Petition for Writ of Certiorari — Caterpillar Inc. v. Michigan Department of Treasury

92-626

No.

+

In The

Supreme Court of the United States

October Term, 1992

¢

CATERPILLAR INC.,

Petitioner,

MICHIGAN DEPARTMENT OF TREASURY,

REVENUE DIVISION,

Respondent.

¢

Petition For Writ Of Certiorari

To The Supreme Court Of

The State Of Michigan

¢

PETITION FOR WRIT OF CERTIORARI

¢

RicHARD A. HANSON

Counsel of Record

Of Counsel

OLIVER OLDMAN

Professor of Law

Harvard University

Langdell Hall

Cambridge, Massachusetts

02138

Don S. HARNACK

Grecory G. PALMER

Carot S. PoRTMAN

McDermott, Witt & EMERY

227 W. Monroe Street

Chicago, Illinois 60606

(312) 372-2000

——

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Do the Capital Acquisition Deduction provisions

of the Michigan Single Business Tax Act violate the Com-

merce Clause because they automatically provide a Mich-

igan based company a larger tax benefit and a lower

effective tax rate as compared to a non-Michigan based

company such as Caterpillar when each acquires an iden-

tical piece of capital equipment?

2. Do the Capital Acquisition Deduction provisions

of the Michigan Single Business Tax Act violate the Com-

merce Clause because they permit a deduction for the

acquisition of real property located in Michigan but not

real property located elsewhere?

3. Did this Court intend in Trinova Corporation v.

Michigan Department of Treasury, ___ U.S. ___, 111 S.Ct. 818

(1991), to exempt from Commerce Clause challenge state

tax provisions which “encourage the growth and devel-

opment of intrastate commerce and industry” even when

such provisions discriminate against out-of-state com-

panies?

4. If this Court decides that the Capital Acquisition

Deduction provisions unconstitutionally discriminate

against Caterpillar, does the decision apply retrospec-

tively?

il

TABLE OF CONTENTS

Page

CUBS TIONS Pee eGR 0 568 oc i techie sees i

TABLE OF ALTRI tee ss ish ce iscecenncetwaieses iii

OPTIONS. DANG 6 5's PES epee caw eet pean 2

PURI A ss vos 5 ae een eed ee eee 2

CONSTITUTIONAL AND STATUTORY PROVI-

SD RIVA OM? 8 iss cds shee eee ese eee 3

STATEMENT OC THE CASS cues icen cesses esas 3

REASONS FOR GRANTING THE PETITION....... 14

The Capital Acquisition Deduction Provisions

Were Not At leswe Env THROWER 6.0 iin cence esas wens: 15

The Capital Acquisition Deduction for Personal

Property Favors Michigan Based Companies

Solely Because of the Location of Their Business .... 16

The Capital Acquisition Deductions For Real

Property Impermissibly Encourage Michigan

ENUVOOEMNOI on nc icc nnscnssayese ae eaee ee eenes one 21

This Court Should Clarify Its Decision In Tri-

nova To Reaffirm That Discriminatory State

Taxes Ave Imperentesioet... ...<c<sunavsicdercdntia 23

This Court Should Reverse the Michigan

Supreme Court and Apply its Decision Retro-

PTET eee ee er eee 25

CONCCLUISRIN ... ....aced0den eee eee eee eee 28

APPENDED « «0. 0scenkseunea eek eeneeneeeeeseee la

ili

TABLE OF AUTHORITIES

Page

CASES:

American Trucking Associations, Inc. v. Scheiner, 483

cies ce cha hc eh venta es hheake ene 17

American Trucking Associations, Inc. v. Smith, 496

eee ahh ekerka Ske ban bee a Sus 26

Armco Inc. v. Hardesty, 467 U.S. 638 (1984) .......... 27

Ashland Oil, Inc. v. Caryl, 497 U.S. 916 (1990)..... 27, 28

James B. Beam Distilling Company v. Georgia, __

8 RNS eR 8) nr 26

Boston Stock Exchange v. State Tax Commission, 429

Ney ARES E Ran re or passim

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971)...9, 26, 27

Halliburton Oil Well Cemeting Co. v. Reily, 373 U.S.

GG, On @ Genied, 374 U.S. 858 (1963) ................ 7

Kraft General Foods, Inc. v. lowa Department of Reve-

a OP RAR Se CUPPED ive cence nes 12

McGoldrick v. Berwind-White Coal Mining Co., 309

ees hc ee eens cas bet ants ees 23, 24

Mobil Oil Corp. v. Department of Treasury, 422 Mich.

Pi OD POcWUMME FOU CEDOD) on cs ce cce en cnanannn >) an

Nippert v. Richmond, 327 U.S. 416 (1946)............. 24

Trinova Corp. v. Michigan Department of Treasury,

oe. eee ae, Wee CAPPED scan cicuneese passim

io. & sOneeen, 457 US. Sor (19GZ). ..... 2.20005 26, 27

Westinghouse Electric Corp. v. Tully, 466 U.S. 388

REE Ger ae ee eee ae ree ey eee ae passim

iV

TABLE OF AUTHORITIES — Continued

Page

CONSTITUTION AND STATUTES:

SS ee! ee a err errer eee cr ry passim

Mich. Compiled Laws, Ch. 208, M.C.L.A. § 208.23;

oe Se ee. + ere ee rrr ee teres passim

Mich. Compiled Laws, Ch. 208, M.C.L.A.

