Caterpillar, Inc. v. Department of Treasury, Docket No. 119584

• Decision Date: 05 February 1991
• Docket Number: Docket No. 119584
• Court: Court of Appeal of Michigan — District of US
• Parties: CATERPILLAR, INCORPORATED, a/k/a Caterpillar Tractor Company, Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee, and Michigan Manufacturers Association, Amicus Curiae.

Page 80

470 N.W.2d 80

188 Mich.App. 621

CATERPILLAR, INCORPORATED, a/k/a Caterpillar Tractor Company, Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee and Michigan Manufacturers Association, Amicus Curiae.

Docket No. 119584.

Court of Appeals of Michigan.

Submitted May 17, 1990, at Lansing.

Decided Feb. 5, 1991, at 9:10 a.m.

Released for Publication June 21, 1991.

Leave to Appeal Granted

July 26, 1991.

McDermott, Will & Emery by John S. Pennell, Don S. Harnack, Richard A. Hanson, Gregory G. Palmer, and Carol S. Portman, Chicago, Ill., for plaintiff-appellant.

Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., and Richard R. Roesch and Terry P. Gomoll, Asst. Attys. Gen., for defendant-appellee.

Clark, Klein & Beaumont by Dwight H. Vincent, J. Walker Henry, Thomas S. Nowinski, and Joseph A. Bonventre, Detroit, for Michigan Mfrs. Ass'n.

Before SULLIVAN, P.J., and WAHLS and JANSEN, JJ.

PER CURIAM.

Following a bench trial, the Court of Claims essentially made three rulings: (1) the capital acquisition deduction (CAD) provisions of the Single Business Tax Act (SBTA) violate the Commerce Clause of the federal constitution, U.S. Const., art. I, Sec. 8; (2) under both state and federal law, its decision with regard to the constitutionality of the CAD applies prospectively; and (3) the correct remedy is to sever the CAD provisions from the act. Plaintiff appeals the court's latter two rulings. We affirm in part and modify in part.

A brief background on the SBTA and the CAD deductions is in order. The SBTA, enacted as 1975 P.A. 228, M.C.L. 208.1 et seq.; M.S.A. 7.558(1) et seq., was "new and experimental legislation in this state." Town & Country Dodge, Inc. v. Dep't. of Treasury, 420 Mich. 226, 234, 362 N.W.2d 618 (1984). The SBTA imposes a value-added tax using a consumption-type base. Mobil Oil Corp. v. Dep't. of Treasury, 422 Mich. 473, 496, 373 N.W.2d 730 (1985). A taxpayer's tax base is defined as business income before apportionment subject to certain adjustments. M.C.L. 208.9(1); M.S.A. 7.558(9)(1). One of the adjustments includes adding depreciation paid by the taxpayer to the extent deducted from federal taxable income. M.C.L. 208.9(4)(c); M.S.A. 7.558(9)(4)(c); Trinova Corp. v. Dep't. of Treasury, 433 Mich. 141, 150, 445 N.W.2d 428 (1989), cert. gtd. --- U.S. ----, 110 S.Ct. 1317, 108 L.Ed.2d 492 (1990). After the initial tax base is determined, it is apportioned between Michigan and other states in which the taxpayer does business. Once apportioned, the tax base is then subject to certain adjustments. Id., 433 Mich. pp. 151-152, 445 N.W.2d 428; Mobil Oil, supra, 422 Mich. p. 476, 373 N.W.2d 730.

One of the adjustments is the CAD at issue in this case--M.C.L. 208.23; M.S.A. 7.558(23). The CAD allows a taxpayer to deduct the cost of depreciable tangible assets, including both personal and real property. M.C.L. 208.23(a); M.S.A. 7.558(23)(a) employs a two-factor formula--payroll factor plus the property factor--to determine the proper deduction for personal property capital acquisitions. M.C.L. 208.23(c); M.S.A. 7.558(23)(c) provides for the deduction of the cost of real property located in Michigan. ¹ The CAD is what makes the single business tax a consumption-type value-added tax: The SBTA allows a deduction of the "purchase price paid for the capital goods--but then taxes its depreciation." Mobil Oil, supra, pp. 496-497, n. 14, 373 N.W.2d 730.

In this case, plaintiff Caterpillar, Inc., a Delaware corporation with its principal place of business located in Peoria, Illinois, sought to recover the single business taxes it paid in the years 1981-84. One of its arguments was that Sec. 23 violated the Commerce Clause because Michigan-based companies received a larger CAD than non-Michigan-based companies because they were located in Michigan.

The Court of Claims agreed. After reviewing United States Supreme Court decisions involving violations of the Commerce Clause, the Court of Claims held that "[t]he greater CAD is allowed to Michigan-based companies solely because of the location of their businesses," and, thus, that subsections 23(a) and (c) discriminate against non-Michigan-based companies in violation of the Commerce Clause. Because, the Court of Claims held, the Supreme Court "has not invalidated a deduction provision as contrasted with an unconstitutional credit provision" on the basis of the Commerce Clause, the issue was novel and one of first impression. Therefore, the court applied its ruling prospectively. It further severed subsections 23(a) and (c) from the SBTA.

