Caterpillar, Inc. v. Department of Treasury, Revenue Div., Docket No. 90999

• Citation: 440 Mich. 400,488 N.W.2d 182
• Decision Date: 31 July 1992
• Docket Number: Docket No. 90999,No. 11,11
• Parties: CATERPILLAR, INC., formerly Caterpillar Tractor Co., Plaintiff-Appellant and Cross-Appellee, v. DEPARTMENT OF TREASURY, REVENUE DIVISION, Defendant-Appellee and Cross-Appellant. Calendar
• Court: Supreme Court of Michigan

Page 182

488 N.W.2d 182

440 Mich. 400

CATERPILLAR, INC., formerly Caterpillar Tractor Co. Plaintiff-Appellant and Cross-Appellee, v. DEPARTMENT OF TREASURY, REVENUE DIVISION, Defendant-Appellee and Cross-Appellant.

Docket No. 90999.

Calendar No. 11.

Supreme Court of Michigan.

Argued Dec. 5, 1991.

Decided July 31, 1992.

[440 Mich. 403] Peter S. Sheldon, Jeffery V. Stuckey, Dickinson, Wright, Moon, Van Dusen & Freeman, Lansing, John S. Pennell, Don S. Harnack, Richard A. Hanson, Gregory G. Palmer, Carol S. Portman, McDermott, Will & Emery, Chicago, Ill., for plaintiff-appellant.

Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., Russell E. Prins, Terry P. Gomoll, Asst. Attys. Gen., Lansing, Mich., for defendant-appellee.

Jerome B. Libin, Kathleen A. Foudy, Sutherland, Asbill & Brennan, Washington, D.C., Thomas J. Kenny, Raymond & Dillon, P.C., Southfield, Mich., for amicus curiae Mich. Mfrs. Ass'n, Mich. Chamber of Commerce and Greater Detroit Chamber of Commerce.

Honigman Miller Schwartz and Cohn, Benjamin O. Schwendener, Jr., Alan M. Valade, James H. Novis, Roger Cook, Lansing, Mich., for amici curiae Automatic Data Processing, Inc., ADP Automotive Claims Services, Inc., ADP Credit Corp., ADP Financial Information Services, Inc., Atlantic Richfield Co., ARCO Chemical, Inc., Consumers Power Co., Dart Container Corp., Dart Container Corp. of Mich., Handleman Co., Lane Bryant, Inc., Lerner Stores, Inc., Ltd. Exp., Inc., Ltd. Stores, Inc., Pulte Homes Corp., Schostak Bros. & Co., Inc., Sizes Unlimited, Inc. and Victoria's Secret Stores, Inc.

OPINION

RILEY, Justice.

Because the issue here presented can be best understood in its factual context, we begin with a statement of the essential facts from which the issue arises.

I. FACTS AND PROCEEDINGS

Caterpillar, Inc., is a Delaware-based corporation qualified under the laws of Michigan, with its principal place of business in Peoria, Illinois. It is a multinational company, which designs, manufactures, and markets earth-moving, construction, and materials-handling machinery and equipment, as well as engines for such products. Caterpillar conducts a portion of its business in Michigan, and pays taxes to the State of Michigan pursuant to the Single Business Tax Act (SBT), M.C.L. Sec. 208.1 et seq.; M.S.A. Sec. 7.558(1) et seq.

Caterpillar brought an action in the Court of Claims against the Department of Treasury, seeking a refund of all SBT taxes it paid in the years 1981 through 1984. ¹ It challenges the constitutionality of the capital acquisition deduction (CAD), M.C.L. Sec. 208.23(a), (c); M.S.A. Sec. 7.558(23)(a), (c) of the SBT, ² claiming that the CAD burdens interstate commerce, and thereby violates the Commerce Clause of the United States Constitution ³ by discriminating against non-Michigan-based companies and favoring Michigan-based companies. ⁴

On July 13, 1989, the Court of Claims held that the CAD was unconstitutional. The court stated that the CAD discriminates against out-of-state corporations in a way that has been consistently ruled unconstitutional by the United States Supreme Court on the ground that it violates the Commerce Clause. The court cited the following cases in support of this contention: Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1962); Nippert v. Richmond, 327 U.S. 416, 66 S.Ct. 586, 90 L.Ed. 760 (1946); American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987), and Westinghouse Electric Corp. v. Tully, 466 U.S. 388, 104 S.Ct. 1856, 80 L.Ed.2d 388 (1984). The court further ruled that the discriminatory effect of the CAD should be remedied by disallowing the application of the CAD for any taxpayer, and thus the court acted to sever subsections 23(a) and (c) from the SBT. ⁵ The court ruled, however, that its decision would apply only to taxable years beginning after September 30, 1989, thus granting prospective relief only.