§§ 208.45, 46, 49, 51; M.S.A. §§ 7.558 (45), (46),

lc Oe: Ree we go are ere na, arate ne ert passim

OTHER AUTHORITIES:

Act of July 16, 1991, 1991 Mich. Pub. Acts 77..3, 9, 15

H.B. 4640, 78th Legisl., Regular Session 1975......... 6

e

In The

Supreme Court of the United States

October Term, 1992

*

CATERPILLAR INC.,

Petitioner,

MICHIGAN DEPARTMENT OF TREASURY,

REVENUE DIVISION,

Respondent.

*

Petition For Writ Of Certiorari

To The Supreme Court Of

The State Of Michigan

+

PETITION FOR WRIT OF CERTIORARI

¢

Petitioner, Caterpillar Inc. (“Caterpillar”),! respect-

fully prays that a writ of certiorari issue to review the

opinion and judgment of the Michigan Supreme Court

entered on July 31, 1992. In a four to three decision, the

Michigan Supreme Court reversed the lower Michigan

courts and upheld the Capital Acquisition Deduction pro-

visions of the Michigan Single Business Tax Act against

1 Petitioner has no parent company. Petitioner’s subsid-

iaries (other than wholly-owned subsidiaries) are listed in the

Appendix at 126a.

Caterpillar’s claim that these provisions facially discrimi-

nate against Caterpillar in violation of the Commerce

Clause of the United States Constitution.

OPINIONS BELOW

The majority and dissenting opinions of the Michigan

Supreme Court are reported at 440 Mich. 400, ___ N. W.2d

___ (Mich. 1992) and are reprinted in the Appendix at

la-92a.

The opinion of the Michigan Court of Appeals is

reported at 188 Mich. App. 621, 470 N.W.2d 80 (Mich.

App. 1990) and is reprinted in the Appendix at 93a-104a.

The Opinion and Order, Final Judgment in re Capital

Acquisition Deduction, and Clarification of Final Judg-

ment in re Capital Acquisition Deduction of the Michigan

Court of Claims, Judge Thomas L. Brown presiding, are

not reported. They are reprinted in the Appendix at

105a-115a.

JURISDICTION

The opinion and judgment of the Michigan Supreme

Court was entered on July 31, 1992. No rehearing was

requested. The jurisdiction of this Court to review the

judgment of the Michigan Supreme Court is invoked

under 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

This case involves the following constitutional and

statutory provisions:

U.S. Const. Art. I, § 8, cl. 3

Mich. Compiled Laws, Ch. 208, M.C.L.A.

§ 208.23(a); M.S.A. § 7.558 (23)(a)

Mich. Compiled Laws, Ch. 208, M.C.L.A.

§ 208.23(c); M.S.A. § 7.558 (23)(c)

Mich. Compiled Laws, Ch. 208, M.C.L.A.

§ 208.45, 46, 49, 51; M.S.A. § 7.558 (45), (46), (49),

(51)

Act of July 16, 1991, 1991 Mich. Pub. Acts 77

The texts of these provisions are reprinted in the Appen-

dix at 116a-121a.

STATEMENT OF THE CASE

This case involves Caterpillar’s Commerce Clause

challenge to the Capital Acquisition Deduction provisions

of the Michigan Single Business Tax Act. The Single Busi-

ness Tax uses different formulas to apportion the Single

Business tax base and the deduction for the cost of capital

assets. Caterpillar asserts that the use of these differing

formulas facially discriminates in favor of Michigan

based companies and against non-Michigan based com-

panies in the same way as the New York statute which

this Court found unconstitutional in Westinghouse Electric

Corp. v. Tully, 466 U.S. 388 (1984).?

Caterpillar

Caterpillar is incorporated in Delaware and head-

quartered in Peoria, Illinois. Caterpillar and its subsid-

iaries constitute the world’s largest manufacturer of

earthmoving, construction and materials handling equip-

ment.

Caterpillar’s facilities and employees are predomi-

nantly located in Illinois. Caterpillar conducts a portion

of its business in Michigan and sells products to cus-

tomers in Michigan. Caterpillar is subject to and pays

Michigan Single Business Tax.

The Michigan Single Business Tax

The Michigan Single Business Tax is a modified value

added tax. The tax is imposed on the value added to the

economy by the taxpayer’s business. Value added is

2 Throughout this Petition Caterpillar refers to Michigan

based companies and non-Michigan based companies. A “Mich-

igan based” company is a company engaged in interstate busi-

ness with a predominant part of its facilities and employees in

Michigan as compared to its sales in Michigan. A “non-Michi-

gan based” company is a company such as Caterpillar, engaged

in interstate business with a predominant part of its facilities

and employees outside of Michigan as compared to its sales in

Michigan. The Michigan Supreme Court adopted these defini-

tions for purposes of its opinion. Appendix at 3a, n. 4.

basically the sum of the taxpayer’s net income, compen-

sation, depreciation on capital assets, and interest

expense.

The Single Business Tax uses the three-factor prop-

erty, payroll and sales formula to determine the share of a

company’s value added tax base which is fairly appor-

tioned to and taxable by Michigan.? The use of the three-

factor formula to apportion the value added tax base was

considered and upheld by this Court in Trinova Corp. v.

Michigan Department of Treasury, U.S. __, 111 S.Ct. 818

(1991).

