Caterpillar, Inc v. Department of Treasury

440 Mich 400 CATERPILLAR, INC DEPARTMENT OF TREASURY (Calendar 11). 5, Argued 90999. Docket No. December No. 31, July by Supreme Decided 1992. Certiorari denied the Court — (1992). 1992, 30, of the United States on November Inc., Caterpillar, corporation place principal a Delaware with its Peoria, Illinois, portion of business in conducts a its Michigan, brought business an action the Court of Claims against Department Division, Treasury, seeking the Revenue paid single a refund of all business taxes between 1981 and 1984, claiming capital acquisition permitted that the deduction Single the under Business Tax Act burdens com- merce, thereby violating the Commerce Clause of the United by discriminating against non-Michigan- States Constitution court, companies. Brown, J., based The Thomas L. that the held capital acquisition deduction was unconstitutional and dis- application any taxpayer beginning allowed its P.J., September Appeals, Sullivan, 1989. The Court of JJ., curiam, opinion per Jansen, Wahls in an affirmed the grant prospective only ruling decision to relief without on the capital acquisition whether issue the deduction violates the Clause, language Commerce and held that provision produces discriminatory deduction effect 119584). (Docket parties appeal. should be removed No. Both opinion joined by In an Riley, Boyle, Justice Justices Griffin, Mallett, Court held: 208.23(a), 7.558(23)(a), (c); (c), capital acquisi- MCL MSA Single Act, tion deduction of the Tax Business does not violate the Commerce Clause of the United States Constitution. Act, Single 1. Business Tax the tax of a base Under taxpayer doing Michigan appor- business both in and outside by multiplying average tioned the tax base of the ratios Michigan payroll payroll, Michigan prop- of its to its total its erty property, Michigan to its total and its sales to its total capital acquisition exempts acquisition deduction _sales. References 2d, Am Jur State and Local Taxation 96-99. §§ Commerce; See Index to Annotations under Business and Law; Constitutional Taxes. taxpayer’s capital tax base after from a assets calculating single Because the purposes business tax. activity, represents only apportioned business base personal real related only tangible and estate Michigan activity qualify Personal for the deduction. business 23(a), prop- apportioned pursuant real property to subsection is 23(c). is pursuant used erty, A two-factor formula to subsection personal property by apportionment tangible of to the calculate personal property tangible ac- multiplying the total cost of regardless purchased, by a quired during year, of where the tax average taxpayer’s ratio the derived from an factor property Michigan property and the ratio of its its total to Michigan payroll. payroll real to its total deduction property percent property of the cost of real one hundred is Michigan. located in Transit, Complete Brady, Inc v 430 US 274 2. Auto Under (1977), scrutiny under a Commerce a tax will withstand state activity having challenge applied if it a substan- is an Clause state, fairly apportioned, taxing not does tial nexus with commerce, fairly against related interstate and discriminate case, requisite provided by the In this state. services portion Caterpillar its a busi- nexus because conducts exists Michigan a link ness in and there is definite between Caterpillar’s that the seeks to tax. and business activities state apportionment they in that are inter- The methods of are fair externally presented nally indi- consistent. facts were and No cating misappropriation any any or distorted re- substantial being any taxpayer, In sults. available to the deduction is apportionment discriminatory on different its face. Use of determining single in business tax base and formulas capital any acquisition discrimina- deduction does not evidence discriminatory tory purpose, any nor effect on was interstate Finally, light Caterpillar’s business commerce shown. Michigan, fairly activity related received benefits provided by the state. services Reversed. dissenting, Levin, joined by Justice Cavanagh, Chief Justice apportionment applied both to the

