Reply Brief — Ford Motor Credit Co. v. Michigan Department of Treasury

tn Supreme Court, U.S

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( \b ‘No. 10-481 Del 28 2010

OFFICE Oj

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THE CLERK

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In Che

Supreme Court of the Gnited States

FORD MOTOR CREDIT COMPAN

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DEPARTMENT OF TREASURY, TREASURER

FOR THE DEPARTMENT OF TREASURY

AND STATE OF MICHIGAN,

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rit i) mae?

On Petition For A Writ Of Certiorari

To The Michigan Court Of Appeals

REPLY BRIEF OF PETITIONERS

«

GREGORY G. GARR] MICHAEL J. BOWE)

GABRIEL K. BELI Counsel of Record

LATHAM & WATKINS LLP PETER O, LARSEN

555 llth Street, NW AKERMAN SENTERFPIT!

Suite 1000 50 N. Laura Street

Washington, DC 20004 Suite 2500

(202) 637-2200 Jacksonville, FL 32202

(904) 798-3700

michael.bowen@akerman.

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Counsel Jor Pi tittoner

KLE LAW BRIEF PRINTING CO. (80 £0-D904

OR CALL COLLECT (402) 3

TABLE OF

TABLE OF CONTENTS

CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Page

CASI

DaimlerChrysler Services North America LLC

vu. Deptt of Treasury, 723 N.W.2d 569 (Mich

Ct. App. 2006) | sakasunies 8

General Motors Corp. v. Romein, 503 U.S. 18]

(1992). 3, 4

Interstate Pipe Line Co. v. Stone, 337 U.S. 662

(1949), veut a | 4

Landgraf v. USI Film Prod., 511 U.S. 244

(1999)... oa 4.5.6

Lynce v. Mathis, 519 U.S. 433 (1997) o

Martin v. Hadix, 527 U.S. 343 (1999).. | wD, 6

McKesson Corp. v. Diviston of Alcoholic Bever

ages and Tobacco, 496 U.S. 18 (1990) ~

Miller v. Florida, 482 U.S. 423 (1987) .... )

Nelson v. Sears. Roebuck & Co.. 312 U.S. 359

CRUE ED ccccace : 4

Tesoro Refining and Marketing Co. v. Dep't of

Revenue, Docket No. 39417-1-II (Wash. Ct

App. Dec. 21, 2010) ... LO

United States v. Carlton, 512 U.S. 26 (1994) passim

United States v. Hemme, 476 U.S. 558 (1986) 8

Weaver v. Graham, 450 U.S. 24 (1981) .

1}]

TABLE OF AUTHORITIES ~ Continued

STATUTES AND PUBLIC LAW

1987 Mich. Pub. Act 28. 3

M.C.L. § 205.541.. 2.5.6.8

INTRODUCTION

As explained in the petition, this case presents

an important and recurring issue on which the lower

courts are divided concerning the constitutional

limits on retroactive tax legislation. Respondents

ignore or concede each of the overriding reasons set

forth in the petition for pranting certiorari. They do

not. dispute that the lower courts are divided on the

proper interpretation of United States v. Carlton, 512

U.S. 26 (1994), and the constitutional limits on retro-

active tax legislation. They do not dispute that the

question presented is exceptionally important and

frequently recurring and, indeed, do not even

acknowledge, much less address, the amicus briefs

filed on behalf of the U.S. Chamber of Commerce and

other interests emphasizing the need for this Court’s

review. And they do not seriously attempt to defend

the constitutionality of the retroactive tax law at

issue under this Court’s precedents and due process

principles. Instead, respondents devote their efforts

almost entirely to attempting to evade review of the

certworthy question presented by raising various

vehicle objections. Each of those objections is entirely

baseless and poses no obstacle to granting certiorari

in this case.