A major element of the Single Business Tax, which

was not at issue in Trinova, is the Capital Acquisition

Deduction. The Capital Acquisition Deduction provisions

permit taxpayers to deduct, subject to certain limits, the

cost of capital assets in the year the assets are acquired. In

effect, the Single Business Tax allows a deduction for the

“purchase price paid for the capital good - but then taxes

its depreciation.” Mobil Oil Corp. v. Department of Treasury,

422 Mich. 473, 373 N.W.2d 730, at 741, n. 14 (Mich. 1985).

The Capital Acquisition Deduction is taken after the tax-

payer has applied the three-factor formula to determine

the portion of the value added tax base which is appor-

tioned to and taxed by Michigan.

3 The three-factor formula produces an apportionment per-

centage which is the average of three ratios: (1) Michigan prop-

erty to total property, (2) Michigan payroll to total payroli, and

(3) Michigan sales to total sales. See, Trinova Corporation v. Mich-

igan Department of Treasury, __ U.S. __, 111 S.Ct. 818, 826

(1991).

The three-factor formula is not used to determine the

deduction for the cost of capital assets. The Capital

Acquisition Deduction for tangible personal property

such as equipment is determined by multiplying the total

cost of all equipment purchases, regardless of location, by

a two-factor formula consisting of the taxpayer’s prop-

erty and payroll factors.4 The deduction for real property

such as buildings is limited to the cost of such property

located in Michigan.

Proceedings Below

Caterpillar filed suit in the Michigan Court of Claims

on December 10, 1984, requesting a refund of Single

Business Tax for the tax year 1981. Caterpillar filed a

second suit, for the tax years 1982, 1983 and 1984, on

March 15, 1987. The cases were consolidated for trial and

decision.

Caterpillar made two separate claims for relief. As

one basis for relief, Caterpillar alleged that the three-

factor formula overstated the amount of Caterpillar’s

value added tax base fairly apportioned to Michigan.

As a separate basis for relief, Caterpillar alleged that

the Capital Acquisition Deduction provisions discrimi-

nated against Caterpillar in violation of the Commerce

4 As originally proposed and as passed by both the Michi-

gan House and Michigan Senate, the deduction for tangible

personal property was to be determined using the three-factor

property, payroll and sales formula. See H.B. 4640, 78th Legisl.,

Regular Session (1975). In the conference to reconcile the House

and Senate versions of the Single Business Tax, the formula was

changed to the two-factor formula.

Clause. Caterpillar alleged that the methods used to

determine the allowable Capital Acquisition Deduction

provided greater tax benefits and produced lower tax

rates for Michigan based companies and Michigan invest-

ments solely because the companies and investments

were located in Michigan. Caterpillar’s discrimination

claim relied primarily on this Court’s decisions in West-

inghouse, Boston Stuck Exchange v. State Tax Commission,

429 U.S. 318 (1977) and Halliburton Oil Well Cementing Co.

v. Reily, 373 U.S. 64, reh’g denied, 374 U.S. 858 (1963).°

On July 13, 1989, the Court of Claims entered its

Opinion and Order. The court declared that the Capital

Acquisition Deduction provisions violated the Commerce

Clause because the provisions impermissibly favored

Michigan based companies over non-Michigan based

companies. The court stated:

The discriminatory effect of MCL 208.23; MSA

7.588(23) has been consistently ruled unconstitu-

tional by the U.S. Supreme Court on grounds

that it violates the commerce clause. In Hallibur-

ton Oil Well Cementing Co. v. Reily, 373 U.S. 64

(1962), reh’g denied, 374 U.S. 858 (1963), the U.S.

5 Prior to a decision on Caterpillar’s claims the Chief Judge

of the Court of Claims issued an order holding in abeyance all

cases involving challenges to the three-factor formula, pending

final action in Trinova. Because the constitutionality of the Capi-

tal Acquisition Deduction provisions was a “separate issue” not

present in Trinova and an issue “of great importance to the

Department of Treasury and taxpayers”, the parties filed a joint

motion on November 10, 1988 requesting the Court of Claims to

immediately consider and decide Caterpillar’s constitutional

claim. A copy of the Joint Motion is reprinted in the Appendix at

122a. Judge Brown granted the motion on November 16, 1988.

Supreme Court struck down a Louisiana use tax

exemption which had the effect of imposing a

lower use tax on property assembled in Louisi-

ana as compared to property assembled out of

state and brought into Louisiana. The Court

found this exemption to be a clear violation of

the Commerce Clause because it discriminated

against the out-of-state manufacturer as com-

pared to the in-state manufacturer when each

engaged in the same transaction — use of identi-

__ cal property in the state. The same result ensues

here. A Michigan company receives a greater

CAD than Plaintiff when each engages in the

same transaction — purchase and use of an iden-

tical piece of property in Michigan.

Appendix at 107a. The Court of Claims also determined

that its decision would be effective only for tax years

beginning after September 30, 1989 and denied Caterpil-

lar relief for the years 1981 - 1984. The Court of Claims

further held that the discriminatory effect of the Capital

Acquisition Deduction provisions should be remedied by

severing those provisions from the statute.

Caterpillar appealed to the Michigan Court of

Appeals those parts of Court of Claims’ decision which

denied retrospective relief and which eliminated the Cap-

ital Acquisition Deduction for future years. The Depart-

ment of Treasury did not appeal any part of the Court of

Claims decision. The Michigan Manufacturers Associa-

tion was, however, permitted to file a brief amicus curiae

to the Court of Appeals which argued that the Capital

Acquisition Deduction provisions were constitutional.