stated that formulas components personal property property the real of the and tax, single capital acquisition on of the business their deduction effect, against inter- face in their inevitable discriminate and subtle, apportionment but The scheme is state commerce. protectionism example forbidden of interstate economic classic by the Clause. Commerce discriminating prohibits Clause states from The Commerce Mich in- between economic entities on the basis of or out-of-state services, goods, status and economic or between activities on origin may out-of-state location. A basis of in- or or state promote compete economy tax to its domestic with other commerce, ways states for of interstate but a share uniformly affecting given type activity, of economic without any discriminatory treatment of entities out-of-state or activi- if, ties. A state tax violates the Clause Commerce as a result of deductions, imposed credits or rate the effective tax on the apportioned income or tax base a state other varies on the taxpayer basis of the out-of-state status of the or related entity, degree activity or on business the basis of the commerce, so as to favor in-state commerce. personal property taxpayer generally Under the cad, may Michigan-apportioned its deduct from tax base the costs of tangible personal property during year accrued the tax without regard acquired placed it to whether or into service in state property or out of state. Because the is based factor on all real personal property during year, owned or rented the tax affected, necessarily will be and the formula resulting average payroll from the factors acquired newly personal prop- also will be affected whether erty subject placed to the cad is in into service or out of state. apportionment personal property Because the of the cad is tied directly average proportion property payroll of and Michigan, Michigan-based company reap situated in a will a greater any personal property from benefit investment in than predominantly non-Michigan-based company. Further, will a an personal property always in-state investment in will increase formula, property the and factor the cad and an out-of-state Thus, always company investment will decrease both. invent- ing always reap greater personal property in state will cad. property taxpayer generally may cad, Under the real Michigan-apportioned deduct from its base tax the costs of real property physically Michigan during located in that accrued Thus, year. apportionment property the tax of the real Michigan strictly dependent prop- on the location of the erty depend taxpayer. and does not on the relative status of the personal property property Both appor- and the real formulas, applied conjunction tionment when in with the un- derlying itself, three-factor sbt of result in imposition higher regard of effective rates with tax companies predominantly non-Michigan that are either based Michigan. or that direct their investments outside The discrimi-. natory converge especially preferential effects so as to afford an Michigan company Michigan-based invests in to a rate By relying part on of the Commerce Clause. contravention relying purposes, Michigan while sales for initial taxation payroll exclusively Michigan for relevant and on purposes, sbt and the combined scheme deduction protectionism per and is invalid economic results classic se. acquisi- dissenting, capital that the Brickley, stated Justice dependent personal property, on the for that is tion deduction payroll company’s property of a amount relation state, provided out on an and the amount basis, impermissible thus is violative the Commerce capital acquisi- The of the United States Constitution. Clause however, provided wholly property, for tion deduction real character, company’s independent and thus does of a Clause. not violate Commerce (1991) App 621; reversed. 188 Mich 470 NW2d Single — — Tax Clause Business Constitutional Law Commerce Capital — Acquisition Deduction. Single capital acquisition Act Business Tax deduction of the United States does not violate the Commerce Clause (US Const, I, 8, 208.23[a], [c]; MSA art MCL § Constitution cl 7.558[23][a],[c]). Emery (by McDermott, A. Han- Will Richard & Gregory son, Harnack, G. Pennell, John Don S. S. Portman) Dickinson, Palmer, and Carol S. (by Wright, Moon, & Peter S. Van Dusen Freeman plaintiff. Stuckey) Jeffery for the Sheldon and V Kelley, Attorney Gay General, Frank J. Secor Hardy, General, and E. Prins and Solicitor Russell Terry Attorneys General, Gomoll, P. Assistant the defendant.