ARGUMENT

1. Respondents’ principal submission in arguing

that certiorari 1S not warranted is that the courts

below did not decide the constitutional question

presented, and instead resolved this case on the

supposedly “independent and adequate” state ground

that it does not involve a “retroactive application” of

tax laws at all. Opp. 1, 10. That argument is patently

wrong, and provides no basis for denying review.

First, respondents themselves acknowledge that

the lower courts did decide the constitutional ques-

tion presented. See Opp. 8 (“The trial court decided

that ... [petitioner’s] constitutional challenge to the

statute lacked merit.”); id. at 9 (“The Michigan Court

of Appeals found no merit to ... Ford’s claims that

2007 P.A. 105 violated constitutional rights and ran

afoul of the criteria of Carlton for when tax law [sic]

may be challenged retroactively.”). And that conclu-

sion is unassailable. See Pet. App. 1 (“We reject the

constitutional arguments raised by plaintiffs ... ”)

(Michigan Court of Appeals); id. at 11 (“[Tlhe Court

can find nothing in thle] statute that renders it

constitutionally infirm.”) (Michigan trial court); 1bid.

(“Plaintiff has not established that the challenged

statute is unconstitutional either as written or as

applied by Defendant in denying a sales tax refund in

this matter.”) (same); see also id. at 41 (“[P]laintiffs

assert that the seven-year retroactive application of

the amended MCL 205.541 constitutes a due process

violation and the requirement that retroactive legis-

lation be limited to a modest period of retroactivity.

We disagree.”) (GMAC decision). Moreover, respon-

dents themselves previously acknowledged that the

proper application of “the holding of {this} Court in

United Staies v Carlton” is “directly presented” in this

case. Govt’s Supp. Br. 1 (Mich. App. Sept. 11, 2009).

Second, although Michigan is free to label its

laws as it wishes, the retroactive effect of its laws is a

federal question — and that is the question presented

here. In attempting to dodge that federal question

and divert attention away from the statute’s indefi-

nite retroactive reach, respondents claim that the

statute operates merely as the “Legislature’s correc-

tion of a judicial interpretation.” Opp. 10. But regard-

less of the statute’s purpose, it undeniably applies

retroactively. Indeed, the Michigan Legislature

explicitly directed that the statute “shall be retroac:

tively applied.” Opp. 7 (quoting statute). The fact that

the amendment was passed in the wake of a judicial

decision declaring what the tax law had been does not

alter the amendment’s retroactive effect or constitu-

tional infirmity.

This Court previously took up a case in an almost

identical posture, in General Motors Corp. v. Romein,

503 U.S. 181 (1992). Romein also arose out of a Mich-

igan state court decision and addressed whether a

state legislative amendment was impermissibly

retroactive under the Due Process Clause. The legis-

lative amendment in Romein likewise dealt with a

purported “correction” to a Michigan state court

interpretation of a statute. The Michigan Legislature

referred to the legislative amendments at issue in

Romein as “remedial and curative.” Romein v. General

Motors Corp., 462 N.W.2d 555, 560 n.3 (Mich. 1990)

(quoting 1987 PA. 28). The fact that the legislative

amendment in Romein was styled as “remedial and

curative” did not prevent the Michigan Supreme

Court and this Court from addressing the core consti-

tutional issue of whether the retroactive law impli-

cated due process concerns. Each of the participants

in the Romein controversy (including the Michigan

state officials themselves) readily acknowledged that

the retroactive effect of the legislative amendment

provided the central constitutional question regard-

less of the descriptive terms used to describe the

amended law.

This Court has consistently held that it is the

retroactive effect of a statute — and not the descrip-

tive label assigned to it — that controls the constitu-

tional analysis. See Landgraf v. USI Film Prods., 511

U.S. 244, 270 (1994) (discussing long pedigree); cf.

Nelson v. Sears, Roebuck & Co., 312 U.S. 359, 363

(1941) (“In passing on the constitutionality of a tax

law ‘we are concerned only with its practical opera-

tion, not its definition or the precise form of descrip-

tive words which may be applied to it.’”) (citation

omitted). To conclude otherwise would elevate form

over substance and subordinate critical due process

protections to a legislature’s creative drafting skills.

