May 22, 2017 / 2:05 PM / 3 months ago

U.S. top court rejects challenge to state retroactive tax changes

U.S. Supreme Court is seen in Washington, U.S., October 3, 2016.Yuri Gripas/Files

WASHINGTON (Reuters) - The U.S. Supreme Court on Monday declined to hear a challenge by several major corporations to a Michigan law that retroactively changed the way businesses are taxed in the state, leading to $1 billion extra for government coffers.

The justices turned away appeals by Goodyear Tire and Rubber Co, IBM Corp, AT&T Inc's DirecTV, Monster Beverage Corp and others of a lower court's ruling in favor of the state. The companies argued that Michigan's retroactive change to its tax regime violated their rights to due process under the U.S. Constitution.

The Supreme Court also refused to take up an appeal by closely held Dot Foods Inc over a lower court ruling favoring Washington state in a similar retroactive tax dispute.

Before 2008, companies with activities in Michigan and outside the state could limit their tax liability by apportioning their income using a three-factor formula set out under a decades-old agreement called Multistate Tax Compact, which took into account a company's sales, property and payroll in the state.

That compact, which Michigan joined in 1970, helped to avoid duplicative taxation of companies among member states.

Michigan's 2008 Business Tax Act provided for apportionment based on sales alone. In 2014, the Michigan Supreme Court ruled that the act did not expressly repeal the compact's three-factor apportionment provision. That decision meant the state could lose $1 billion in already-collected tax revenue, Michigan said in court papers.

In response, the state legislature rewrote the law to correct what it called an erroneous interpretation by the court. The new law expressly repealed the compact and applied it retroactively to 2008, saying that was the "original intent" of the legislature.

Dozens of companies filed suit against Michigan as far back as 2011 over the tax changes. But based on the 2014 legislation, Michigan's Court of Appeals dismissed them, saying the changes did not violate the companies' right to due process. The Michigan Supreme Court declined to review the cases last year.

The corporations urged the U.S. Supreme Court to hear their cases, saying that retroactive tax laws are becoming more common in the United States as a "ready source of revenue" for governments.

In the Dot Foods' case, a lower court had upheld Washington's decision to close a tax loophole and apply the change to Illinois-based Dot Foods for the four years prior to the statute's enactment. Dot accused the state of violating its due process rights.

Reporting by Andrew Chung; Editing by Will Dunham

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