Amici Curiae: (by

Honigman, Miller, Alan M. Schwartz & Cohn Benjamin Jr., Schwendener, H. Valade, James O. Cook) Roger Novis, for Data Pro- Automatic and cessing, Services, Inc., Claims ADP Automotive Corp., Inc., ADP Financial Informa- ADP Credit Mich Opinion op the Court Company, Services, Inc., tion Atlantic Richfield Chemical, Inc., ARCO pany, Corporation Consumers Power Com- Corporation, Dart Container Dart Container Michigan, Company, Handleman Kojaian Properties, Bryant, Inc., Inc., Lane Lerner Express, Stores, Inc., Inc., Stores, Limited Limited Corporation, Inc., Pulte Homes Schostak Brothers Company, Inc., & Unlimited, Inc., Sizes and Victo- Stores, ria’s Secret Inc. (by

Sutherland, Asbill & Brennan Jerome B. Foudy) Raymond Libin and A. Kathleen & (by Kenny) Michigan Dillon, P.C. Thomas J. Association, Manufacturers Chamber of Commerce, and Greater Detroit Chamber of Com- merce. presented J. Because the issue here can Riley, begin

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

I. FACTS AND PROCEEDINGS Caterpillar, corporation Inc., is a Delaware-based qualified Michigan, under laws of with its principal place Peoria, of business in Illinois. It is company, designs, a multinational which manufac- earth-moving, tures, and markets construction, materials-handling machinery equipment, and as well as conducts a

engines products. Caterpillar for such portion Michigan, of its business pays Michigan pursuant taxes the State of Single Business Tax Act MCL 208.1 et (sbt), 7.558(1) seq.; seq. MSA et Caterpillar brought an action in the Court of against Department Treasury, Claims ing seek- paid years a refund of all sbt taxes it in the Caterpillar 405 of v op Opinion the Court challenges through the 1984.1It constitution- 1981 capital acquisition ality deduction the of (cad), (c) 7.558(23)(a), 208.23(a), (c); the of MSA MCL claiming sbt,2 com- that cad burdens thereby Clause merce, the Commerce and violates by discriminat- United States Constitution3 of the ing against companies non-Michigan-based companies.4 favoring Michigan-based July 1989, that 13, Court of Claims held the On The court stated cad was unconstitutional. complaint respect year 1981 was filed in the Court 1 A with to the 10, complaint respect 1984. A with of Claims on December through years March in the Court of Claims on 1982 1984 was filed 12, subsequently consolidated on 1987. These cases were 28, May 1987. 2Caterpillar challenged constitutionality of the also sbt’s three- pursuant apportionment company’s tax base factor formula for of a to a refund 41 and 45. claimed that was entitled SBT §§ application pursuant of the three- of taxes factor to SBT 69 because § Caterpillar’s apportionment fairly represent formula did not and, thus, in violated the Due Process business activities Equal States Constitution. Protection Clauses of the United and Before a decision G. Harrison issued an administrative Claims, Judge by the Court of Chief Circuit Michael holding abeyance order in all Supreme involving pending action Court in cases such claims eventually upheld Corp Dep’t Treasury. the constitu Trinova v We tionality formula in of the sbt and its three-factor 141; Corp Dep’t Treasury, 428 433 Mich 445 NW2d Trinova v affirmed, (1989), Corp Trinova and the United States Court 358; 818; Michigan Dep’t Treasury, 111 112 L Ed 2d 498 US S Ct (1991). 884 10, 1988, parties joint by the motion was filed On November separately Caterpillar’s requesting that the Court of Claims decide 16, remaining On November claim that the cad was unconstitutional. granted of Claims the motion. the Court Congress regulate shall have Power ... To Commerce States, Nations, foreign among the several and with with the Indian Tribes Const, I, 8, .... art cl § 3.] [US "Michigan-based” company Caterpillar’s means a multistate term employees predominant part company Michigan company tions predominant its facilities and with the "non-Michigan comparison The term based” to its sales. large opera- company with out-of-state refers to a multistate employees Michigan (companies less are whose facilities state). comparison in the Neither term to its sales exclusively Michigan company operates within the describes a state —an company. intrastate Mich Opinion Court against out-of-state cor that the discriminates porations consistently way in a that has been by the United States Su ruled unconstitutional preme ground it violates Court on following Commerce Clause. The court cited cases in support of this contention: Halliburton Oil Cementing Reily, 83 S Ct Well Co (1963), Nippert Richmond, 1201; 10 L 202 Ed 2d v (1946), 416; 586; 327 66 90 L Ed 760 US S Ct Trucking Ass’ns, Scheiner, American Inc v 483 US (1987), 266; 2829; 107 S Ct 97 L Ed 2d 226 Westinghouse Corp Tully, 388; Electric (1984). 1856; L S Ct 80 Ed 2d The court discriminatory further ruled that the effect of by disallowing applica should be remedied any taxpayer, tion of the cad for court acted to sever subsections thus (c) 23(a) from however, ruled, the sbt.5 The court deci- its statutory language of the cad is stated as follows: provided After allocation as in section 40 or provided adjusted by as following: in section the tax base shall be (a) cost, installation, including Deduct the fabrication and paid year tangible type or accrued the taxable assets of a are, become, which or under the internal revenue code will amortization, eligible depreciation, capital for or accelerated recovery purposes excluding cost assets which are defined for federal income tax costs of section 1250 of the internal revenue code, except tangible subject that for which are to a assets lease 168(f)(8) agreement back code, under section of the internal revenue only the deduction shall allowed to the lessee or be 168(f)(8) may agreement. sublessee as the case be under the fraction, multiplied by This deduction shall be the numerator payroll plus of which is the denominator of which is 2. factor factor and the (c) cost, installation, including Deduct the fabrication and (a) excluding paid the cost deducted under subdivision or ac- are, tangible year type crued in the or depreciation, for federal income tax assets of a which taxable eligible will under internal revenue code become amortization, capital recovery or accelerated cost purposes, provided that the assets are 7.558(23). physically Michigan. 208.23; located in MSA [MCL Emphasis added.] Caterpillar Opinion op the Court beginning years apply only sion would to taxable prospec- September granting 30, 1989, after thus only. tive relief

