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Michigan Retroactive Tax Legislation – Is it Legal?

The United States Constitution expressly forbids ex post facto laws with respect to both the federal and state governments.[i] An ex post facto law is one that retroactively changes the legal status and consequences of a particular action. The easiest way to understand it is in the criminal realm. Today, I ate a yogurt. Two years from now, the government passes a law saying it is a third-degree felony to eat yogurt and makes the law retroactive for a 5-year period. While eating my yogurt today was not against the law, I am still, two years later, guilty of a felony and can be punished accordingly. Fortunately, the government is not too interested in yogurt. Unfortunately, the government is very interested in tax.

In 2014, Michigan passed 2014 PA 282, a retroactive tax law replacing the elective three-factor apportionment formula from the Multistate Tax Compact to which Michigan adhered with a new single-factor apportionment formula. This may have been just another disappointment to Taxpayers, who are regularly disappointed by the creative and nefarious ways in which states try to drum up revenue. But with a retroactive application to 2008, it was just plain devastating.

It is no surprise that the state supreme court upheld the state’s interest in collecting more tax. The case challenging this law was in fact 50 consolidated cases in Gillette Commercial Operations North America & Subsidiaries et al. v. Dep’t of Treasury, No. 325258 (Mich. Ct. App. Sept. 29, 2015). The question now is: will the Supreme Court hear the case? The Department of treasury argues that the Supreme Court can’t. Rather than a retroactive law, the state argues that 2014 PA 282 is simply a clarification of the preexisting law. Therefore, under the state statutory-construction law, the Michigan state court had adequate and independent state law ground to uphold 2014 PA 282 and the Supreme Court of the United States does not have the jurisdiction to overturn it.

However, Gillette still has a convincing argument that this law violates the Due Process rights of Michigan taxpayers. In a large state like Michigan, this retroactive law has an enormous effect on businesses. But what is truly at stake is the precedent. If states can retroactively raise taxes, they can abuse this power to get an immediate surge of revenue whenever they want. The economic impact could be detrimental not only to the large businesses currently fighting the law, but it could easily bankrupt midsize and small businesses overnight despite years of accurate reporting. It is up to the Supreme Court to resolve this issue for all the states but first they must grant certiorari. In the next few months Taxpayers will know for sure if the federal government will intervene, but for now all Taxpayers can do is hope.

About the Author:  Jeanette Moffa is an associate attorney of the Law Offices of Moffa, Sutton, & Donnini, P.A. Ms. Moffa concentrates in the area of State and Local Taxation with a heavy emphasis on sales and use tax. In addition to Florida and multi-state sales and use tax issues, she also works on appellate administrative law cases. She is also an adjunct professor at Broward College.

[i]In Article 1, Section 9, Clause 3, and Article 1, Section 10, respectively.