Caterpillar appealed the Court of Claims decision to grant prospective relief only and to sever the CAD in its entirety from the SBT. On February 5, 1991, the Court of Appeals entered its decision, 188 Mich.App. 621, 470 N.W.2d 80 (1991), noting first that it was not ruling on the issue whether the CAD violates the Commerce Clause of the United States Constitution. ⁶ In regard to the other issues, the Court affirmed the Court of Claims decision to grant prospective relief only, but modified its decision in regard to the specific relief granted. The Court of Appeals held that instead of severing the CAD in its entirety, only that language that produces the discriminatory effect should be removed from the SBT. ⁷

Caterpillar filed an application for leave to appeal, and the Department of Treasury filed an application for leave to appeal as cross-appellant. On October 4, 1991, we granted both applications and limited the appeals to the following issues: (1) whether, before the passage of 1991 P.A. 77, ⁸ the CAD provisions violated U.S. Const., art. I, Sec. 8, cl. 3, 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, plaintiff-appellant should receive. 439 Mich. 857, 475 N.W.2d 818.

II. CAPITAL ACQUISITION DEDUCTION

To better understand the issues implicated in this case, we move next to a discussion of the CAD. It is important to note that the CAD is not an isolated tax statute, but is part of an overall tax scheme that represents a policy choice adopted by the state Legislature. This tax scheme is the SBT. The SBT, enacted by the Legislature in 1975, ⁹ 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). ¹⁰ The SBT is a consumption-type value-added tax. See Mobil Oil v. Dep't of Treasury, 422 Mich. 473, 496, and n. 14, 373 N.W.2d 730 (1985). It is not, however, a pure value-added tax because it is subject to various exemptions, exclusions, and industry-specific adjustments. ¹¹ Under the SBT, the first step in determining a taxpayer's tax liability is to determine its tax base. This tax base is defined as business income before apportionment subject to certain adjustments. M.C.L. Sec. 208.9; M.S.A. Sec. 7.558(9). The tax base is then apportioned between Michigan and other states in which the taxpayer conducts business activities. M.C.L. Secs. 208.40, 208.41, 208.45; M.S.A. Secs. 7.558(40), 7.558(41), 7.558(45). This is done by using a three-factor apportionment formula. ¹² After apportionment, the tax base is subject to several additional adjustments. ¹³ One such adjustment is the CAD.

The CAD does just what its name suggests. It provides a deduction for the acquisition of capital assets. Following the general principles of consumption-type value-added tax treatment, the CAD allows the taxpayer's tax base to be reduced by the amount expended during the tax year to acquire capital assets. See Kasischke, Computation of the Michigan single business tax: Theory and mechanics, 22 Wayne L.R. 1069 (1976). This consumption-type element of the CAD and SBT thereby provides a cash-flow advantage to the purchaser/user of capital assets. The CAD allows the purchaser/user to increase its cash flow by reducing its tax liability through the deduction. Such a tax policy may help to encourage Michigan-related investments and may provide an economic stimulus to certain parts of the business sector due to the increase in cash flow. ¹⁴

The deduction provided by the CAD is not applied to the tax base until after the tax base has been allocated or apportioned. M.C.L. Sec. 208.23; M.S.A. Sec. 7.558(23). Since the tax base after apportionment represents only Michigan business activity, only capital acquisitions related to Michigan business activity should qualify for treatment pursuant to the CAD. The CAD (subsections 23[a] and 23[c] is designed to accomplish this result. Subsections 23(a) and 23(c) provide methods of apportioning a taxpayer's capital acquisitions so that only those acquisitions that relate to Michigan business activity are included in the CAD. Apportioning the CAD for tangible personal property ¹⁵ is accomplished in subsection 23(a). Apportioning the CAD for real property ¹⁶ is accomplished in subsection 23(c). ¹⁷

Under subsection 23(a), the deduction for tangible personal property is available for any taxpayer, whether a multistate company ¹⁸ or a company whose business activity is allocated entirely to Michigan ¹⁹--an in-state company. Furthermore, subsection 23(a) does not limit the CAD for tangible personal property to only those assets located in Michigan. Because tangible personal property is readily transportable, it is not that easy to determine where tangible personal property is actually located, or how or if such location should be or is solely determinative of its proper use in the CAD. The Legislature recognized that it could not reach such a determination without imposing burdensome accounting problems upon the taxpayers and upon the Michigan taxing system itself. In response to these problems, the Legislature, following traditional taxing policy and practice of state legislatures, adopted an apportionment formula to calculate the CAD for tangible personal property related to Michigan business activities. The apportionment formula adopted was a two-factor formula. To figure out the CAD for tangible personal property, the total cost of the tangible personal property acquired during the tax year (regardless of whether it is purchased in Michigan) is multiplied by the average of the property factor and the payroll factor. ²⁰

The two-factor formula used in subsection 23(a) is obviously not the same as the three-factor formula used in computing a taxpayer's tax base attributable to Michigan. ²¹ The theory behind the use of the two-factor apportionment formula in subsection 23(a) is that the...