Caterpillar appealed the Court of Claims deci- grant prospective relief and to sever sion the February entirety in its from the sbt. On Appeals 5, 1991, the Court of entered its (1991), App decision, 188 Mich 470 NW2d 80 ruling noting first that on the issue was whether the cad violates the Commerce Clause of regard the United States Constitution.6 In to the issues, other Claims decision to the Court affirmed the Court of

grant prospective only, relief regard specific but modified its decision granted. Appeals relief instead of that The Court of held that

severing entirety, only in its language produces discriminatory effect should be removed from the sbt.7 application ap- filed an for leave to appeal The Court stated that because defendant did not cross ruling regard constitutionality, the Court of Claims that issue was not before the Court. Without the Court of to the cad’s decrying by this decision Appeals, constitutionality we find that the issue of of the justly Although appeal is before us. defendant did not cross the cad finding reveals that argument unconstitutionality, of a review of the record in this case Appeals in the Court of did include the defendant’s brief thus, constitutional; noting that the cad was it is worth positive argue constitutionality in that defendant did make a the Court of within this Court’s effort to however, Appeals. importantly, More we find that it is jurisdiction sponte. to review this issue sua "The time, general may, any at in addition to its Court judgment ought powers any . . . or order that to have been enter entered, grant other and and relief as the and enter further orders 7.316(A)(7). 7.302(F)(4)(a), may require . . .” case . MCR See also MCR appeal which states that an "shall be limited to the issues raised in by application appeal,” unless otherwise ordered the the for leave to analysis by judiciary a of the Court. Review and of a decision level legislative finding an of the branch to be in violation of enactment policy) prescriptions (especially of state tax constitutional the area proper justified remains is in order to ensure that balance government. Careful review of constitu between the two branches of logically legitimately by cannot be or viewed tional issues this Court overreaching. as 7 statutory language emphasized portions of the of the cad See the in n 5. 400 Mich 408 Opinion of the Court Department

peal, application filed an cross-appellant. appeal as for leave to applications granted 4, 1991, both we On October and limited (1) following appeals issues: passage 77,8 whether, 1991 PA before provisions Const, I, 8, 3, § cl if US art violated cad (2) limiting so, erred whether the lower courts beginning rulings years to tax the effect of their (3) September relief, 1989, if 30, what after any, plaintiff-appellant 439 receive. Mich should 860.