The Michigan Court of Appeals issued its decision on

February 5, 1991. The Court of Appeals affirmed the

Court of Claims’ denial of retrospective relief. Citing

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), the Court of

Appeals held that the Court of Claims decision was not

clearly foreshadowed by prior decisions of this Court.

The Court of Appeals reversed on the question of remedy,

holding that only the language which discriminated

against non-Michigan based companies should be

severed from the statute.

On February 26, 1991, Caterpillar filed an Applica-

tion for Leave to Appeal to the Michigan Supreme Court

challenging only that part of the Court of Appeals deci-

sion which denied retrospective relief. On May 6, 1991,

the Michigan Department of Treasury filed an Applica-

tion for Leave to Appeal, challenging only that part of the

Court of Appeals decision regarding the proper remedy

for discrimination.

Prior to any action by the Michigan Supreme Court,

the Michigan Legislature adopted and the Governor

signed 1991 PA 77, which amended the Capital Acquisi-

tion Deduction provisions for tax years beginning after

September 30, 1989. The amendment provided that the

Capital Acquisition Deduction would be calculated by

applying the three-factor formula to the cost of all capital

assets.

On October 4, 1991, the Michigan Supreme Court

instructed Caterpillar and the Department of Treasury to

brief and argue the following issues: (1) Whether prior to

10

the passage of 1991 PA 77, the Capital Acquisition Deduc-

tion provisions violated the Commerce Clause;® and, if so,

(2) whether the lower courts erred by limiting the effect

of their rulings to tax years beginning after September 30,

1989; and (3) what relief, if any, Caterpillar should

receive.

The decision of the Michigan Supreme Court was

issued on July 31, 1992. The majority began its analysis of

Caterpillar’s discrimination claim by stating that a state

tax violates the Commerce Clause if

it is facially discriminatory, has a discriminatory

purpose, or has the effect of unduly burdening

interstate commerce.

Appendix at 22a (emphasis in original). In response to

Caterpillar’s claim of facial discrimination the majority

stated:

The CAD is available for any taxpayer, whether

a multistate company or a company whose busi-

ness activity is allocated entirely to Michigan -

an instate company. This is true under both

subsections 23(a) and 23(c). Therefore, Caterpil-

lar cannot point to any treatment of instate and

out-of-state companies that is discriminatory on

its face.

6 The Michigan Supreme Court held that it was authorized

to consider the constitutionality of the Capital Acquisition

Deduction provisions because of the importance of the issue.

The Michigan Manufacturers Association again filed a brief

amicus curiae in support of the constitutionality of the Capital

Acquisition Deduction provisions.

11

Appendix at 22a-23a. On the questions of discriminatory

purpose and effect the majority held that the Capital

Acquisition Deduction provisions were fairly designed to

measure the amount of taxpayers’ Michigan investment

and that Michigan was not required to use the same

methods to apportion the value added tax base and the

Capital Acquisition Deduction.

Finally, the majority interpreted this Court’s decision

in Trinova as having already considered and decided that

the Single Business Tax, including the Capital Acquisition

Deduction provisions, did not violate the Commerce

Clause. The majority stated:

Although the Court’s analysis in Trinova was

based on review of the SBT as a whole and not

on the CAD provisions specifically, the Court

expressly stated that the CAD provisions were

relevant to the Court’s analysis and review of

the SBT’s constitutionality. See Trinova, supra,

111 S.Ct. 826 and 835-836.

Appendix at 23a, n. 31. The majority then concluded:

The Trinova Court found that the SBT did not

discriminate against interstate commerce in vio-

lation of the Commerce Clause, distinguishing

the SBT from other taxing statutes that it has

held to be unconstitutional.

Appendix at 26a-27a. Having found that the Capital

Acquisition Deduction provisions were constitutional the

majority did not reach the questions of retrospective

application and remedy.

12

Chief Justice Cavanaugh, joined by Justice Levin,

dissented from the majority opinion.” He began by stat-

ing that Trinova did not address the constitutionality of

the Capital Acquisition Deduction provisions:

The majority appears to suggest that the United

States Supreme Court may have already upheld

the CAD apportionment against Commerce

Clause challenge, as part of the overall scheme

of the SBT, in Trinova. See slip op, p 23, n 31, and

p 26, n 32. If this is what the majority intends to

suggest, the suggestion is plainly erroneous.

Appendix at 32a, n. 3. Chief Justice Cavanaugh went on

to conclude that the Capital Acquisition Deduction provi-

sions were facially discriminatory, citing this Court’s

decisions in Westinghouse; Boston Stock Exchange; and Kraft

General Foods, Inc. v. lowa Department of Revenue, __ U.S.

__, 112 S. Ct. 2365 (1992).

To illustrate the discriminatory effect of the two-

factor formula, Chief Justice Cavanaugh used examples

of hypothetical Michigan based and non-Michigan based

companies similar to those used by this Court in Westing-

house. Appendix at 68a-7la. Based on these examples,

Chief Justice Cavanaugh concluded:

[I]t is clear, on the face of the statute, that two

otherwise similarly situated companies that

invest in equal-value amounts of new personal

property during the tax year will receive differ-

ent deductions under the CAD, depending on

? Justice Brickley filed a separate dissenting opinion in

which he found the Capital Acquisition Deduction for tangible

personal property to be unconstitutional under Westinghouse

but the deduction for real property to be permissible.

13

the degree to which they are physically based in

Michigan to begin with (as measured by the

property and payroll factors), and depending on

whether they invest the newly acquired per-

sonal property in state or out of state.

