Plaintiff and

Defendants came on for consideration, and the Court having considered the pleadings,

including the motions, evidence, and argument of counsel, finds that Defendants, Glenn

Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney

General of the State of Texas', motion should be granted and that the Plaintiff, EMC

Corporation's motion should be denied.

All relief requested by the parties and not specifically granted herein is denied.

This judgment finally disposes of all parties and all claims and is appealable.

Signed this / ~ay of 2015.

1172

Tab 2

Tex. Tax Code § 141.001

(Vernon 2002)

Tax Code § 141.001

CHAPTER 141. MULTISTATE TAX COMPACT

§ 141.001. Adoption of Multistate Tax Compact

The Multistate Tax Compact is adopted and entered into with all jurisdictions legally

adopting it to read as follows:

MULTISTATE TAX COMPACT

ARTICLE I. PURPOSES

The purposes of this compact are to:

1. Facilitate proper determination of state and local tax liability of multistate taxpayers,

including the equitable apportionment of tax bases and settlement of apportionment

disputes.

2. Promote uniformity or compatibility in significant components of tax systems.

3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other

phases of tax administration.

4. Avoid duplicative taxation.

ARTICLE II. DEFINITIONS

As used in this compact:

1. “State” means a state of the United States, the District of Columbia, the

Commonwealth of Puerto Rico, or any territory or possession of the United States.

2. “Subdivision” means any governmental unit or special district of a state.

3. “Taxpayer” means any corporation, partnership, firm, association, governmental unit

or agency or person acting as a business entity in more than one state.

4. “Income tax” means a tax imposed on or measured by net income including any tax

imposed on or measured by an amount arrived at by deducting expenses from gross

income, one or more forms of which expenses are not specifically and directly related to

particular transactions.

5. “Capital stock tax” means a tax measured in any way by the capital of a corporation

considered in its entirety.

6. “Gross receipts tax” means a tax, other than a sales tax, which is imposed on or

measured by the gross volume of business, in terms of gross receipts or in other terms,

and in the determination of which no deduction is allowed which would constitute the tax

an income tax.

7. “Sales tax” means a tax imposed with respect to the transfer for a consideration of

ownership, possession or custody of tangible personal property or the rendering of

services measured by the price of the tangible personal property transferred or services

rendered and which is required by state or local law to be separately stated from the sales

price by the seller, or which is customarily separately stated from the sales price, but does

not include a tax imposed exclusively on the sale of a specifically identified commodity

or article or class of commodities or articles.

8. “Use tax” means a nonrecurring tax, other than a sales tax, which (a) is imposed on or

with respect to the exercise or enjoyment of any right or power over tangible personal

property incident to the ownership, possession or custody of that property or the leasing

of that property from another including any consumption, keeping, retention, or other use

of tangible personal property and (b) is complementary to a sales tax.

9. “Tax” means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and

any other tax which has a multistate impact, except that the provisions of Articles III, IV

and V of this compact shall apply only to the taxes specifically designated therein and the

provisions of Article IX of this compact shall apply only in respect to determinations

pursuant to Article IV.

ARTICLE III. ELEMENTS OF INCOME TAX LAWS

Taxpayer Option, State and Local Taxes

1. Any taxpayer subject to an income tax whose income is subject to apportionment and

allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of

subdivisions in two or more party states may elect to apportion and allocate his income in

the manner provided by the laws of such state or by the laws of such states and

subdivisions without reference to this compact, or may elect to apportion and allocate in

accordance with Article IV. This election for any tax year may be made in all party states

or subdivisions thereof or in any one or more of the party states or subdivisions thereof

without reference to the election made in the others. For the purposes of this paragraph,

taxes imposed by subdivisions shall be considered separately from state taxes and the

apportionment and allocation also may be applied to the entire tax base. In no instance

wherein Article IV is employed for all subdivisions of a state may the sum of all

apportionments and allocations to subdivisions within a state be greater than the

apportionment and allocation that would be assignable to that state if the apportionment

or allocation were being made with respect to a state income tax.

Taxpayer Option, Short Form

2. Each party state or any subdivision thereof which imposes an income tax shall provide

by law that any taxpayer required to file a return, whose only activities within the taxing

jurisdiction consist of sales and do not include owning or renting real estate or tangible

personal property, and whose dollar volume of gross sales made during the tax year

within the state or subdivision, as the case may be, is not in excess of $100,000 may elect

to report and pay any tax due on the basis of a percentage of such volume, and shall adopt

rates which shall produce a tax which reasonably approximates the tax otherwise due.

The Multistate Tax Commission, not more than once in five years, may adjust the

$100,000 figure in order to reflect such changes as may occur in the real value of the

dollar, and such adjusted figure, upon adoption by the commission, shall replace the

$100,000 figure specifically provided herein. Each party state and subdivision thereof

may make the same election available to taxpayers additional to those specified in this

paragraph.

Coverage

3. Nothing in this article relates to the reporting or payment of any tax other than an

income tax.

ARTICLE IV. DIVISION OF INCOME

1. As used in this article, unless the context otherwise requires:

(a) “Business income” means income arising from transactions and activity in the

regular course of the taxpayer’s trade or business and includes income from tangible and

intangible property if the acquisition, management, and disposition of the property

constitute integral parts of the taxpayer’s regular trade or business operations.

(b) “Commercial domicile” means the principal place from which the trade or business

of the taxpayer is directed or managed.

(c) “Compensation” means wages, salaries, commissions and any other form of

remuneration paid to employees for personal services.

(d) “Financial organization” means any bank, trust company, savings bank, industrial

bank, land bank, safe deposit company, private banker, savings and loan association,

credit union, cooperative bank, small loan company, sales finance company, investment

company, or any type of insurance company.

(e) “Nonbusiness income” means all income other than business income.

(f) “Public utility” means any business entity (1) which owns or operates any plant,

equipment, property, franchise, or license for the transmission of communications,

transportation of goods or persons, except by pipe line, or the production, transmission,

sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges

for goods or services have been established or approved by a federal, state or local

government or governmental agency.

(g) “Sales” means all gross receipts of the taxpayer not allocated under paragraphs of

this article.

(h) “State” means any state of the United States, the District of Columbia, the

Commonwealth of Puerto Rico, any territory or possession of the United States, and any

foreign country or political subdivision thereof.

(i) “This state” means the state in which the relevant tax return is filed or, in the case of

application of this article to the apportionment and allocation of income for local tax

purposes, the subdivision or local taxing district in which the relevant tax return is filed.

2. Any taxpayer having income from business activity which is taxable both within and

without this state, other than activity as a financial organization or public utility or the

rendering of purely personal services by an individual, shall allocate and apportion his net

income as provided in this article. If a taxpayer has income from business activity as a

public utility but derives the greater percentage of his income from activities subject to

this article, the taxpayer may elect to allocate and apportion his entire net income as

provided in this article.

3. For purposes of allocation and apportionment of income under this article, a taxpayer

is taxable in another state if (1) in that state he is subject to a net income tax, a franchise

tax measured by net income, a franchise tax for the privilege of doing business, or a

corporate stock tax, or (2) that state has jurisdiction to subject the taxpayer to a net

income tax regardless of whether, in fact, the state does or does not.

4. Rents and royalties from real or tangible personal property, capital gains, interest,

dividends or patent or copyright royalties, to the extent that they constitute nonbusiness

income, shall be allocated as provided in paragraphs 5 through 8 of this article.

5. (a) Net rents and royalties from real property located in this state are allocable to this

state.

(b) Net rents and royalties from tangible personal property are allocable to this state: (1)

if and to the extent that the property is utilized in this state, or (2) in their entirety if the

taxpayer’s commercial domicile is in this state and the taxpayer is not organized under

the laws of or taxable in the state in which the property is utilized.

(c) The extent of utilization of tangible personal property in a state is determined by

multiplying the rents and royalties by a fraction, the numerator of which is the number of

days of physical location of the property in the state during the rental or royalty period in

the taxable year and the denominator of which is the number of days of physical location

of the property everywhere during all rental or royalty periods in the taxable year. If the

physical location of the property during the rental or royalty period is unknown or

unascertainable by the taxpayer, tangible personal property is utilized in the state in

which the property was located at the time the rental or royalty payer obtained

possession.

6. (a) Capital gains and losses from sales of real property located in this state are

allocable to this state.

(b) Capital gains and losses from sales of tangible personal property are allocable to this

state if (1) the property had a situs in this state at the time of the sale, or (2) the

taxpayer’s commercial domicile is in this state and the taxpayer is not taxable in the state

in which the property had a situs.

(c) Capital gains and losses from sales of intangible personal property are allocable to

this state if the taxpayer’s commercial domicile is in this state.

7. Interest and dividends are allocable to this state if the taxpayer’s commercial domicile

is in this state.

8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that

the patent or copyright is utilized by the payer in this state, or (2) if and to the extent that

the patent or copyright is utilized by the payer in a state in which the taxpayer is not

taxable and the taxpayer’s commercial domicile is in this state.

(b) A patent is utilized in a state to the extent that it is employed in production,

fabrication, manufacturing, or other processing in the state or to the extent that a

patented product is produced in the state. If the basis of receipts from patent royalties

does not permit allocation to states or if the accounting procedures do not reflect states

of utilization, the patent is utilized in the state in which the taxpayer’s commercial

domicile is located.

(c) A copyright is utilized in a state to the extent that printing or other publication

originates in the state. If the basis of receipts from copyright royalties does not permit

allocation to states or if the accounting procedures do not reflect states of utilization, the

copyright is utilized in the state in which the taxpayer’s commercial domicile is located.

9. All business income shall be apportioned to this state by multiplying the income by a

fraction, the numerator of which is the property factor plus the payroll factor plus the

sales factor, and the denominator of which is three.

10. The property factor is a fraction, the numerator of which is the average value of the

taxpayer’s real and tangible personal property owned or rented and used in this state

during the tax period and the denominator of which is the average value of all the

taxpayer’s real and tangible personal property owned or rented and used during the tax

period.