II. CAPITAL DEDUCTION ACQUISITION implicated in To understand the issues better case, the cad. next to a discussion of this we move important not an It to note that cad is is part statute, of an overall isolated tax but represents policy adopted by choice scheme the state Legislature. tax scheme is the sbt. This Legislature 1975,9 was The enacted sbt, experimental legislation in this state.” "new and Dep’t Treasury, Dodge, Country Inc Town & (1984).10 226, 234; 362 618 The sbt 420 Mich is a NW2d consumption-type tax. See Mobil value-added Treasury, 473, 496, and n 422 Mich Oil (1985). pure not, however, It 14; 373 NW2d 730 subject to various tax because value-added exemptions, industry-specific exclusions, ad- passage provisions upon of 1991 of the sbt were amended The Caterpillar’s PA 77. claims, however, act was ordered to take immediate effect. years through 1984. There concern case, fore, analysis purposes of this our discussion and for the statutory language limited to the of the effect are supra. through n 5 1984. See January 1976. The sbt became effective enactment, challenges to the Since its there have been several case, grounds. validity and other In each sbt on constitutional the sbt was 640; Dep’t Treasury, App upheld. 75 Mich See Stockler Trinova, (1977); Dodge, supra; Country n 255 718 Town & NW2d Trinova, supra, supra, 2 111 818. 433 Mich n S Ct 2 op Treasury 409 Opinion of the Court step justments.11 Under the the first deter- sbt, mining taxpayer’s liability tax is to determine its This tax is defined as business tax base. base apportionment subject to certain income before adjustments. 7.558(9). 208.9; The tax MCL MSA apportioned Michigan is then between and base taxpayer other states in which the conducts busi- 208.40, 208.41, 208.45; MSA ness activities. MCL 7.558(45). 7.558(40), 7.558(41), using by This is done ap- formula.12 After a three-factor portionment, subject the tax base is several adjustments.13 adjustment additional One such the cad. just suggests. It

The does what its name provides acquisition capital a deduction for the Following general principles assets. sumption-type of con treatment,

value-added tax taxpayer’s allows the tax base to be reduced expended during acquire year amount capital the tax Computation Kasischke,

assets. See of the 11 Trinova, 823-826; Trinova, supra, supra, n 2 n 2 See 111 S Ct 149-153; Kasischke, Computation Michigan single Mich and of the mechanics, (1976), Theory Wayne business tax: further L R 1069 explanation and review of the sbt. taxpayer and without Michi does business both within [I]f gan, portion it must determine the of its total value added Michigan. average portion ... is the attributable That (1) (2) Michigan payroll, Michigan payroll three ratios: to total (3) Michigan property Mich total tax base is attributable to the property, to total sales to total sales. (1979). 208.45, 208.46, 208.49, Comp 208.51 Laws §§ multiplied portion activity of business (under formula), the three-factor result, subject adjustments, taxpay to several further is the 208.31(2).[Trinova, supra, “adjusted er’s n 2 S base.” § Ct 826.] 208.38, 208.23, 208.31(2), 208.31(5), 208.35, example, For MCL 7.558(38), 7.558(31)(2),7.558(31)(5), 7.558(35), 208.39; 7.558(23), MSA 7.558(39). Kasischke, Computation Michigan single of the business See tax, sbt, language supra n 11 at 1082-1094. Under the current 31(5) 31(4).However, to consistent subsection is listed as subsection be Kasischke to this subsection in relation to the with our reference article, time. as it was listed at the relevant we cite subsection Mich 400 410 op Opinion the Court single Theory