Appendix at 49a (emphasis in original). Regarding the

deduction for real property located in Michigan, Chief

Justice Cavanaugh stated:

[T]he deduction, resulting in a substantially

lower effective tax rate on the Michigan-appor-

tioned tax base, is afforded only to a company

investing in Michigan real property, as com-

pared to a similarly situated company investing

in out-of-state real property.

Appendix at 52a. Chief Justice Cavanaugh summarized

his analysis of the Capital Acquisition Deduction provi-

sions as follows:

Thus, both the personal property and real prop-

erty CAD apportionment formulas, when

applied in conjunction with the three-factor

apportionment of the SBT itself, result in the

imposition of higher effective tax rates on the

Michigan-apportioned tax base with regard to

companies that are either predominantly non-

Michigan-based or that direct their investments

outside Michigan... .

Appendix at 53a.

Chief Justice Cavanaugh also challenged the major-

ity’s interpretation of this Court’s decision in Trinova as

holding that all promotion of investment in Michigan is

constitutional. He stated:

ee,

14

[B]ecause I believe my colleagues have mis-

construed the United States Supreme Court's

case law in this regard, | discuss this issue in

some detail.

Trinova would seem, at face value, to afford the

greatest support to my colleagues’ position. The

Court there stated: “It is a laudatory goal in the

design of a tax system to promote investment

that will provide jobs and prosperity to the citi-

zens of the taxing state. States are free to ‘struc-

tur[e] their tax systems to encourage the growth

and development of intrastate commerce and

industry.’ ” 112 L Ed 2d 912, quoting Boston

Stock Exchange, 429 U.S. 336. Such sweeping lan-

guage, if taken out of context and in isolation,

would seem to flash a green light to economic

protectionism. But this language can only be

understood in context.

Appendix at 36a-37a. He argued that the Court’s state-

ment was made only in response to the taxpayer’s claim

in Trinova that encouragement of intrastate business was

itself evidence of discrimination. Chief Justice Cavanaugh

concluded that this language did not immunize the Capi-

tal Acquisition Deduction provisions from Commerce

Clause challenge simply because they encourage Michi-

gan business.

Caterpillar now petitions for a writ of certiorari to

review the Michigan Supreme Court’s decision.

+

REASONS FOR GRANTING THE PETITION

A writ of certiorari should be issued to review the

decision of the Michigan Supreme Court because the

15

decision directly conflicts with this Court’s decisions

regarding discriminatory state taxes, particularly West-

inghouse and Boston Stock Exchange. It is also important

that this Court review and repudiate the majority’s sug-

gestion that Trinova approved the enactment of state tax

Provisions designed to encourage Michigan business

regardless of their discriminatory impact. As Chief Justice

Cavanaugh recognized, if the Michigan Supreme Court’s

misinterpretation of Trinova is not corrected, states may

be encouraged to adopt protectionist tax legislation under

the guise of encouraging intrastate business.

The Capital Acquisition Deduction Provisions Were Not

At Issue In Trinova

The majority’s suggestion that this Court considered

and approved the Capital Acquisition Deduction provi-

sions in Trinova is, as the dissent states, “plainly erro-

neous”. These provisions are referred to only three times

in the Trinova opinion and then only in describing the

calculation of the taxpayer’s Single Business Tax liability.

See 111 S.Ct. at 826, 827 and 833. It distorts these brief

references beyond recognition to suggest that the Court

considered the constitutional status of the Capital Acqui-

sition Deduction provisions. The majority’s attempt to do

so only highlights the weakness of its argument.8

® It is instructive that the Michigan Department of Treasury

was apparently persuaded that the Capital Acquisition Deduc-

tion provisions were unconstitutional and, thus, did not appeal

the Court of Claims decision. The Michigan legislature appar-

ently reached the same conclusion and enacted 1991 PA 77 to

change the method of calculating the Capital Acquisition

—vv ee

16

The Capital Acquisition Deduction for Personal Prop-

erty Favors Michigan Based Companies Solely Because

of the Location of Their Business

The inevitable effects of using a two-factor property

and payroll formula to determine the Capital Acquisition

Deduction for personal property are undisputed. They

are illustrated by Chief Justice Cavanaugh’s hypothetical

taxpayers. Appendix at 68a-7la. The majority made no

effort to challenge or rebut his analysis.

The hypotheticals involve two companies of identical

size, with identical Michigan three-factor apportionment

percentages and making identical investments. The use of

the two-factor formula to determine the Capital Acquisi-

tion Deduction for tangible personal property gives the

Michigan based company a substantially greater deduc-

tion than a non-Michigan based company when each

invests in an identical piece of equipment in Michigan.

Similarly, the use of the two-factor formula provides the

Michigan based company with a lower effective tax rate

than the non-Michigan based company. The greater tax

benefit and lower effective tax rate are provided to the

Michigan based company solely because its business is

located in Michigan and for no other reason.

Even Chief Justice Cavanaugh overlooks the most

pernicious effect of the method used to calculate the

Capital Acquisition Deduction for personal property.

Under his example the Michigan based company receives

a Capital Acquisition Deduction of $68,233 where it

invests $100,000 in equipment for use outside Michigan.

Deduction to one utilizing the three-factor formula. That action

came after this Court’s decision in Trinova.

17

Appendix at 70a. The non-Michigan based company

receives a $31,667 Capital Acquisition Deduction when it

invests $100,000 on equipment for use inside Michigan.