11. Property owned by the taxpayer is valued at its original cost. Property rented by the

taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the

annual rental rate paid by the taxpayer less any annual rental rate received by the

taxpayer from subrentals.

12. The average value of property shall be determined by averaging the values at the

beginning and ending of the tax period but the tax administrator may require the

averaging of monthly values during the tax period if reasonably required to reflect

properly the average value of the taxpayer’s property.

13. The payroll factor is a fraction, the numerator of which is the total amount paid in this

state during the tax period by the taxpayer for compensation and the denominator of

which is the total compensation paid everywhere during the tax period.

14. Compensation is paid in this state if:

(a) the individual’s service is performed entirely within the state;

(b) the individual’s service is performed both within and without the state, but the

service performed without the state is incidental to the individual’s service within the

state; or

(c) some of the service is performed in the state and (1) the base of operations or, if there

is no base of operations, the place from which the service is directed or controlled is in

the state, or (2) the base of operations or the place from which the service is directed or

controlled is not in any state in which some part of the service is performed, but the

individual’s residence is in this state.

15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer

in this state during the tax period, and the denominator of which is the total sales of the

taxpayer everywhere during the tax period.

16. Sales of tangible personal property are in this state if:

(a) the property is delivered or shipped to a purchaser, other than the United States

government, within this state regardless of the f. o. b. point or other conditions of the

sale; or

(b) the property is shipped from an office, store, warehouse, factory, or other place of

storage in this state and (1) the purchaser is the United States government or (2) the

taxpayer is not taxable in the state of the purchaser.

17. Sales, other than sales of tangible personal property, are in this state if:

(a) the income-producing activity is performed in this state; or

(b) the income-producing activity is performed both in and outside this state and a

greater proportion of the income-producing activity is performed in this state than in any

other state, based on costs of performance.

18. If the allocation and apportionment provisions of this article do not fairly represent

the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or

the tax administrator may require, in respect to all or any part of the taxpayer’s business

activity, if reasonable:

(a) separate accounting;

(b) the exclusion of any one or more of the factors;

(c) the inclusion of one or more additional factors which will fairly represent the

taxpayer’s business activity in this state; or

(d) the employment of any other method to effectuate an equitable allocation and

apportionment of the taxpayer’s income.

ARTICLE V. ELEMENTS OF SALES AND USE TAX LAWS

Tax Credit

1. Each purchaser liable for a use tax on tangible personal property shall be entitled to

full credit for the combined amount or amounts of legally imposed sales or use taxes paid

by him with respect to the same property to another state and any subdivision thereof.

The credit shall be applied first against the amount of any use tax due the state, and any

unused portion of the credit shall then be applied against the amount of any use tax due a

subdivision.

Exemption Certificates, Vendors May Rely

2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or

other exemption certificate or other written evidence of exemption authorized by the

appropriate state or subdivision taxing authority, the vendor shall be relieved of liability

for a sales or use tax with respect to the transaction.

ARTICLE VI. THE COMMISSION

Organization and Management

1. (a) The Multistate Tax Commission is hereby established. It shall be composed of one

“member” from each party state who shall be the head of the state agency charged with

the administration of the types of taxes to which this compact applies. If there is more

than one such agency the state shall provide by law for the selection of the commission

member from the heads of the relevant agencies. State law may provide that a member of

the commission be represented by an alternate but only if there is on file with the

commission written notification of the designation and identity of the alternate. The

attorney general of each party state or his designee, or other counsel if the laws of the

party state specifically provide, shall be entitled to attend the meetings of the

commission, but shall not vote. Such attorneys general, designees, or other counsel shall

receive all notices of meetings required under paragraph 1(e) of this article.

(b) Each party state shall provide by law for the selection of representatives from its

subdivisions affected by this compact to consult with the commission member from that

state.

(c) Each member shall be entitled to one vote. The commission shall not act unless a

majority of the members are present, and no action shall be binding unless approved by a

majority of the total number of members.

(d) The commission shall adopt an official seal to be used as it may provide.

(e) The commission shall hold an annual meeting and such other regular meetings as its

bylaws may provide and such special meetings as its executive committee may

determine. The commission bylaws shall specify the dates of the annual and any other

regular meetings, and shall provide for the giving of notice of annual, regular and special

meetings. Notices of special meetings shall include the reasons therefor and an agenda of

the items to be considered.

(f) The commission shall elect annually, from among its members, a chairman, a

vice-chairman and a treasurer. The commission shall appoint an executive director who

shall serve at its pleasure, and it shall fix his duties and compensation. The executive

director shall be secretary of the commission. The commission shall make provision for

the bonding of such of its officers and employees as it may deem appropriate.

(g) Irrespective of the civil service, personnel or other merit system laws of any party

state, the executive director shall appoint or discharge such personnel as may be

necessary for the performance of the functions of the commission and shall fix their

duties and compensation. The commission bylaws shall provide for personnel policies

and programs.

(h) The commission may borrow, accept or contract for the services of personnel from

any state, the United States, or any other governmental entity.

(i) The commission may accept for any of its purposes and functions any and all

donations and grants of money, equipment, supplies, materials and services, conditional

or otherwise, from any governmental entity, and may utilize and dispose of the same.

(j) The commission may establish one or more offices for the transacting of its business.

(k) The commission shall adopt bylaws for the conduct of its business. The commission

shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any

amendments thereto with the appropriate agency or officer in each of the party states.

(l) The commission annually shall make to the governor and legislature of each party

state a report covering its activities for the preceding year. Any donation or grant

accepted by the commission or services borrowed shall be reported in the annual report

of the commission, and shall include the nature, amount and conditions, if any, of the

donation, gift, grant or services borrowed and the identity of the donor or lender. The

commission may make additional reports as it may deem desirable.

Committees

2. (a) To assist in the conduct of its business when the full commission is not meeting, the

commission shall have an executive committee of seven members, including the

chairman, vice-chairman, treasurer and four other members elected annually by the

commission. The executive committee, subject to the provisions of this compact and

consistent with the policies of the commission, shall function as provided in the bylaws

of the commission.

(b) The commission may establish advisory and technical committees, membership on

which may include private persons and public officials, in furthering any of its activities.

Such committees may consider any matter of concern to the commission, including

problems of special interest to any party state and problems dealing with particular types

of taxes.

(c) The commission may establish such additional committees as its bylaws may

provide.

Powers

3. In addition to powers conferred elsewhere in this compact, the commission shall have

power to:

(a) Study state and local tax systems and particular types of state and local taxes.

(b) Develop and recommend proposals for an increase in uniformity or compatibility of

state and local tax laws with a view toward encouraging the simplification and

improvement of state and local tax law and administration.

(c) Compile and publish information as in its judgment would assist the party states in

implementation of the compact and taxpayers in complying with state and local tax laws.

(d) Do all things necessary and incidental to the administration of its functions pursuant

to this compact.

Finance

4. (a) The commission shall submit to the governor or designated officer or officers of

each party state a budget of its estimated expenditures for such period as may be required

by the laws of that state for presentation to the legislature thereof.

(b) Each of the commission’s budgets of estimated expenditures shall contain specific

recommendations of the amounts to be appropriated by each of the party states. The total

amount of appropriations requested under any such budget shall be apportioned among

the party states as follows: one-tenth in equal shares; and the remainder in proportion to

the amount of revenue collected by each party state and its subdivisions from income

taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such

amounts, the commission shall employ such available public sources of information as,

in its judgment, present the most equitable and accurate comparisons among the party

states. Each of the commission’s budgets of estimated expenditures and requests for

appropriations shall indicate the sources used in obtaining information employed in

applying the formula contained in this paragraph.

(c) The commission shall not pledge the credit of any party state. The commission may

meet any of its obligations in whole or in part with funds available to it under paragraph

1(i) of this article: provided that the commission takes specific action setting aside such

funds prior to incurring any obligation to be met in whole or in part in such manner.

Except where the commission makes use of funds available to it under paragraph 1(i),

the commission shall not incur any obligation prior to the allotment of funds by the party

states adequate to meet the same.

(d) The commission shall keep accurate accounts of all receipts and disbursements. The

receipts and disbursements of the commission shall be subject to the audit and

accounting procedures established under its bylaws. All receipts and disbursements of

funds handled by the commission shall be audited yearly by a certified or licensed public

accountant and the report of the audit shall be included in and become part of the annual

report of the commission.

(e) The accounts of the commission shall be open at any reasonable time for inspection

by duly constituted officers of the party states and by any persons authorized by the

commission.

(f) Nothing contained in this article shall be construed to prevent commission

compliance with laws relating to audit or inspection of accounts by or on behalf of any

government contributing to the support of the commission.

ARTICLE VII. UNIFORM REGULATIONS AND FORMS

1. Whenever any two or more party states, or subdivisions of party states, have uniform

or similar provisions of law relating to an income tax, capital stock tax, gross receipts tax,

sales or use tax, the commission may adopt uniform regulations for any phase of the

administration of such law, including assertion of jurisdiction to tax, or prescribing

uniform tax forms. The commission may also act with respect to the provisions of Article

IV of this compact.

2. Prior to the adoption of any regulation, the commission shall:

(a) As provided in its bylaws, hold at least one public hearing on due notice to all

affected party states and subdivisions thereof and to all taxpayers and other persons who

have made timely request of the commission for advance notice of its regulation-making

proceedings.

(b) Afford all affected party states and subdivisions and interested persons an

opportunity to submit relevant written data and views, which shall be considered fully by

the commission.

3. The commission shall submit any regulations adopted by it to the appropriate officials

of all party states and subdivisions to which they might apply. Each such state and

subdivision shall consider any such regulation for adoption in accordance with its own

laws and procedures.

ARTICLE VIII. INTERSTATE AUDITS

1. This article shall be in force only in those party states that specifically provide therefor

by statute.