This Court has long discouraged such efforts and

instead looked to whether the statute at issue oper-

ates retroactively and — if so, as here — whether the

retroactive effect passes federal constitutional mus-

ter. Interstate Pipe Line Co. v. Stone, 337 U.S. 662,

666 (1949) (“While we are of course bound by the

construction given a state statute by the highest court

of the State, we are concerned with the practical opera-

tion of challenged state tax statutes, not with their

descriptive labels.”).

The Court also has made clear that whether or

not a statute operates retroactively “demands a

common sense, functional argument about ‘whether

the new provision attaches new legal consequences to

events completed before its enactment.’” Martin v.

Hadix, 527 U.S. 343, 357-58 (1999) (quoting

Landgraf, 511 U.S. at 270). See also Lynce v. Mathis,

519 U.S. 4383 (1997) (holding that a state law is

retroactive if it “appllies] to events occurring before

its enactment”); Miller v. Florida, 482 U.S. 423, 430

(1987) (holding that “a law is retrospective if it

‘changes the legal consequences of acts completed

before its effective date’” (quoting Weaver v. Graham,

450 U.S. 24, 31 (1981))). In this case, that inquiry

leads to the undeniable conclusion that the statute at

issue has been applied retroactively, just as the

Michigan legislature directed that it be.

It is undisputed that petitioner filed refund

claims in the amount of several million dollars prior

to the enactment of the amendments to M.C.L.

§ 205.541 for periods going back at least five years.

See Opp. 6. The retroactive effect of the amendments

to M.C.L. § 205.541 reached back and deprived peti-

tioner of its outstanding refund claims for those

years. Under Michigan law at the time the statute at

issue was enacted, petitioner was entitled to the

refunds at issue. “‘|T|]he new provision attaches new

legal consequences to events completed before its

6

enactment.” Martin, 527 U.S. at 357-58 (quoting

Landgraf, 511 U.S. at 270). Michigan is of course free

to change its tax laws, but not in a manner that

retroactively claws back refunds to which a taxpayer

is entitled going back five years in this case and,

indeed, potentially indefinitely in other cases, given

that the statute poses no limit on its retroactivity.

And to the extent there could be any doubt that a

State may not avoid the unconstitutional retroactive

effect of a tax law by simply labeling it “curative,”

then this Court should grant certiorar) and eliminate

it. Indeed, as the U.S. Chamber of Commerce (at 5-6)

and other amici have stressed, particularly in these

difficult economic times, it is critical that States have

clear guidance on the constitutional limits on the

politically expedient means of raising revenue by

passing retroactive tax laws like the one at issue here.

2. Respondents also contend that this case is a

poor factual vehicle for considering the constitutional

limits on retroactive tax legislation and the reach of

this Court’s decision in Carlton. Opp. 16-17. Not so.

Sadly for Michigan taxpayers, there is nothing “pecu-

liar” (id. at 16) about the factual circumstances

underlying this case. Indeed, respondents do not

contest that there are over 90 cases pending before

Michigan courts substantially identical to this action

challenging the constitutionality of the retroactive

application of the amendments to M.C.L. § 205.541.

See Pet. 21. In these cases, taxpayers filed sales tax

refund claims prior to the effective date of the retro-

active tax provision at issue and the Michigan state

~]

officials applied the amended law retroactively to

“extinguish[ ]” (Pet. App. 7) the taxpayers’ entitle-

ment to a refund. Moreover, as underscored by the

significant amicus attention this case has attracted,

there is nothing unique or atypical about this factual

or legislative scenario.