Appendix at 68a. Thus, the Michigan based company

receives a greater Capital Acquisition Deduction for

investing outside Michigan than the non-Michigan based

company receives for investing inside Michigan.

State tax provisions which discriminate based solely

on the location of the taxpayer’s business have repeatedly

been held unconstitutional by this Court. American Truck-

ing Associations, Inc. v. Scheiner, 483 U.S. 266 (1987), sum-

marizes the Court’s decisions as follows:

Under our consistent course of decisions in

recent years a state tax that favors in-state busi-

ness over out-of-state business for no other rea-

son than the location of its business is

prohibited by the Commerce Clause. Tyler Pipe

Industries, Inc. v. Washington Dept. of Revenue,

ante, p. 232; Bacchus Imports, Ltd. v. Dias, 468 U.S.

263 (1984); Armco Inc. v. Hardesty, 467 U.S. 638

(1984); Westinghouse Electric Corp. v. Tully, 466

U.S. 388 (1984); Maryland v. Louisiana, 451 U.S.

725 (1981); Boston Stock Exchange v. State Tax

Comm’‘n, 429 U.S. 318 (1977).

483 U.S. at 286. Westinghouse illustrates the analysis

which this Court has used to test state taxes against

discrimination claims.

Westinghouse involved a challenge to New York’s

method of calculating a credit against its franchise tax for

shipments made by Domestic International Sales Corpo-

rations (“DISCs”) through New York ports. Like the Sin-

gle Business Tax, the New York franchise tax is

— ye

18

apportioned using a three-factor formula. Like the Capi-

tal Acquisition Deduction, the DISC credit was taken

after the franchise tax base was apportioned. The DISC

credit was based upon the percentage of exports through

New York ports versus total exports. The higher the

percentage of shipments through New York, the greater

the credit.

The Court’s opinion analyzed the effect of the DISC

credit by constructing hypotheticals showing various per-

centages of shipments through New York. The hypotheti-

cals established that taxpayers received greater tax

benefits and lower effective tax rates as their level of

shipments through New York increased. On these bases

the method used to calculate the DISC credit was found

to violate the Commerce Clause.

Chief Justice Cavanaugh’s hypotheticals establish the

same patterns. Taxpayers receive a greater Capital Acqui-

sition Deduction and lower effective tax rates as their

production activities are concentrated in Michis .

Westinghouse is also instructive because New York

tried to defend the DISC credit using the same arguments

that the Michigan Supreme Court majority used in the

present case. For example, the majority in this case claims

that the method used to apportion the Capital Acquisi-

tion Deduction is fair. New York also claimed that the

method used to determine the DISC credit was constitu-

tionally acceptable. The Court responded:

The Tax Commission’s argument that New York

employs a constitutionally acceptable allocation

formula, in our view, serves only to obscure the

19

issue in this case. The acceptability of the alloca-

tion formula employed by the State of New York

is not relevant to the question before us.

466 U.S. at 398. The same response is appropriate here.

The majority in this case takes comfort in the fact that

this Court approved the use of the three-factor formula to

apportion the Single Business Tax base and infers that

this approval extends to the Capital Acquisition Deduc-

tion provisions. New York similarly argued that the

Court’s approval of the three-factor formula to apportion

DISC income should be viewed as approval of the DISC

credit. The Court in Westinghouse responded that the tax-

payer's

challenge is not foreclosed by our holding that

New York’s allocation of DISC income is consti-

tutionally acceptable. See 459 U.S. 1144 (1983)

(dismissing for want of a substantial federal

question Westinghouse’s challenge to method of

allocating DISC income to parent). “Fairly

apportioned” and “nondiscriminatory” are not

synonymous terms.

466 U.S. at 399. The same response is appropriate here.

The majority argues that the Capital Acquisition

Deduction provisions are intended only to limit the

deduction to capital investments taxable in Michigan.

New York argued that the limitation on the DISC credit

was intended to ensure that the credit was available only

for activities taxable by New York. In Westinghouse the

Court responded:

The Tax Commission argues that multiplying

the allowable credit by the New York export

ratio of the DISC merely ensures that the State is

20

not allowing a parent corporation to claim a tax

credit with respect to DISC income that is not

taxable by the State of New York. This argument

ignores the fact that the percentage of the

DISC’s accumulated income that is subject to

New York franchise tax is determined by the

parent’s business allocation percentage, not by

the export ratio. In computing the allowable

credit, the statute requires the parent to factor in

its business allocation percentage. § 210.13(a).

This procedure alleviates the State’s fears that it

will be overly generous with its tax credit, for

once the adjustment of multiplying the allow-

able DISC export credit by the parent’s business

allocation percentage has been accomplished,

the tax credit has been fairly apportioned to

apply only to the amount of the accumulated

DISC income taxable to New York. From the

standpoint of fair apportionment of the credit,

the additional adjustment of the credit to reflect

the DISC’s New York export ratio is both inaccu-

rate and duplicative.

466 U.S. at 399. The same response is appropriate here.°

° One other defense offered by the majority deserves com-

ment. The majority suggests that the two-factor formula was

chosen because the acquisition of capital assets “is most likely to

be located where a company’s property and payroll (employees)

are located.” No empirical support is offered for this statement.

Moreover, if the statement is true, why did Michigan adopt a

provision which disproportionately benefits Michigan based

companies if they would place new investments in Michigan in

any case? Caterpillar respectfully suggests that the answer is

that the two-factor formula was chosen precisely because it

benefits Michigan based companies - to the detriment of com-

panies such as Caterpillar.