2. Any party state or subdivision thereof desiring to make or participate in an audit of any

accounts, books, papers, records or other documents may request the commission to

perform the audit on its behalf. In responding to the request, the commission shall have

access to and may examine, at any reasonable time, such accounts, books, papers,

records, and other documents and any relevant property or stock of merchandise. The

commission may enter into agreements with party states or their subdivisions for

assistance in performance of the audit. The commission shall make charges, to be paid by

the state or local government or governments for which it performs the service, for any

audits performed by it in order to reimburse itself for the actual costs incurred in making

the audit.

3. The commission may require the attendance of any person within the state where it is

conducting an audit or part thereof at a time and place fixed by it within such state for the

purpose of giving testimony with respect to any account, book, paper, document, other

record, property or stock of merchandise being examined in connection with the audit. If

the person is not within the jurisdiction, he may be required to attend for such purpose at

any time and place fixed by the commission within the state of which he is a resident:

provided that such state has adopted this article.

4. The commission may apply to any court having power to issue compulsory process for

orders in aid of its powers and responsibilities pursuant to this article and any and all such

courts shall have jurisdiction to issue such orders. Failure of any person to obey any such

order shall be punishable as contempt of the issuing court. If the party or subject matter

on account of which the commission seeks an order is within the jurisdiction of the court

to which application is made, such application may be to a court in the state or

subdivision on behalf of which the audit is being made or a court in the state in which the

object of the order being sought is situated. The provisions of this paragraph apply only

to courts in a state that has adopted this article.

5. The commission may decline to perform any audit requested if it finds that its available

personnel or other resources are insufficient for the purpose or that, in the terms

requested, the audit is impracticable of satisfactory performance. If the commission, on

the basis of its experience, has reason to believe that an audit of a particular taxpayer,

either at a particular time or on a particular schedule, would be of interest to a number of

party states or their subdivisions, it may offer to make the audit or audits, the offer to be

contingent on sufficient participation therein as determined by the commission.

6. Information obtained by any audit pursuant to this article shall be confidential and

available only for tax purposes to party states, their subdivisions or the United States.

Availability of information shall be in accordance with the laws of the states or

subdivisions on whose account the commission performs the audit, and only through the

appropriate agencies or officers of such states or subdivisions. Nothing in this article shall

be construed to require any taxpayer to keep records for any period not otherwise

required by law.

7. Other arrangements made or authorized pursuant to law for cooperative audit by or on

behalf of the party states or any of their subdivisions are not superseded or invalidated by

this article.

8. In no event shall the commission make any charge against a taxpayer for an audit.

9. As used in this article, “tax,” in addition to the meaning ascribed to it in Article II,

means any tax or license fee imposed in whole or in part for revenue purposes.

ARTICLE IX. ARBITRATION

1. Whenever the commission finds a need for settling disputes concerning

apportionments and allocations by arbitration, it may adopt a regulation placing this

article in effect, notwithstanding the provisions of Article VII.

2. The commission shall select and maintain an arbitration panel composed of officers

and employees of state and local governments and private persons who shall be

knowledgeable and experienced in matters of tax law and administration.

3. Whenever a taxpayer who has elected to employ Article IV, or whenever the laws of

the party state or subdivision thereof are substantially identical with the relevant

provisions of Article IV, the taxpayer, by written notice to the commission and to each

party state or subdivision thereof that would be affected, may secure arbitration of an

apportionment or allocation, if he is dissatisfied with the final administrative

determination of the tax agency of the state or subdivision with respect thereto on the

ground that it would subject him to double or multiple taxation by two or more party

states or subdivisions thereof. Each party state and subdivision thereof hereby consents to

the arbitration as provided herein, and agrees to be bound thereby.

4. The arbitration board shall be composed of one person selected by the taxpayer, one by

the agency or agencies involved, and one member of the commission’s arbitration panel.

If the agencies involved are unable to agree on the person to be selected by them, such

person shall be selected by lot from the total membership of the arbitration panel. The

two persons selected for the board in the manner provided by the foregoing provisions of

this paragraph shall jointly select the third member of the board. If they are unable to

agree on the selection, the third member shall be selected by lot from among the total

membership of the arbitration panel. No member of a board selected by lot shall be

qualified to serve if he is an officer or employee or is otherwise affiliated with any party

to the arbitration proceeding. Residence within the jurisdiction of a party to the

arbitration proceeding shall not constitute affiliation within the meaning of this

paragraph.

5. The board may sit in any state or subdivision party to the proceeding, in the state of the

taxpayer’s incorporation, residence or domicile, in any state where the taxpayer does

business, or in any place that it finds most appropriate for gaining access to evidence

relevant to the matter before it.

6. The board shall give due notice of the times and places of its hearings. The parties

shall be entitled to be heard, to present evidence, and to examine and cross-examine

witnesses. The board shall act by majority vote.

7. The board shall have power to administer oaths, take testimony, subpoena and require

the attendance of witnesses and the production of accounts, books, papers, records, and

other documents, and issue commissions to take testimony. Subpoenas may be signed by

any member of the board. In case of failure to obey a subpoena, and upon application by

the board, any judge of a court of competent jurisdiction of the state in which the board is

sitting or in which the person to whom the subpoena is directed may be found may make

an order requiring compliance with the subpoena, and the court may punish failure to

obey the order as a contempt. The provisions of this paragraph apply only in states that

have adopted this article.

8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall

be assessed and allocated among the parties by the board in such manner as it may

determine. The commission shall fix a schedule of compensation for members of

arbitration boards and of other allowable expenses and costs. No officer or employee of a

state or local government who serves as a member of a board shall be entitled to

compensation therefor unless he is required on account of his service to forego the

regular compensation attaching to his public employment, but any such board member

shall be entitled to expenses.

9. The board shall determine the disputed apportionment or allocation and any matters

necessary thereto. The determinations of the board shall be final for purposes of making

the apportionment or allocation, but for no other purpose.

10. The board shall file with the commission and with each tax agency represented in the

proceeding: the determination of the board; the board’s written statement of its reasons

therefor; the record of the board’s proceedings; and any other documents required by the

arbitration rules of the commission to be filed.

11. The commission shall publish the determinations of boards together with the

statements of the reasons therefor.

12. The commission shall adopt and publish rules of procedure and practice and shall file

a copy of such rules and of any amendment thereto with the appropriate agency or officer

in each of the party states.

13. Nothing contained herein shall prevent at any time a written compromise of any

matter or matters in dispute, if otherwise lawful, by the parties to the arbitration

proceeding.

ARTICLE X. ENTRY INTO FORCE AND WITHDRAWAL

1. This compact shall enter into force when enacted into law by any seven states.

Thereafter, this compact shall become effective as to any other state upon its enactment

thereof. The commission shall arrange for notification of all party states whenever there

is a new enactment of the compact.

2. Any party state may withdraw from this compact by enacting a statute repealing the

same. No withdrawal shall affect any liability already incurred by or chargeable to a party

state prior to the time of such withdrawal.

3. No proceeding commenced before an arbitration board prior to the withdrawal of a

state and to which the withdrawing state or any subdivision thereof is a party shall be

discontinued or terminated by the withdrawal, nor shall the board thereby lose

jurisdiction over any of the parties to the proceeding necessary to make a binding

determination therein.

ARTICLE XI. EFFECT ON OTHER LAWS AND JURISDICTION

Nothing in this compact shall be construed to:

(a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that

a party state shall be obligated to implement Article III 2 of this compact.

(b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any

tax on motor fuel, other than a sales tax; provided that the definition of “tax” in Article

VIII 9 may apply for the purposes of that article and the commission’s powers of study

and recommendation pursuant to Article VI 3 may apply.

(c) Withdraw or limit the jurisdiction of any state or local court or administrative officer

or body with respect to any person, corporation or other entity or subject matter, except to

the extent that such jurisdiction is expressly conferred by or pursuant to this compact

upon another agency or body.

(d) Supersede or limit the jurisdiction of any court of the United States.

ARTICLE XII. CONSTRUCTION AND SEVERABILITY

This compact shall be liberally construed so as to effectuate the purposes thereof. The

provisions of this compact shall be severable and if any phrase, clause, sentence or

provision of this compact is declared to be contrary to the constitution of any state or of

the United States or the applicability thereof to any government, agency, person or

circumstance is held invalid, the validity of the remainder of this compact and the

applicability thereof to any government, agency, person or circumstance shall not be

affected thereby. If this compact shall be held contrary to the constitution of any state

participating therein, the compact shall remain in full force and effect as to the remaining

party states and in full force and effect as to the state affected as to all severable matters.

Tab 3

Tex. Tax Code § 171.106

(Vernon 2002)

Tax Code § 171.106

CHAPTER 171. FRANCHISE TAX

§ 171.106. Apportionment of Taxable Capital and Taxable Earned Surplus to This State

(a) Except as provided by Subsections (c) and (d), a corporation’s taxable capital is

apportioned to this state to determine the amount of the tax imposed under Section

171.002(b)(1) by multiplying the corporation’s taxable capital by a fraction, the

numerator of which is the corporation’s gross receipts from business done in this state, as

determined under Section 171.103, and the denominator of which is the corporation’s

gross receipts from its entire business, as determined under Section 171.105.

(b) Except as provided by Subsections (c) and (d), a corporation’s taxable earned surplus

is apportioned to this state to determine the amount of tax imposed under Section

171.002(b)(2) by multiplying the taxable earned surplus by a fraction, the numerator of

which is the corporation’s gross receipts from business done in this state, as determined

under Section 171.1032, and the denominator of which is the corporation’s gross receipts

from its entire business, as determined under Section 171.1051.

(c) A corporation’s taxable capital or earned surplus that is derived, directly or indirectly,

from the sale of management, distribution, or administration services to or on behalf of a

regulated investment company, including a corporation that includes trustees or sponsors

of employee benefit plans that have accounts in a regulated investment company, is

apportioned to this state to determine the amount of the tax imposed under Section

171.002 by multiplying the corporation’s total taxable capital or earned surplus from the

sale of services to or on behalf of a regulated investment company by a fraction, the

numerator of which is the average of the sum of shares owned at the beginning of the

year and the sum of shares owned at the end of the year by the investment company

shareholders who are commercially domiciled in this state or, if the shareholders are

individuals, are residents of this state, and the denominator of which is the average of the

sum of shares owned at the beginning of the year and the sum of shares owned at the end

of the year by all investment company shareholders. The corporation shall make a

separate computation to allocate taxable capital and earned surplus. In this subsection,

“regulated investment company” has the meaning assigned by Section 851(a), Internal

Revenue Code.