Likewise, contrary to the suggestion of respon-

dents (Opp. 17), there is no basis to draw any consti-

tutional distinction between the retroactive denial of

a tax refund to which a taxpayer was entitled and a

retroactive increase in tax liability. An increase in tax

liability and a denial of a refund are merely opposite

sides of the same coin. There is no practical economic

or pocketbook difference between a retroactive denial

of a refund claim and a retroactive increase in tax

liability. In each case, the retroactive application of

the provision acts to make the taxpayer worse off

economically. The same goes for the retroactive denial

of a deduction, which was the tax vehicle at issue in

Carlton. 512 U.S. at 28-29. Indeed, if anything, the

retroactive denial of a refund actually presents a

stronger case for review by this Court. As amici

Council on State Taxation (COST) points out (at

12-14), retroactive denial of refunds raises unique

constitutional questions not found when analyzing

retroactive increases in tax liability.

3. To the extent that respondents even attempt

to defend the constitutionality of the retroactive law

at issue, their response is unavailing. Opp. 17-19. It

does not help respondents that the Michigan

Legislature passed its retroactive law to address an

8

unanticipated budget shortfall. Jd. at 18. As amici

explain, that simply heightens the general im-

portance of the case and need for review. Moreover,

the Court in Carlton was faced with a similar claim

in support of the purportedly “curative” (512 U.S. at

31) tax law at issue there, but acknowledged that

there are certainly limits on the efficacy of such a

position. See id. at 32-33, 38 (O’Connor, J., concur-

ring). And, even before Carlton, this Court struck

down retroactive tax legislation supported by the

government’s claim of the need to raise revenues. See

United States v. Hemme, 476 U.S. 558 (1986). More-

over, as noted by the U.S. Chamber of Commerce (at

9), acceptance of such a basis in support of retroactive

tax provisions would “threaten|} to undermine busi-

nesses’ confidence in the courts.”

Respondents’ claim (Opp. 18-19) that petitioner

cannot show detrimental reliance or disruption to its

settled expectations is mistaken. Prior to the enact-

ment of the amendments to M.C.L. § 205.541, and on

the basis of the holding in DaimlerChrysler Services

North America LLC v. Dep't of Treasury, 723 N.W.2d

569 (Mich. Ct. App. 2006) establishing what refunds

were owed under existing Michigan law, petitioner

filed claims for tax refunds. This Court has routinely

used due process considerations to defend a taxpay-

er’s settled interests in claims for refund. See, e.g.,

McKesson Corp. v. Division of Alcoholic Beverages

and Tobacco, 496 U.S. 18 (1990). Unquestionably,

petitioner's claims for refund are similarly protected

by this Court’s due process jurisprudence. “Retro-

actively disallowing the tax benefit that the earlier

9

law offered, without compensating those who incurred

expenses in accepting that offer” is “harsh and op-

pressive by any normal measure.” Carlton, 512 U.S.

at 39-40 (Scalia, J., joined by Thomas, J., concurring

in the judgment).

In attempting to find some limit on the retro-

active reach of the law, respondents point to statutory

language stating that “this amendatory act is not

intended to affect a refund required by a final order of

a court of competent jurisdiction for which all rights

of appeal have been exhausted or have expired.” Opp.

19. However, that language does not impose a tem-

poral limit on the amendment’s retroactive reach;

indeed, it contains no temporal reference at all. To the

contrary, it is clear that this language was merely

intended to isolate “winners” and “losers” under the

amended law. DaimlerChrylser, having litigated and

obtained a final order from the Michigan courts,

would be paid its refund, while all other taxpayers

would have their claims nullified on an indefinite

retroactive basis. Moreover, whatever the statute's

outer limits, in this case it was applied to extinguish

refunds going back five years. Pet. 7. That crosses the

due process “modesty” limit that this Court recog-

nized in Carlton.

As explained in the petition, other state courts

have held that periods of similar — and even shorter —

retroactivity cross the constitutional line. Pet. 18-21.

The decision below directly conflicts with those prec-

edents, adding to the growing confusion in the lower

courts on the scope of this Court’s decision in Carlton

and due process limits on retroactive tax legislation.