_

21

In the end, Westinghouse rejected all of New York’s

defenses with an analysis very similar to that used by

Chief Justice Cavanaugh:

It is this second adjustment, made only to the

credit and not to the base taxable income figure,

that has the effect of treating differently parent

corporations that are similarly situated in all

respects except for the percentage of their

DISCs’ shipping activities conducted from New

York. This adjustment has the effect of allowing

a parent a greater tax credit on its accumulated

DISC income as its subsidiary DISC moves a

greater percentage of its shipping activities into

the State of New York.

466 U.S. at 400-401. The Capital Acquisition Deduction

has the same effect and the Court should come to the

same conclusion here.

It is the use of one formula to determine the amount

of value added activities in Michigan and a second and

different formula to calculate the allowable Capital

Acquisition Deduction for personal property which make

that provision unconstitutional. The result is discrimina-

tion in favor of Michigan based companies solely because

they are located in Michigan. Such discrimination is

unconstitutional.

The Capital Acquisition Deductions For Real Property

Impermissibly Encourage Michigan Investment

The majority and Justice Brickley claim that limiting

the Capital Acquisition Deduction for real property to

property located in Michigan is a constitutionally permis-

sible way to encourage Michigan investment. They ignore

a aaa aia

22

the interrelationship of the Capital Acquisition Deduction

provisions and the depreciation element of the value

added tax base.

As the Michigan Supreme Court recognized in Mobil

Oil, the Single Business Tax permits an immediate write-

off for capital assets and then taxes the depreciation of

such assets. As the Michigan Supreme Court put it, the

Single Business Tax allows a deduction for the

purchase price paid for the capital good — but

then taxes its depreciation.

373 N.W.2d at 741, n. 14. The effect of this combination

can be seen in Chief Justice Cavanaugh’s hypotheticals.

Appendix at 68a-71a.

Each hypothetical taxpayer acquiring Michigan real

property receives a 100% Capital Acquisition Deduction

but pays Single Business Tax on only approximately 50%

of the subsequent depreciation on the property which is

included in the tax base. By contrast, each hypothetical

taxpayer constructing an industrial building outside

Michigan receives no Capital Acquisition Deduction but

still pays Single Business Tax on approximately 50% of

the subsequent depreciation included in the tax base. This

is a powerful, and impermissible, tax advantage to build-

ing in Michigan.

In Boston Stock Exchange the issue was whether New

York could encourage trade on New York stock exchanges

by imposing a lower tax rate on transactions conducted

wholly on the New York exchanges than the rate applied

to transactions conducted partially outside New York.

23

The Court held that the New York law violated the Com-

merce Clause because it provided a direct commercial

advantage to local business. The Court stated:

The obvious effect of the tax is to extend a

financial advantage to sales on the New York

exchanges at the expense of the regional

exchanges. Rather than “compensating” New

York for a supposed competitive disadvantage

resulting from § 270, the amendment forecloses

tax-neutral decisions and creates both an advan-

tage for the exchanges in New York and a dis-

criminatory burden on commerce to its sister

States.

429 U.S. at 331. The Capital Acquisition Deduction for

real property has the same effect. By permitting a deduc-

tion for Michigan investment but not for out of state

investment, the Capital Acquisition Deduction for real

Property unconstitutionally encourages taxpayers to

locate their plants in Michigan to the detriment of other

States.

This Court Should Clarify Its Decision In Trinova To

Reaffirm That Discriminatory State Taxes Are Imper-

missible

This Court’s role in policing discriminatory state

taxes is based on a fundamental fact of political life —

taxpayers have little political voice outside their home

state. This lack of a political voice was recognized by

Justice Stone in McGoldrick v. Berwind-White Coal Mining

Co., 309 U.S. 33 (1940). He explained the Court’s rationale

for striking discriminatory state taxes:

ew

24

Lying back of these decisions is the recognized

danger that, to the extent the burden falls on

economic interests without the state, it is not

likely to be alleviated by those political

restraints which are normally exerted on legisla-

tion where it affects adversely interests within

the state.

309 U.S. at 46, n.2. Justice Rutledge made a similar point

in Nippert v. Richmond, 327 U.S. 416 (1946):

Provincial interests and local political power are

at their maximum weight in bringing about

acceptance of this type of legislation. With the

forces behind it, this is the very kind of barrier

the commerce clause was put in the fundamen-

tal law to guard against.

327 U.S. at 434.

States may misinterpret certain language in this

Court’s decision in Trinova, leading them to believe that

this Court is now more tolerant of discriminatory state

tax provisions if they are intended to promote intrastate

business and investment. In Trinova, the taxpayer claimed

that the fact the Single Business Tax was adopted to

encourage Michigan investment was evidence that the tax

was unconstitutional. This Court rejected that argument,

stating: .

States are free to “structur[e] their tax systems

to encourage the growth and development of

intrastate commerce and industry.” Boston Stock

Exchange, supra, 429 U.S., at 336-337.

Trinova, U.S. at__, 111 S.Ct. at 835. The Court did not

repeat the next sentence from Boston Stock Exchange:

—

25

We hold only that in the process of competition

no State may discriminatorily tax the products

manufactured or the business operations per-

formed in any other State.

429 U.S. at 337.

As Chief Justice Cavanaugh noted, the quotation

from Trinova can be misinterpreted as an approval of

discriminatory state tax provisions designed to encourage

local business. He stated:

Such sweeping language, if taken out of context

and in isolation, would seem to flash a green

light to economic protectionism.