(d) A corporation’s taxable capital or taxable earned surplus that is derived, directly or

indirectly, from the sale of management, administration, or investment services to an

employee retirement plan is apportioned to this state to determine the amount of the tax

imposed under Section 171.002 by multiplying the corporation’s total taxable capital or

earned surplus from the sale of services to an employee retirement plan company by a

fraction, the numerator of which is the average of the sum of beneficiaries domiciled in

Texas at the beginning of the year and the sum of beneficiaries domiciled in Texas at the

end of the year, and the denominator of which is the average of the sum of all

beneficiaries at the beginning of the year and the sum of all beneficiaries at the end of the

year. The corporation shall make a separate computation to apportion taxable capital and

earned surplus. In this section, “employee retirement plan” means a plan or other

arrangement that is qualified under Section 401(a), Internal Revenue Code, or satisfies

the requirements of Section 403, Internal Revenue Code, or a government plan described

in Section 414(d), Internal Revenue Code. The term does not include an individual

retirement account or individual retirement annuity within the meaning of Section 408,

Internal Revenue Code.

(e) On or before January 1, 1998, each entity registered with the State Securities Board

under The Securities Act (Article 581, Vernon’s Texas Civil Statutes) that provides

management, administration, or investment services to an employee retirement plan, must

file a report with the comptroller containing such information as the comptroller deems

necessary in order to determine the fiscal impact of Subsection (d). The State Securities

Board and the Securities Commissioner shall cooperate with the comptroller in obtaining

the information. The Securities Commissioner shall impose the penalties provided in The

Securities Act (Article 581-1 et seq., Vernon’s Texas Civil Statutes) against any entity

that the comptroller certifies is delinquent in the filing of the report required by this

section.

(f) On or before September 1, 1998, the comptroller shall issue a report which evaluates

the statewide fiscal impact of Subsection (d). If the comptroller determines that

implementing Subsection (d) will not have a negative fiscal impact on this state,

Subsection (d) shall be effective for reports or returns originally due on or after January

1, 1999. If the comptroller determines that there will be a negative fiscal impact, that

subsection shall not be implemented.

(g) If this Act and another Act of the 75th Legislature, Regular Session, 1997, make the

same substantive change from the current law but differ in text, this Act prevails

regardless of the relative dates of enactment.

(h) A banking corporation shall exclude from the numerator of the bank’s apportionment

factor interest earned on federal funds and interest earned on securities sold under an

agreement to repurchase that are held in this state in a correspondent bank that is

domiciled in this state. In this subsection, “correspondent” has the meaning assigned by

12 C.F.R. Section 206.2(c).

Tab 4

Tex. Tax Code § 112.151

(Vernon 2002)

Tax Code § 112.151

CHAPTER 112. TAXPAYERS’ SUITS

§ 112.151. Suit for Refund

(a) A person may sue the comptroller to recover an amount of tax, penalty, or interest that

has been the subject of a tax refund claim if the person has:

(1) filed a tax refund claim under Section 111.104 of this code;

(2) filed, as provided by Section 111.105 of this code, a motion for rehearing that has

been denied by the comptroller; and

(3) paid any additional tax found due in a jeopardy or deficiency determination that

applies to the tax liability period covered in the tax refund claim.

(b) The suit must be brought against both the comptroller and the attorney general and

must be filed in a district court.

(c) The suit must be filed before the expiration of 30 days after the issue date of the

denial of the motion for rehearing or it is barred.

(d) The amount of the refund sought must be set out in the original petition. A copy of the

motion for rehearing filed under Section 111.105 of this code must be attached to the

original petition filed with the court and to the copies of the original petition served on

the comptroller and the attorney general.

(e) A person may not intervene in the suit.

(f) Repealed by Acts 1997, 75th Leg., ch. 1423, § 19.128, eff. Sept. 1, 1997.

Tab 5

Tex. Const. art. I, §16

Texas Const. Art. 1, § 16

Sec. 16. No bill of attainder, ex post facto law, retroactive law, or any law impairing the

obligation of contracts, shall be made.

Tab 6

U.S. Const. art. I, § 10

U.S.C.A. Const. Art. I § 10, cl. 1

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque

and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin

a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law

impairing the Obligation of Contracts, or grant any Title of Nobility

Tab 7

Int'l Bus. Machines Corp. v. Dep't of

Treasury, 852 N.W.2d 865 (2014)

496 Mich. 642 calculate using Compact’s three-factor

Supreme Court of Michigan. apportionment test.

INTERNATIONAL BUSINESS

MACHINES CORP. Judgment of the Court of Appeals

v. reversed; remanded to Court of Claims.

DEPARTMENT OF TREASURY.

Zahra, J., filed concurring opinion.

Docket No. 146440. | July 14, 2014.

McCormack, J., filed dissenting opinion

in which Young, C.J., and Kelly, J.,

concurred.

Synopsis

Background: Corporate taxpayer that

did business in multiple states filed Attorneys and Law Firms

complaint challenging decision of

Department of Treasury rejected **867 Miller, Canfield, Paddock and

taxpayer’s election of three-factor Stone, PLC, Lansing (by Clifford W.

apportionment formula under Multistate Taylor and Gregory A. Nowak), and

Tax Compact for calculating business Silverstein & Pomerantz LLP (by Amy

income and requiring taxpayer to L. Silverstein, Edwin P. Antolin, and

apportion its income using sales-factor Johanna W. Roberts, pro hac vice) for

formula under Business Tax Act (BTA). IBM Corporation.

The Court of Claims granted

Department’s motion for summary Bill Schuette, Attorney General, Aaron

disposition based on determination that D. Lindstrom, Solicitor General, and

BTA repealed Compact by implication. Michael R. Bell, Assistant Attorney

Taxpayer appealed, and the Court of General, for the Department of Treasury.

Appeals, 2012 WL 6913772, affirmed.

Taxpayer’s application for leave to **868 Honigman Miller Schwartz and

appeal was granted. Cohn LLP, Detroit (by Lynn A. Gandhi)

for the Council on State Taxation.

Honigman Miller Schwartz and Cohn

Holdings: The Supreme Court, Viviano, LLP, Detroit (by Lynn A. Gandhi) and

J., held that: Morrison & Foerster LLP (by Craig B.

Fields and Mitchell A. Newark, pro hac

[1] vice) for Lorillard Tobacco Company.

enactment of BTA did not repeal

Compact by implication, and

Joe Huddleston, Shirley K. Sicilian, and

[2]

modified gross receipts tax fell within Sheldon H. Laskin, pro hac vice, for the

scope of Compact’s definition of Multistate Tax Commission.

“income tax” that taxpayer could

Jeffrey B. Litwak, pro hac vice.

Richard L. Masters, pro hac vice, for the

Interstate Commission for Juveniles and Accordingly, we reverse the Court of

the Association of Compact Appeals judgment in favor of the

Administrators of the Interstate Compact Department, reverse the Court of Claims

on the Placement of Children. order granting summary disposition in

favor of the Department, and remand to

BEFORE THE ENTIRE BENCH. the Court of Claims for entry of an order

granting summary disposition in favor of

Opinion IBM.

VIVIANO, J.

*644 In this case, we must determine I. FACTS AND PROCEEDINGS

whether plaintiff International Business

Machines Corporation (IBM) could elect IBM is a corporation based in New York

to use the three-factor apportionment that provides information technology

*645 formula under the Multistate Tax products and services worldwide. In

Compact1 (the Compact) for its 2008 December 2009, IBM filed its Michigan

Michigan taxes, or whether it was Business Tax annual return for the 2008

required to use the sales-factor tax year. Line 10 of IBM’s return, the

apportionment formula under the “Apportionment Calculation” line, read

Michigan Business Tax Act (BTA).2 The “SEE ATTACHED ELECTION.” IBM

Department of Treasury (the filed a separate *646 statement along

Department) rejected IBM’s attempt to with its return, entitled “Election to use

use the Compact’s apportionment MTC Three Factor Apportionment,”

formula and, instead, required IBM to indicating that it elected to apportion its

apportion its income using the BTA’s business income tax base and modified

sales-factor formula. gross receipts tax base using the

three-factor apportionment formula

We conclude that IBM was entitled to provided in the Compact. Under these

use the Compact’s three-factor calculations, IBM sought a refund of

apportionment formula for its 2008 $5,955,218. The Department disagreed.