We begin by noting that the Attorney General did not cross appeal the Court of Claims ruling that subsection 23(a) and (c) violate the Commerce Clause. That issue, therefore, is not before us. See, e.g., Peisner v. The Detroit Free Press, Inc., 421 Mich. 125, 129, n. 5, 364 N.W.2d 600 (1984); Pontiac Twp. v. Featherstone, 319 Mich. 382, 390, 29 N.W.2d 898 (1947). Instead, the issues before us are whether the Court of Claims decision operates prospectively or retrospectively and what is the appropriate remedy. Although interrelated, these are distinct issues. See American Trucking Ass'ns, Inc. v. Smith, 495 U.S. ----, ----, ----, 110 S.Ct. 2323, 2331, 2333, 110 L.Ed.2d 148, 159, 161 (1990) (plurality opinion of Justice O'Connor); Ervin & Giddings, Supreme court distinguishes remedy and retroactivity issues affecting state taxes, 73 Journal of Taxation 296, 297 (1990).

We now turn to the issue whether the Court of Claims decision operates prospectively or retrospectively. Plaintiff urges that, under both federal and state law, the decision operates retrospectively. If the Court of Claims decision operates retrospectively under federal law, then we cannot apply the decision prospectively on the basis of state law. To do so would frustrate federal law because the Court of Claims decision was based on federal law--the Commerce Clause. See Ervin & Giddings, p. 298. Therefore, we first engage in an analysis under federal law.

In determining whether a decision under the Commerce Clause applies retrospectively, i.e., "applies to conduct or events that occurred before the date of the decision," four justices of the Supreme Court in American Trucking Ass'ns applied the three-part test announced in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-107, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971):

First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed. Second, ... we must ... weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. Finally, we [must] weig[h] the inequity imposed by retroactive application, for where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the injustice or hardship by a holding of nonretroactivity. [American Trucking Ass'ns, supra, --- U.S. at ----, 110 S.Ct. at 2331, 110 L.Ed.2d at 160, quoting Chevron Oil, 404 U.S. at 106-107, 92 S.Ct. at 355.]

The first prong is the threshold inquiry. If it is not satisfied, the other two prongs are irrelevant. See, e.g., Ashland Oil, Inc. v. Caryl, 497 U.S. ----, 110 S.Ct. 3202, 111 L.Ed.2d 734 (1990).

We conclude that the three-pronged test is satisfied in this case. First, although the Court of Claims decision obviously did not overrule clear precedent, it was an issue of first impression whose resolution was not "clearly foreshadowed." The question of constitutionality of the CAD is one of first impression. Moreover, as noted earlier, the SBTA "was new and experimental legislation in this state." Town & Country Dodge, supra, 420 Mich. p. 234, 362 N.W.2d 618. We also believe that the method of determining the CAD--especially for personal property--is unique. A similar deduction has never been declared to be unconstitutional. We therefore do not believe that it was "clearly foreshadowed" that subsections 23(a) and (c) would be declared unconstitutional. Cf. McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, 495 U.S. ----, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990); Ashland Oil, supra; Allis-Chalmers Corp. v. North Bonneville, 113 Wash.2d 108, 117, 775 P.2d 953 (1989).

We also believe that the second and third prongs of the Chevron Oil test are met in this case. The Commerce Clause created an area of trade free from interference by the states. American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 280, 107 S.Ct. 2829, 2838, 97 L.Ed.2d 226 (1987); Nat'l. Can Corp. v. Washington Dep't. of Revenue, 109 Wash.2d 878, 888, 749 P.2d 1286 (1988), app. dis. 486 U.S. 1040, 108 S.Ct. 2030, 100 L.Ed.2d 615 (1988). Here though, "whatever chill was imposed on interstate trade is in the past." Nat'l. Can Corp., supra, 109 Wash.2d pp. 888-889, 749 P.2d 1286. Because the Court of Claims declared that the CAD violated the constitution and a remedy is in order, the purpose of the Commerce Clause will not be retarded by prospective application. Nor will prospective application tend to encourage future free-trade violations. Again, the SBTA and CAD are unique. The state now has more guidance on how to structure the SBTA and CAD so as not to violate the Commerce Clause. Retroactive application of the Court of Claims decision would be more in the nature of a punitive award for trying to better state taxation schemes.

Finally, retrospective application could be potentially devastating for the state, both financially and administratively. See, e.g., American Trucking Ass'ns v. Smith, supra, --- U.S. p. ----, 110 S.Ct. p. 2333, 110 L.Ed.2d pp. 162-163. Because the CAD presumably had gone unchallenged for a long period after its enac...