Appendix at 36a-37a. The majority adopted just such a

misinterpretation in this case.

It is all too likely that other states will follow the lead

of the majority when analyzing the permissibility of dis-

criminatory state taxes. The Court should take this oppor-

tunity to reconfirm its long standing rule that state tax

provisions which encourage intrastate business are con-

stitutional only if the provisions do not discriminate

against interstate commerce.

This Court Should Reverse the Michigan Supreme

Court and Apply its Decision Retrospectively

Caterpillar submits that the Michigan Supreme

Court’s decision is in error and the Capital Acquisition

Deduction provisions are unconstitutional. If this Court

concludes that these provisions are unconstitutional, Cat-

erpillar requests that the Court make it clear that its

decision applies retrospectively. While this issue was not

addressed by the Michigan Supreme Court, the Court of

26

Appeals refused retrospective treatment. If this Court

reverses and does not address the question of retrospec-

tivity, the result will simply be further litigation on that

question in the state courts. Because the question of retro-

spectivity is a federal question, American Trucking Associa-

tions, Inc. v. Smith, 496 U.S. 167 (1990), it is appropriate

that the Court address the question now.

The Michigan Court of Appeals concluded that the

decision finding Capital Acquisition Deduction provi-

sions unconstitutional could apply only prospectively

because

the SBTA “was new and experimental legisla-

tion in this state.” Town & Country Dodge, supra,

p 234. We also believe that the method of deter-

mining the CAD - especially for personal prop-

erty — is unique. A similar deduction has never

been declared to be unconstitutional.

Appendix at 98a. This conclusion fundamentally mis-

reads the first test of Chevron Oil.!° This is seen most

clearly by comparing the Court of Appeals decision with

this Court’s statements on prospective and retrospective

decisions in U.S. v. Johnson, 457 U.S. 537 (1982) and in its

10 Prior to the United States Supreme Court’s decision in

James B. Beam Distilling Company v. Georgia, __ U.S. __, 111

S.Ct. 2439 (1991), it appeared settled that a decision based on the

Constitution could be applied only prospectively if it satisfied

the criteria set forth in Chevron Oil. However, in Beam Distilling

five justices explicitly rejected the Chevron test or seriously

questioned its continued validity. Plurality opinion of Justices

Souter and Stevens, __:;U.S. at __, 111 S.Ct. at 2447, and con-

curring opinions of Justices Scalia, Marshall and Blackmun, __

U.S. at__, 111 S.Ct. at 2450 and 2451. Nonetheless, even under

Chevron retrospectivity is mandated in this case.

EE EEE Ee

27

per curiam decision in Ashland Oil, Inc. v. Caryl, 497 U.S.

916 (1990).

U.S. v. Johnson involved the question of whether a

prior decision of the United States Supreme Court in a

criminal case applied retrospectively. The Court stated:

[When a decision of this Court merely has

applied settled precedents to new and different

factual situations, no real question has arisen as

to whether the later decision should apply retro-

spectively. In such cases, it has been a foregone

conclusion that the rule of the later case applied

in earlier cases, because the later decision has

not in fact altered that rule in any material way.

457 U.S. at 549. The statement has direct application on

the present case. A decision finding the Capital Acquisi-

tion Deduction provisions unconstitutional does nothing

more than apply settled precedents of Commerce Clause

jurisprudence to a new and different factual situation.

Thus, retrospective application should be a “foregone

conclusion.”?!

This Court’s per curiam decision in Ashland Oil also

counsels in favor of retrospective application. In Ashland

Oil, the Court gave retrospective application to its deci-

sion in Armco Inc. v. Hardesty, 467 U.S. 638 (1984), point-

ing out:

11 The fact that Johnson is a criminal case does not detract

from its application here. The first test of Chevron Oil, whether a

decision overrules prior precedent or could not otherwise be

anticipated, is the same for civil and criminal cases. Johnson

cited Chevron Oil and other civil cases as relevant to the deter-

mination of whether a decision is a matter of “first impression”

or “clearly foreshadowed” by prior law. 457 U.S. at 550, n. 12.

ee

28

Armco neither overturned established precedent

nor decided “an issue of first impression whose

resolution was not clearly foreshadowed.” Chevron

Oil, supra, 404 U.S., at 106, 92 S.Ct., at 355. To be

sure, Armco paved the way for Tyler Pipe Industries,

Inc. v. Washington State Dept. of Revenue, 483 U.S.

232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987), which

arguably “overturn[ed] a lengthy list of settled

decisions” and “revolutionize[d] the law of state

taxation,” Id., at 257, 107 S.Ct., at 2825 (Scalia, J.,

concurring in part and dissenting in part), by

extending the internal consistency test. Armco

itself, however, was not revolutionary.

497 U.S. at __, 110 S.Ct. at 3205. A decision finding the

Capital Acquisition Deduction provisions unconstitu-

tional can hardly be described as “revolutionary”. Such a

decision overrules no prior decisions of this Court. It

simply applies settled law. Thus, retrospective applica-

tion is both appropriate and necessary.

*

CONCLUSION

This petition for a writ of certiorari to the Supreme

Court of Michigan should be granted.

Respectfully submitted,

RicHARD A. HANSON

Counsel of Record

Of Counsel Don S. HARNACK

OLIVER OLDMAN Grecory G. PALMER

Professor of Law Carot S. PorTMAN

Harvard University McDermott, Witt & Emery

Langdell Hall 227 W. Monroe Street

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