Michigan taxes and that the Court of It determined that IBM could not elect to

Appeals erred by holding otherwise on use the Compact’s formula and that IBM

the basis of its erroneous conclusion that was entitled to a refund of only

the Legislature had repealed the $1,253,609 when calculated under the

Compact’s election provision by BTA’s sales-factor apportionment

implication when it enacted the BTA. We formula.

further hold that IBM could use the

Compact’s apportionment formula for IBM filed a complaint in the Court of

that portion of its tax base subject to the Claims, challenging the Department’s

modified gross receipts tax of the BTA. decision. Thereafter, IBM moved for

summary disposition under MCR apportionment formula

2.116(C)(10), and the Department moved provided in the

for summary disposition under MCR Multistate Tax Compact,

2.116(I)(2). After a hearing on the MCL 205.581, in

motions, the Court of **869 Claims calculating its 2008 tax

denied summary disposition to IBM and liability to the State of

granted summary disposition in favor of Michigan, or whether it

the Department. The Court of Claims was required to use the

determined that the BTA mandated the apportionment formula

use of the sales-factor apportionment provided in the

formula. Michigan Business Tax

Act, MCL 208.1101 et

In an unpublished opinion, the Court of seq.; (2) whether § 301

Appeals affirmed the Court of Claims of the Michigan

order granting summary disposition in Business Tax Act, MCL

favor of the Department.3 The Court of 208.1301, repealed by

Appeals first determined that there was a implication Article III(1)

facial conflict between the BTA and the of the Multistate Tax

Compact insofar as the BTA mandates Compact; (3) whether

use of the sales-factor formula while the the Multistate Tax

Compact permits taxpayers to elect to Compact constitutes a

use a three-factor apportionment contract that cannot be

formula.4 On the basis of this conflict, the unilaterally altered or

Court of Appeals concluded that the amended by a member

Legislature had repealed the Compact’s state; and (4) whether

election provision by implication *647 the modified gross

when it enacted the BTA.5 The Court of receipts tax component

Appeals then stated that it did not need to of the Michigan

decide whether the modified gross Business Tax Act

receipts tax was an “income tax” under constitutes an income

the Compact subject to the Compact’s tax under the Multistate

apportionment formula in light of its Tax Compact.[7]

conclusion that the Compact’s election

provision had been repealed by

implication.6

IBM sought leave to appeal in this Court. II. STANDARD OF REVIEW

We granted IBM’s application and asked [1] [2]

the parties to address We review de novo a Court of

Claims decision on a motion for

(1) whether the plaintiff summary disposition.8 We also review de

could elect to use the novo issues of statutory interpretation.9

expressly amended the ITA to the extent

necessary to implement the SBTA and

expressly repealed provisions of the ITA

that would conflict with the SBTA.17 The

*648 III. HISTORY OF BUSINESS Legislature, however, did not expressly

TAXATION IN MICHIGAN repeal the Compact.18

Because we believe it important to our

analysis in this case, we begin with a The SBTA remained in effect until 2008,

discussion of the history of business when the Legislature enacted the BTA,

taxation in Michigan. Michigan’s which is at issue in this case.19

taxation of business income or activity Representing another shift in business

began in 1953, when the Legislature taxation, the BTA imposed two main

enacted a business activities tax that taxes: the business income tax and the

taxed the adjusted receipts of a modified gross receipts tax.20 In enacting

taxpayer.10 This tax remained **870 in the BTA, the Legislature expressly

effect until Michigan adopted its first repealed the SBTA, but again did not

corporate income tax as part of the expressly repeal the Compact.21

Income Tax Act of 1967 (ITA).11 Against However, the BTA was short-lived.

the backdrop of the ITA, Michigan Effective January 1, 2012, Michigan

joined the Multistate Tax Compact in returned to a corporate income tax.22 At

1970 when the Legislature enacted MCL **871 the same time, the *650

205.581.12 The Compact “symbolized the Legislature stayed true to its past practice

recognition that, as applied to multistate of repealing conflicting tax acts and

businesses, traditional state tax expressly repealed the BTA.23

administration was inefficient and costly

to both State and taxpayer.”13 Thus, the Throughout the evolution of our state’s

goals of the Compact include facilitating method of business taxation, the

and promoting equitable and uniform Compact has remained in effect. Another

taxation of multistate taxpayers.14 To this constant throughout this history is that

end, the *649 Compact operates in the Legislature has always required a

conjunction with Michigan’s tax acts, multistate taxpayer with business income

containing several provisions designed to or activity both within and without the

ensure uniform taxation of multistate state to apportion its tax base.24 This

taxpayers. process, known as formulary

apportionment, has allowed Michigan to

In 1976, the Legislature replaced the tax the portion of a taxpayer’s multistate

corporate income tax with a single business carried on in Michigan without

business tax.15 Unlike its predecessor, the violating the Due Process Clause of the

Single Business Tax Act (SBTA) taxed United States Constitution.25 We now

business activity, not income, and address whether a multistate taxpayer

operated as “a form of value added tax.”16 retained the privilege of electing the

In enacting the SBTA, the Legislature apportionment method provided by the

Compact for the 2008 tax year. be allowed “only when the inconsistency

and repugnancy are plain and

unavoidable.”31 We will “construe

statutes, claimed to be in conflict,

harmoniously” to find “any other

IV. WHETHER IBM COULD ELECT reasonable *652 construction” than a

TO USE THE COMPACT’S repeal by implication.32 Only when we

APPORTIONMENT FORMULA determine that two statutes “are so

FOR ITS 2008 TAXES incompatible that both cannot stand” will

To determine whether IBM could elect to we find a repeal by implication.33

use the Compact’s three-factor [8] [9]

apportionment formula to calculate its In attempting to find a harmonious

2008 Michigan taxes, we must decide if construction of the statutes, we “will

the Legislature repealed the Compact’s regard all statutes upon the same general

election provision by implication when it subject-matter as part of one system....”34

enacted the BTA.26 Further, “[s]tatutes in pari materia,

although in apparent conflict, should, so

far as reasonably possible, be construed

in harmony with each other, so as to give

force and effect to each....”35 This Court

*651 A. LEGAL PRINCIPLES has stated:

[3] [4] [5] [6] [7]

We begin our analysis “with

the axiom that repeals by implication are It is a well-established rule that in the

disfavored.”27 We will presume, “in most construction of a particular statute, or

circumstances, that if the Legislature had in the interpretation of its provisions,

intended to repeal a statute or statutory all statutes relating to the same subject,

provision, it would have done so or having the same general purpose,

explicitly.”28 Nevertheless, “[w]hen the should be read in connection with it, as

intention of the legislature is clear, repeal together constituting one law, although

by implication may be accomplished by they were enacted at different times,

the enactment of a subsequent act and contain no reference to one

inconsistent with a former act” or “by the another. The endeavor should be made,

occupancy of the entire field by a by tracing the history of legislation on

subsequent enactment.”29 **872 the subject, to ascertain the uniform

However, “where the intent of the and consistent purpose of the

Legislature is claimed to be unclear, it is legislature, or to discover how the

our duty to proceed on the assumption policy of the legislature with reference

that the Legislature desired both statutes to the subject-matter has been changed

to continue in effect unless it manifestly or modified from time to time. In other

appears that such view is not reasonably words, in determining the meaning of a

plausible.”30 Repeals by implication will particular statute, resort may be had to

the established policy of the legislature to apportion and allocate in accordance

as disclosed by a general course of with article IV.... [39]

legislation. With this purpose in view This provision allows a taxpayer subject

therefore it is proper to consider, not to an income tax to elect to use a party

only acts passed at *653 the same state’s apportionment formula or the

session of the legislature, but also acts Compact’s three-factor apportionment

passed at prior and subsequent formula.

sessions.[36]

In this case, the Compact’s election *654 However, the Department rejected

provision and § 301 of the BTA share the IBM’s attempts to apportion its income

common purpose of setting forth the through the Compact’s apportionment

methods of apportionment of a formula. Instead, it required IBM to

taxpayer’s multistate business income; apportion its BTA tax base consistently

therefore, we must construe them with the BTA and its sales-factor

together as statutes in pari materia.37 formula. Section 301 of the BTA reads as

follows:

(1) Except as otherwise provided in

this act, each tax base established

B. APPLICATION under this act shall be apportioned in

[10] accordance with this chapter.

With the history of Michigan business

taxation and applicable legal principles in (2) Each tax base of a taxpayer whose

mind, we turn to the specific statutes at business activities are confined solely

issue. IBM sought to apportion its **873 to this state shall be allocated to this

BTA tax base using the Compact’s state. Each tax base of a taxpayer

three-factor apportionment formula.38 In whose business activities are subject to

so doing, IBM relied on the Compact’s tax both within and outside of this state

election provision, which reads in shall be apportioned to this state by

pertinent part: multiplying each tax base by the sales

factor calculated under section 303.[40]

(1) Any taxpayer subject to an income We recognize that the language of the

tax whose income is subject to BTA is mandatory in nature.41 Under the

apportionment and allocation for tax statute, a taxpayer’s BTA tax base must

purposes pursuant to the laws of a be apportioned through the BTA’s

party state or pursuant to the laws of sales-factor apportionment formula.42 The

subdivisions in 2 or more party states Department argues that this mandatory

may elect to apportion and allocate his language precludes the use of any other

income in the manner provided by the apportionment formula and, reading it in

laws of such state or by the laws of isolation, we would agree. However, as

such states and subdivisions without stated previously, § 301 of the BTA is

reference to this compact, or may elect

not the only provision of Michigan’s tax using the terms “may elect,”

laws pertaining to the apportionment of contemplates a divergence between a

business income—the Compact’s party state’s mandated apportionment

election provision shares the same formula and the Compact’s own

purpose. Therefore, we cannot interpret § formula—either at the time of the

301 of the BTA in a vacuum.43 Rather, Compact’s adoption by a party state or at

we must *655 consider it along with the some point in the future.47 Otherwise,

Compact “by tracing the history of there would be no point in giving

legislation on the subject, to ascertain the taxpayers an election between the two. In

uniform and consistent purpose of the fact, reading the Compact’s election

legislature.”44 provision as forward-looking—i.e.,

contemplating the future enactment of a

The BTA is not the first Michigan state income tax with a mandatory

business tax act to contain a mandatory apportionment formula different from the

apportionment formula. All our past Compact’s apportionment formula—is

business tax acts mandated that a the only way to give meaning to the

taxpayer with **874 income or activity provision when it was enacted in

that was taxable within and without the Michigan.48 Viewed in this light, the

state allocate and apportion its tax base BTA’s mandatory apportionment

consistently with each respective act.45 language may plausibly be read as

These acts further mandated that the tax compatible with the Compact’s election

base be apportioned through a specific provision.

apportionment formula.46 The mandatory

apportionment language of the BTA is Moreover, our review of the statutes in

nearly identical to the language of its pari materia indicates a uniform and

predecessors. consistent purpose of the Legislature for

the Compact’s election provision to

The Department argues that the operate alongside Michigan’s tax acts.49

Legislature repealed the Compact’s Just as it did *657 when it enacted the

election provision when it enacted *656 ITA,50 the Legislature, **875 in enacting

the BTA because § 301 of the BTA is the the BTA, had full knowledge of the

first tax provision with apportionment Compact and its provisions.51 Even with

language directly in conflict with the such knowledge on both occasions, the

Compact’s election provision. The Legislature left the Compact’s election

import of this argument is that the provision intact. By contrast, the

Compact’s election provision was a dead Legislature expressly repealed or

letter when it was enacted because both amended other inconsistent acts

the ITA and the election provision regarding the taxation of businesses.52

required use of the same three-factor Had the Legislature believed that the

apportionment formula. However, the Compact’s election provision no longer

Department’s argument overlooks that had a place in Michigan’s tax system or

the Compact’s election provision, by conflicted with the purpose of the BTA,

it could have taken the necessary action Compact’s election provision by adding

to eliminate the election provision. the following language:

Because the Legislature gave no clear

indication that it intended to repeal the [E]xcept that beginning January 1,

Compact’s election provision, we 2011 any taxpayer subject to the

proceed under the assumption that the Michigan business tax act, 2007 PA

Legislature intended for both to remain 36, MCL 208.1101 to 208.1601, or the

in effect.53 After reading the statutes in income tax act of 1967, 1967 PA 281,

pari materia, we conclude that a MCL 206.1 to 206.697, shall, for

reasonable construction exists other than purposes of that act, apportion and

a repeal by implication.54 Under Article allocate in accordance with the

III(1) of the Compact, the Legislature provisions *659 of that act and shall

provided a multistate taxpayer with a not apportion or allocate in accordance

choice between the apportionment with article IV.[[[57]

method contained in the Compact or the There is no dispute that the Legislature

apportionment method required by specifically intended to retroactively

Michigan’s tax laws. If a taxpayer elects repeal the Compact’s election provision

to apportion its income through the for taxpayers subject to the BTA

Compact, Article IV(9) mandates that the beginning January 1, 2011. The

*658 taxpayer do so using a three-factor Legislature could have—but did

apportionment formula. Alternatively, if not—extend this retroactive repeal to the

the taxpayer does not make the Compact start date of the BTA. In addressing this

election, then the taxpayer must use the legislation, the dissent suggests that “the

apportionment formula set forth in 2011 Legislature may have simply been

Michigan’s governing tax laws. In this acting expressly to confirm what the

case, IBM’s tax base arose under the 2007 Legislature believed it had already

BTA. Had it not elected to use the done implicitly.”58 We would agree with

Compact’s apportionment formula, IBM that conclusion if the Legislature had

would have been required to apportion its retroactively repealed the Compact’s

tax base consistently with the mandatory election provision beginning January 1,

language of the BTA-i.e., through the 2008, the effective date of the BTA.

BTA’s sales-factor apportionment However, by only repealing the

formula. Thus, we believe the BTA and

55 Compact’s election provision starting

the Compact are compatible and can be January 1, 2011, the Legislature created a

read as a harmonious whole. window in which it did not expressly

preclude use of the Compact’s election

Subsequent action by the Legislature provision for BTA taxpayers. Further, we

indicates that it did not impliedly repeal believe that the express repeal of the

the Compact’s election provision when it Compact’s election provision effective

enacted the BTA.56 On May 25, 2011, the January 1, 2011, is evidence that the

**876 Legislature expressly amended the Legislature had not impliedly repealed

the provision when it enacted the BTA.59 Rather, by using the applicable canons of

Therefore, a review of the 2011 construction and faithfully applying our

amendments supports our conclusion that precedents in this area, we have arrived

the Compact’s election provision at a reasonable construction that

remained in effect for the 2008 tax year. harmonizes the BTA and the Compact.64

The dissent agrees that “every attempt”

must be made to construe the BTA and

the Compact harmoniously. But, in the

C. RESPONSE TO THE DISSENT end, the dissent fails to heed this call.

[11]

The dissent’s analysis has a Instead, because of its rigid focus on the

tantalizing simplicity to it. It homes in on mandatory language of the BTA—to the

the plain language and mandatory *660 exclusion of the language and history of

nature of the BTA’s apportionment the Compact, and its place in Michigan’s

provision. However, the dissent spends taxation scheme—the dissent’s analysis

very little time considering the language is at odds with our longstanding

of the Compact, its history, or the history implied-repeal jurisprudence.

of business taxation in Michigan. While

this approach may be proper in

construing the BTA in a typical case, it is

incomplete when we are faced with the D. CONCLUSION AS TO THE

question of implied repeal. Under such ISSUE OF IMPLIED REPEAL

circumstances, that the dissent has

[12]

arrived at the better or even the best In sum, because we are able to

interpretation of the BTA does not end the harmonize the BTA and the Compact’s

inquiry. Rather, because there is a election provision, we conclude that the

presumption against implied repeals,60 it statutes are not “ ‘so incompatible that

is our task to determine if there is any both cannot stand.’ ”65 We believe that

other reasonable construction that would our interpretation allows the Compact’s

harmonize the two statutes and avoid a election provision to serve its purpose of

repeal by implication.61 providing uniformity to multistate

taxpayers in light of Michigan’s

Repeals by implication are rare, and enactment of an apportionment formula

properly so, given that we will presume different from the Compact’s formula.

under most circumstances that “if the Any conflict apparent from a first

Legislature **877 had intended to repeal reading of these statutes is reconcilable

a statute or statutory provision, it would when the statutes are read in pari

have done so explicitly.”62 They are even materia.66 Therefore, the Department has

more unlikely in the realm of our state’s failed to overcome *662 the presumption

taxation laws.63 This certainly creates a against repeals by implication.

very *661 high bar, but we disagree with Accordingly, the Court of Appeals erred

the dissent that we have made it absolute. by holding that the Legislature repealed

the Compact’s election provision by measured by net income

implication when it enacted the BTA. including any tax

Instead, we hold that the Compact’s imposed on or measured

election provision was available to IBM by an amount arrived at

for the 2008 tax year.67 by deducting expenses

from gross income, 1 or

more forms of which

expenses are not

specifically and directly

**878 V. WHETHER THE related to particular

MODIFIED GROSS RECEIPTS TAX transactions.[69]

IS AN INCOME TAX UNDER THE

COMPACT

Under the Compact’s broad definition, a

[13]

Having determined that IBM could tax is an income tax if the tax measures

elect to use the Compact’s apportionment net income by subtracting expenses from

formula for the 2008 tax year, we must gross income, with at least one of the

next consider whether IBM could expense deductions not being specifically

apportion its entire BTA tax base through and directly related to a particular

the Compact’s apportionment formula. transaction.70

IBM’s 2008 BTA tax base contained two

components: the business income tax “Modified gross receipts tax” is not

base and the modified gross receipts tax defined by the BTA, but MCL

(MGRT) base. The parties quarrel over 208.1203(2) states, “[The MGRT] levied

whether both components may be and imposed under this section is upon

apportioned under the Compact. The the privilege of *664 doing business and

Compact election is available to “[a]ny not upon income or property.” Although

taxpayer subject to an income tax.”68 this statement indicates that the MGRT is

While it is undisputed that the business not a tax upon income under the BTA,

income tax is an income tax, the we must still determine whether the

Department argues that the *663 MGRT MGRT fits under the broad definition of

is not an income tax, but rather a gross “income tax” under the Compact.

receipts tax not subject to the Compact’s

election provision. Therefore, we must The MGRT base is “a taxpayer’s gross

determine whether the MGRT is an receipts ... less purchases from other

income tax under the Compact and, thus, **879 firms....”71 The BTA defines

apportionable under the Compact’s “gross receipts” as

three-factor apportionment formula.

[14]

The Compact defines “income tax” as the entire amount received by the

follows: taxpayer as determined by using the

taxpayer’s method of accounting used

[A] tax imposed on or for federal income tax purposes, less

any amount deducted as bad debt for independent contractors.76 Once gross

federal income tax purposes that receipts is reduced by any applicable

corresponds to items of gross receipts deductions, the taxpayer arrives at its

..., from any activity whether in MGRT base, which is then subject to the

intrastate, interstate, or foreign MGRT at a rate of .80 percent after

commerce carried on for direct or allocation or apportionment to this state.77

indirect gain, benefit, or advantage to

the taxpayer or to others.... [72] Having examined how a taxpayer’s

Not only is the gross receipts amount MGRT base is calculated, we now turn to

reduced by numerous exclusions, it is the question whether the MGRT fits

also subject to a deduction for the within the Compact’s definition of

“amount deducted as bad debt for federal “income tax.” For the MGRT to be an

income tax purposes that corresponds to income tax under the Compact, a tax

items of gross receipts included in the must measure net income by starting

modified gross receipts tax base.”73 This with gross income and subtracting

total—the entire amount received by the expenses, with at least one of the expense

taxpayer from any activity minus the deductions not specifically and directly

bad-debt deduction and the numerous related to a particular transaction.78 The

exclusions under MCL 208.1111—is the Compact and the BTA do not define

gross receipts base from which the “gross income.” Therefore, we look

MGRT liability originates. elsewhere to determine what normally

constitutes gross income. The Internal

After the taxpayer determines its gross Revenue Code defines “gross income” as

receipts through the above calculation, “all income from whatever source

the taxpayer then reduces the gross derived” and includes a nonexclusive list

receipts base by “purchases from other of items that includes things such as

firms.”74 The “purchases from other “gross income derived *666 from

firms” deductions include, among other business” and “gains derived from

things, “inventory acquired during *665 dealings in property.”79 **880 26 C.F.R.

the tax year, including freight, shipping, § 1.61–1 provides that “[g]ross income

delivery, or engineering charges included includes income realized in any form,

in the original contract price”; “assets ... whether in money, property, or services.”