LO

See id.; see also Tesoro Refining and Marketing Co. «

Dep't of Revenue, Docket No. 39417-1-II (Wash. Ct

App. Dec. 21, 2010) (retroactive tax law with 24-year

reach held unconstitutional under Car/ton). Respon

dents do not deny the existence of that conflict. They

simply ignore it.

4

4. Respondents likewise ignore the widespread

practical ramifications of the question presented, as

stressed by the numerous amici that have filed in

support of certiorari. First, as those amici have

explained, if the decision below is permitted to stand,

it will create “even more uncertainty” for businesses

and taxpayers “already struggling in the current

economy.” U.S. Chamber Br. 6; see also COST Br. 14

Such uncertainty is antithetical to the predictable

business climate needed to sustain economic growth

Second, the decision below undermines the tax sys-

tem itself because taxpayers faced with the risk of

“ambiguity and inconsistency in the application of tax

laws” will be reluctant to rely upon, and voluntarily

comply with, questionable tax laws. U.S. Chamber Br

8-9. See also COST Br. 13-14 (such actions “produce

the devastating consequence of discouraging compli

ance with tax laws” if taxpayers think a state will do

“whatever it takes not to refund the tax even if it was

unlawfully collected”). Third, if states have unlimited

discretion to retroactively amend tax laws, then there

is little incentive for them to try to get it right the

first time. U.S. Chamber Br. 9. This further erodes

public confidence in a tax system grounded in the

rule of law. Finally, with the ever-present risk of

LI

retroactive tax legislation, there will be a race to the

courthouse to be the “lead” case and secure a favora

ble judgment before the legislature changes the law

and precludes a remedy for all later-comers (which is

precisely what happened here). COST Br. 5, 12-14

The resulting increase in litigation will be a consider

able strain on the state administrative mechanisms,

the judicial system and, ultimately, the taxpayers

themselves. COST Br. 14

The importance and recurring nature of the

constitutional question presented is undeniable. As

the U.S. Chamber of Commerce explains (at 5 n.3),

States currently face insurmountable budget deficits

and are increasingly turning to the politically expedi

ent option of retroactive tax laws in an effort to

alleviate their fiscal woes. Indeed, as respondents

admit, budget concerns prompted enactment of the

retroactive tax provision at issue here. Opp. 17-18.

Faced with both a lack of guidance on the fundamen

tal constitutional question presented and the increa:

ing temptation on the part of state legislatures to

turn to retroactive tax laws, the lower courts are now

faced with a bevy of similar suits and have struggled

under existing precedent including Carlton to

“foster| | a stable and predictable tax environment for

business.” U.S. Chamber Br. 5-6. This has resulted in

conflicting lower court decisions and constitutional

disarray on a critically important issue. Absent

needed guidance from this Court, States will continue

to pus the boundaries of retroactivity while likewise

creating additional uncertainty for business al

ready struggling in the current economy

The lower courts are divided on the constitutional

limits governing retroactive tax laws. That issue wa

squarely presented to the courts below, and thoss

courts expressly rejected it — finding no constitutional

impediment, under this Court’s decision in Carlton o1

otherwise, to a tax law that has no temporal limit on

its retroactive reach. And as the U.S. Chamber of

Commerce and other amici have stressed, this case

presents a timely and worthy vehicle for this Court to

provide much needed guidance on this nationally

important question. Certiorari is therefore warranted

CONCLUSION

For the foregoing reasons, he petition [for writ Ol

certioram should be granted

,

tespectfully submitt

GREGORY G. GARRI MICHAEL J. BOWE!

GABRIEL K. BEL! Counsel of Recor

LATHAM & WATKINS LLP PETER O. LARSE!

555 11th Street, NW AKERMAN SENTERFIT

Suite 1000 50 N. Laura Street

Washington, DC 20004 Suite 2500

202) 637-2200 Jacksonville, FL 32202

(904) 798-3700

michael howen@aker man

Vecember 28. 2010