# EMC Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas > Texas Court of Appeals, 3rd District (Austin) · April 30, 2015 URL: https://www.frixlaw.com/law-library/cases/4064842 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** April 30, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4064842 ## How later opinions describe it (automated extraction) - discussing definitional differences between the ITA and the Compact ## Opinion text 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 reve [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4064842. Public record. Not legal advice.