acquired during the tax year of a type 26 C.F.R. § 1.61–3 further provides that

that are, or under the internal revenue gross income for manufacturing,

code will become, eligible for merchandising, or mining businesses is

depreciation, amortization, or accelerated “the total sales, less the cost of goods

capital cost recovery for federal income sold, plus any income from investments

tax purposes”; and materials and supplies and from incidental or outside operations

to the extent not included in inventory or or sources.” Moreover, Black’s Law

depreciable property.75 There are also Dictionary states that gross income

deductions for compensation paid in means “[t]otal income from all sources

certain industries and for payments to before deductions, exemptions, or other

tax reductions.”80 the taxpayer as determined from any

gainful activity minus inventory and

These definitions of gross income are certain other deductions that are expenses

similar to the definition of gross receipts not specifically and directly related to a

under the BTA—the entire amount particular transaction. Therefore, IBM

received by the taxpayer as determined could elect to use the Compact’s

from any gainful activity. Like gross apportionment formula for that portion of

income under the Internal Revenue Code, its tax base subject to the MGRT for the

gross receipts are subject to myriad 2008 tax year.85

exclusions and deductions. Notably,

gross receipts are subject to a reduction

for the purchase of inventory during the

tax year, including freight, shipping,

delivery, or engineering charges included VI. CONCLUSION

in the original contract price. This is We conclude that Court of Appeals erred

similar to the IRS’s definition of “gross by holding that the BTA repealed the

income” for manufacturing, Compact’s election provision by

merchandising, or mining implication. Therefore, IBM could elect

businesses—total sales less the cost of to use **881 the Compact’s

goods sold.81 In addition, several of these apportionment formula during the 2008

exclusions or deductions are not tax *668 year. We further hold that IBM

specifically and directly related to could use the Compact’s apportionment

particular transactions.82 Depreciable formula to apportion its MGRT base

*667 assets can be assets used over a under the BTA. Accordingly, we reverse

certain number of years and, thus, not the Court of Appeals’ judgment in favor

related to a single transaction.83 Materials of the Department, reverse the Court of

and supplies purchased during a tax year Claims’ order granting summary

can be used at any time for the operation disposition in favor of the Department,

of a business and for any amount of and remand to the Court of Claims for

transactions. Finally, the purchase of entry of an order granting summary

inventory, which includes such things as disposition in favor of IBM.

goods held for resale or raw materials,

some of which can stay in a taxpayer’s

warehouse for an indeterminate amount

of time, can be an expense not

specifically or directly related to a CAVANAGH and MARKMAN, JJ.,

particular transaction.84 concurred with VIVIANO, J.

We hold that the MGRT fits within the ZAHRA, J. (concurring).

broad definition of “income tax” under

the Compact by taxing a variation of net I agree with the lead opinion’s holding

income—the entire amount received by that IBM was entitled to use the

Compact’s elective three-factor shall be deemed a reference to the

apportionment and allocation formula for re-enacted provision.

its 2008 Michigan taxes. I also agree Pursuant to this provision, we must

with both the lead opinion and the construe the Compact as though it had

dissenting opinion that the tax bases at not been impliedly repealed.2

issue here are “income taxes” within the That said, the BTA’s exclusive

meaning of the Compact. Whether the apportionment method remains in

Legislature repealed the Compact’s conflict with the election provision of the

election provision by implication when it Compact. This conflict, in my view, is

enacted the BTA is a very close question. easily resolved because the Legislature in

I would not reach that question because 2011 also expressly supplemented the

the Legislature made clear that taxpayers Compact. This new provision is not “the

are entitled to use the Compact’s election same as those of prior laws” and is a

provision for the 2008, 2009, and 2010 “new enactment,” which expressly

tax years. provides that a taxpayer could elect to

apportion its income under article IV of

Assuming that the Legislature impliedly the Compact

repealed the Compact’s election

provision in 2008 by enacting the BTA, except that beginning

IBM could nonetheless avail itself of the January 1, 2011 any

Compact’s election provision for tax taxpayer subject to the

years 2008 through 2010 because the Michigan business tax

Legislature, in 2011, clearly intended to act, 2007 PA 36, MCL

provide multistate taxpayers the benefit 208.1101 to 208.1601,

of the Compact’s election provision for or the income tax act of

these tax years. Specifically, on May 25, 1967, 1967 PA 281,

2011, the Legislature necessarily MCL 206.1 to 206.697,

re-enacted all the provisions of the shall, for purposes of

Compact, and ordered that act to take that act, apportion and

immediate effect.1 MCL 8.3u provides allocate in accordance

that with the provisions of

that act and shall not

apportion or allocate in

*669 [t]he provisions of any law or accordance with article

statute which is re-enacted, amended IV.[3]

or revised, so far as they are the same

as those of prior laws, shall be **882 There can be no dispute given this

construed as a continuation of such language that the Legislature specifically

laws and not as new enactments. If any intended to retroactively repeal the

provision of a law is repealed and in Compact’s election provision beginning

substance re-enacted, a reference in January 1, 2011. Further, I conclude that

any other law to the repealed provision this language contemplates that any

taxpayer could avail itself of the Dissenting Opinion by McCORMACK,

Compact’s election provision for tax J.

years 2008 through 2010. This is because

the Legislature, either under the *670

original enactment of the Compact4 McCORMACK, J. (dissenting).

(assuming the Legislature did not repeal

the Compact’s election provision by I respectfully dissent because I conclude

implication when it enacted the BTA) or that the Michigan Business Tax Act

under the above re-enactment and (BTA), MCL 208.1101 et seq., requires

supplementation of the Compact5 taxpayers to apportion their multistate

(assuming the Legislature repealed the income in accordance with the BTA’s

Compact’s election provision by sales-only apportionment formula and

implication when it enacted the BTA), without resort to the Multistate Tax

chose to commence its express repeal of Compact’s election provision. I reach

the Compact’s election provision on this result because the Legislature’s *671

January 1, 2011, even though the conflict command—“each tax base established

between the BTA and the Compact had under this act shall be apportioned in

existed from the 2008 tax year. Simply accordance with this chapter,” MCL

put, the contrapositive of the Compact’s 208.1301(1) (emphasis added)—is plain,

supplemental provision must mean that unambiguous, and permits only one

before January 1, 2011, a taxpayer could, interpretation. Further, there is no

“for purposes of that act [the ITA or the constitutional barrier that prevents the

BTA], apportion and allocate in Legislature from making the Compact’s

accordance with the provisions of [the alternative election provision unavailable

ITA or the BTA] and [may] apportion or to taxpayers. I would affirm the judgment

allocate in accordance with article IV” of of the Court of Appeals.

the Compact. This is, in my opinion, the

most reasonable understanding of this

legislation.

I. AN IRRECONCILABLE

In sum, the Legislature in 2011 created a CONFLICT OF STATUTES

window in which it intended the

Compact’s election provision to apply. In The threshold issue is, at its core, one of

this case, IBM sought to “apportion and statutory interpretation. When the

allocate” its taxes under the BTA well language of a statute is unambiguous, we

before January 1, 2011, and therefore give effect to its plain meaning. Ter Beek

may apportion or allocate its taxes in v. City of Wyoming, 495 Mich. 1, 8, 846

accordance with article IV of the N.W.2d 531 (2014). It is hard to imagine

Compact. For this reason, I concur in the a more unambiguous command than the

result reached in the lead opinion. mandatory directive found in § 301 of the

BTA: “Except as otherwise provided in

this act, each tax base established under

this act shall be apportioned in results: either taxes established under the

accordance with this chapter.” MCL BTA need not be apportioned “in

208.1301(1). There is no “otherwise accordance with this chapter,” as § 301

provided” exception in the BTA that demands, or taxpayers may not elect to

would aid IBM in its **883 attempt to use the Compact formula to apportion tax

avoid the statute’s sales-only bases established under the BTA. While I

apportionment requirement. And, within agree with the lead opinion that statutes

Chapter 208 of the Michigan Compiled that appear to be conflict should be read

Laws, it is the BTA alone that provides together and reconciled, if reasonably

the formula by which taxpayers are to possible, Rathbun v. State of Michigan,

apportion their multistate income. See 284 Mich. 521, 544, 280 N.W. 35 (1938),

MCL 208.1301(2); MCL 208.1303(1). I disagree that this is a case where

Neither the Compact nor its reconciliation is possible. The differing

apportionment provisions are referred to opinions offered *673 by this Court here

anywhere in the BTA. make the underlying conflict undeniably

plain. The Compact and the BTA are

I share the lead opinion’s view that we irreconcilably in conflict; one

must make every attempt “to construe statute—either the Compact or the

statutes, claimed to be in conflict, BTA—must prevail over the other. And

harmoniously[.]” Wayne Co. Prosecutor neither alternative is easily dismissed.

v. Dep’t of Corrections, 451 Mich. 569, Traditional rules of construction lead me

577, 548 N.W.2d 900 (1996).1 When to resolve the conflict in favor of the later

later enacted legislation irreconcilably enacted and more specific legislation.

*672 conflicts with a prior act, however, See Kalamazoo v. KTS Indus., Inc., 263

“the last expression of the legislative will Mich.App. 23, 38–39, 687 N.W.2d 319

must control.” Jackson v. Mich. (2004) (resolving a direct conflict

Corrections Comm., 313 Mich. 352, 356, between two statutes in favor of the

21 N.W.2d 159 (1946). subsequently enacted legislation).

Section 301(1) of the BTA directs that The lead opinion agrees that the plain

taxes established under the BTA be language of § 301 is mandatory. But it

apportioned “in accordance with this asserts that § 301 can nevertheless be

chapter.” “[T]his chapter” requires interpreted as permitting taxpayers to

taxpayers to use a sales-only make the Compact election. I do not see

apportionment formula. The Compact,

2

how this interpretation of the BTA is

however, provides that “[a]ny taxpayer reasonable. If a taxpayer can elect an

subject to an income tax [3] ... may elect to alternative apportionment formula, then §

apportion” its income in accordance with 301 is **884 in no sense mandatory.

the Compact’s three-factor Quite the opposite: § 301’s mandatory

apportionment formula. MCL 205.581, apportionment “in accordance with this

Art. III(1). Reading these provisions side chapter” becomes optional. By

by side, I see two, and only two, possible interpreting § 301 as permitting

taxpayers to make the Compact election, relying on the fact that the Legislature

the lead opinion has not, as it claims, has expressly repealed and amended tax

settled on a harmonious construction of statutes in the past, simply states that

the BTA and the Compact. Rather, it has “[h]ad the Legislature believed that the

resolved the conflict in favor of the Compact’s election provision no longer

Compact, the earlier enacted statute. But had a place in Michigan’s tax system ...,

our precedent is clear: when an it could have taken the necessary action

irreconcilable conflict exists, as in this to eliminate the election provision.” Ante

case, the later enacted legislation at 875. Because it did not, the lead

controls. Jackson, 313 Mich. at 356, 21 opinion “proceed[s] under the

N.W.2d 159; see also Washtenaw Co. assumption that the Legislature intended

Rd. Comm’rs v. Pub. Serv. Comm., 349 for [the Compact’s election provision] to

Mich. 663, 680, 85 N.W.2d 134 (1957). remain in effect.” Ante at 875. This, of

Because I am not convinced that the two course, simply assumes the lead

statutes can be read harmoniously, I opinion’s conclusion that there was no

believe that, for tax years 2008 through repeal. Yes, repeals by implication are

2010, the enactment of the BTA disfavored, and that the Legislature

impliedly repealed the Compact’s knows how to effect an express repeal is

election provision. irrefutable. But by demanding that the

Legislature take “the necessary

The lead opinion tries to give some effect action”—i.e., expressly amend or repeal

to § 301 by stating that a taxpayer “must the Compact—the lead opinion has

use the apportionment formula set forth elevated the presumption against implied

in” the BTA if it does not make the *674 repeals into an absolute bar.

Compact election. Ante at 875. This

construction does not make § 301’s Having failed to adequately explain why

mandatory directive “mandatory” at all. the statutory language itself permits the

When a taxpayer is given a choice as to result it reaches, the lead opinion anchors

whether they will apportion their income its analysis in a historical overview of

in accordance with the BTA’s sales-only business taxation in Michigan. While

formula, the number of alternative informative, I find this approach

options—a single one, or more—is ultimately unpersuasive. The lead

irrelevant. As long as an alternative opinion argues that because the Compact

option exists, the taxpayer may, not must, was enacted at a time when Michigan

use the apportionment formula set forth law applied the same three-factor

in the BTA. And once the lead opinion’s apportionment *675 formula as that

“mandatory” construction is revealed to provided in the Compact, the Legislature,

be anything but that, I do not believe that in enacting it, must have anticipated the

the lead opinion has persuasively future enactment of a tax act requiring a

explained why the BTA did not impliedly different apportionment formula and

amend or repeal the Compact’s election intended for the Compact to prevail

provision. Rather, the lead opinion, should a conflict arise. But even

assuming that the lead opinion is correct, throws light on doubtful language, and

that interpretation reads into the Compact for future cases it has authority.”); Frey

a policy choice by the 1970 Legislature v. Michie, 68 Mich. 323, 327, 36 N.W.

that the 2008 Legislature was free to 184 (1888) (“It is unnecessary to say

disagree with, either by enacting an more than that a *676 legislative

income tax with a different, mandatory interpretation of old laws has no judicial

apportionment formula, as it did in 2008, force. Whether right or wrong must be

or by repealing the election provision determined by the statutes themselves.”).

outright, as it did in 2011. See Studier v. The question we must answer in this case

Mich. Pub. Sch. Employees’ Retirement concerns what the Legislature intended

Bd., 472 Mich. 642, 661, 698 N.W.2d when it enacted the BTA-not what it

350 (2005) (“[A] fundamental principle intended when it enacted the Compact

of the jurisprudence **885 of both the forty years earlier or amended it three

United States and this state is that one years later. While in answering this

legislature cannot bind the power of a question the 2011 amendment may be

successive legislature.”). considered “with some care, so far as it

throws light on doubtful language,”

The lead opinion underscores its error by Baxter, 57 Mich. at 132, 23 N.W. 711,

attaching particular significance to 2011 that light does not shine on the lead

PA 40, which expressly amended the opinion’s argument.

Compact to make the election

unavailable to BTA taxpayers beginning In my view the BTA made the Compact

January 1, 2011. The effect of this election unavailable. Because the statutes

amendment on tax years 2011 and are irreconcilably in conflict, the latter,

beyond is plain to see, but whether the as the more specific and later enacted

amendment lends force to IBM’s position statute, must be given effect over the

in this dispute is not. In enacting this former. For this reason, I disagree with

amendment, the 2011 Legislature may the lead opinion that the BTA’s

have simply been acting expressly to mandatory directive can be interpreted so

confirm what the 2007 Legislature as to allow BTA taxpayers to make the

believed it had already done implicitly. Compact election instead. As a result, I

And even if the 2011 Legislature was find it necessary to address IBM’s

expressing its view that the BTA did not, argument that the Legislature was not

in fact, repeal the election provision, this constitutionally permitted to make the

Court is not bound by the prior BTA’s sales-only apportionment formula

Legislature’s construction of the earlier exclusive and mandatory without first

enactment. See Baxter v. Robertson, 57 repealing the Compact in its entirety.

Mich. 127, 132, 23 N.W. 711 (1885)

(“Legislative construction of past

legislation has no judicial force except

for the future. But it is always entitled to

be considered with some care, so far as it

II. THE LEGISLATURE WAS NOT carry the supreme force of federal law,

BARRED FROM UNILATERALLY IBM believes that the Legislature could

AMENDING THE COMPACT not impose an exclusive apportionment

formula because the Compact supersedes

IBM asks this Court to invoke the conflicting state law in any event. This is

authority of “compact law” and hold that contrary to our well-established rule that

the Legislature, even had it intended to a statute can be amended, repealed, or

alter the Compact’s election provision superseded, in whole or in *678 part,

when it enacted the BTA, was prohibited expressly or impliedly, by a subsequently

from doing so.4 I would decline that enacted statute. LeRoux v. Secretary of

invitation. State, 465 Mich. 594, 615, 640 N.W.2d

849 (2002) (“Absent the creation of

*677 The United States Constitution contract rights, the later Legislature is

provides that “[n]o State shall, without free to amend or repeal existing statutory

the **886 Consent of Congress ... enter provisions.”). The essence of IBM’s

into any Agreement of Compact with argument is that because a compact is an

another State[.]” U.S. Const., art. I, § 10, agreement between Michigan and the

cl. 3. As the Supreme Court explained in other member states, it is not like any

U.S. Steel Corp. v. Multistate Tax other state law subject to traditional

Comm., 434 U.S. 452, 98 S.Ct. 799, 54 principles of statutory construction, but

L.Ed.2d 682 (1978), the clause is not to rather it has some greater force and

be read strictly, but only as requiring authority. As a result, any variation from

congressional consent for compacts that the Compact’s terms is strictly

tend to increase the political power of the prohibited. In support of this proposition,

states in a way that “may encroach upon IBM cites as persuasive authority

or interfere with the just supremacy of McComb v. Wambaugh, 934 F.2d 474,

the United States.” Id. at 471, 98 S.Ct. 479 (C.A.3, 1991), and CT Hellmuth &

799 (quotation marks and citation Assoc., Inc. v. Washington Metro. Area

omitted). Those compacts that receive Transit Auth., 414 F.Supp. 408, 409

congressional authorization and fall (D.Md., 1976). Neither case, in my view,

within the scope of the Compact Clause supports such a rule.

are treated as federal law. Cuyler v.

Adams, 449 U.S. 433, 440, 101 S.Ct. In McComb, the plaintiff, as guardian ad

703, 66 L.Ed.2d 641 (1981). Compacts litem for a minor child, brought a suit

without congressional approval, against the city of Philadelphia and its

however, are not transformed into federal employees under 42 U.S.C. § 1983. The

law; thus their construction is a matter of suit sought damages for injuries the child

state statutory law. suffered as a result of parental abuse.

Before he was injured the child was

Notwithstanding the fact that the under the protective custody of a

Multistate Tax Compact, as a compact Virginia court. The Virginia court

without congressional approval, does not ordered that the child be returned to his

parental home in Philadelphia, where the authority for the above emphasized

abuse occurred. Plaintiff argued that the rule—that compacts without

Virginia court order, in conjunction with congressional approval cannot be

the Interstate Compact for Placement of unilaterally amended and must take

Children (ICPC), a compact to which precedent over conflicting state

Pennsylvania and Virginia are parties law—and I have found none. Moreover,

that had not been congressionally the unsupported statement contradicts the

approved, extended the jurisdiction of the one that precedes it. Either the compact

Virginia court into Pennsylvania and must be construed as state law or it must

thereby imposed a legal duty on the be construed as something with greater

Philadelphia social workers. The United authority than state law, but the McComb

States Court of Appeals for the Third court said both. Finally, this statement

Circuit rejected this argument, ultimately was dictum, because the court did not

concluding that the ICPC did not apply identify any potential conflict between

when a child is returned by the *679 the ICPC and Pennsylvania law and the

sending state to a natural parent residing court ultimately determined that the

in another state. McComb, 934 F.2d at ICPC did not apply. Id. at 482.

482.

In CT Hellmuth, the plaintiff sought to

IBM cites the Third Circuit’s discussion compel disclosure of documents under

of the scope of the ICPC for its argument Maryland law. The defendant, an

here: interstate agency formed by an interstate

compact between Maryland, Virginia,

Because Congressional consent was and the District of Columbia, argued that

neither given nor required, the [ICPC] its status as an interstate agency

does not express federal law. exempted it from the Maryland law. In

Consequently, this Compact must be granting the defendant’s motion for

construed as state law.... summary judgment, the court remarked

that

Nevertheless, uniformity of

interpretation is important in the *680 when enacted, a compact

construction of a Compact because in constitutes not only law, but a contract

some contexts it is **887 a contract which may not be amended, modified,

between the participating states. or otherwise altered without the

Having entered into a contract, a consent of all parties. It, therefore,

participant state may not unilaterally appears settled that one party may not

change its terms. A Compact also takes enact legislation which would impose

precedence over statutory law in burdens upon the compact absent the

member states. [McComb, 934 F.2d at concurrence of the other signatories.

479 (citations omitted; emphasis [CT Hellmuth, 414 F.Supp. at 409.]

added).]

CT Hellmuth and the cases it relied upon,

The McComb court

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