Michigan and mechan business tax: (1976). consumption- Wayne ics, 22 L R 1069 This thereby provides type of the cad and sbt element purchaser/user advantage to the cash-flow a capital purchaser/user The cad allows the assets. reducing by its tax liabil

to increase its cash flow ity through policy may a tax the deduction. Such Michigan-related help encourage investments to may provide stimulus to certain an economic and parts due to the increase of the business sector flow.14 cash applied provided by the is not

The deduction until after the tax base has been to the tax base apportioned. 208.23; MCL MSA allocated or 7.558(23). after Since the tax base Michigan activity, only represents only business Michigan capital acquisitions to business related pursuant activity qualify to should for -treatment (subsections 23[c]) 23[a] the cad. The cad designed 23(a) is accomplish this result. Subsections 23(c) apportioning provide methods of taxpayer’s capital acquisitions only so that those acquisitions that relate to business activ- Apportioning ity are included in the cad. cad tangible personal property15 accomplished in for is 23(a). Apportioning the for real subsection 23(c).17 property16 accomplished in subsection 23(a), tangi- the deduction for Under subsection any personal property is available for tax- ble encouragement may depend on such or stimulus occurs Whether A factors that affect business decisions and choices. numerous other description not, however, necessary analysis of such factors are only of the issue us. We mention this to draw for the resolution before analyze behavior in attention to the fact that we can never relation to tax schemes in a theoretical vacuum. business tangible personal property Tangible personal property means as defined the sbt and cad. property as sbt and cad. Real means real defined n 5. See Opinion of the Court payer, company18 whether a multistate or a com- pany activity entirely whose business is allocated Michigan19 company. Furthermore, in-state —an 23(a) tangible subsection does not limit the personal property assets those located Michigan. tangible personal property Because readily transportable, easy it is not that to deter- tangible personal property actually mine where located, or if how or such location should be or is solely proper determinative of its use in the cad. could Legislature recognized The such a determination without some upon sponse ing that it reach

imposing burden- accounting problems upon taxpayers and Michigan taxing system itself. In re- problems, Legislature,

to these follow- taxing policy practice traditional of state legislatures, adopted apportionment an formula to tangible personal property calculate the related to tionment mula. To property, for Michigan appor- business activities. The adopted formula was a two-factor for- figure tangible personal out the tangible personal the total cost property acquired during (regardless year the tax purchased Michigan) of whether it is in multi- plied by average property of the factor and the payroll factor.20 23(a)

The two-factor formula used in subsection 18 7.558(41). 208.41; See MCL MSA 7.558(40). 208.40; See MCL MSA

[2] x = property factor. = taxpayer's Michigan property taxpayer’s total property taxpayer’s Michigan payroll

y = = payroll factor taxpayer’s payroll total = acquisition tangible personal property TPP total during year (x Y) / =CAD TPP X + (an Obviously, person subject only Michigan in for a to tax in-state company), a full deduction will result. Mich Opinion of the Court obviously as the three-factor for- not the same computing taxpayer’s a The tax base mula used attributable to use of the two-factor

Michigan.21 theory behind the formula 23(a) acquisition capi- is that the subsection company’s likely a tal is most property to be located where payroll (employees) located. The are in the three-factor formula sales factor used premise taxpayer’s on the that while a excluded investment assets) productive capacity (capital prop- taxpayer’s existing follows the erty investment necessarily labor, it does not follow the location of its sales.22 23(c) 23(a),

As with subsection under subsection any property the deduction for real taxpayer, is available for company or a com- whether multistate pany activity entirely whose business is allocated company. to apportionment, in-state The method of —an simple. however, is much more property Location of real and does not is obvious accounting problems. Moreover, involve invest- directly property ment in real is considered to be productive capacity. Therefore, related subsec- 23(c) provides percent hundred deduc- tion tion for the cost of real one "provided Michigan.” physically the assets are located symmetry the three-factor The lack of between apportionment calculating formula used for apportionment tax base and the two-factor sbt 23(a) formula used under subsection of the is Caterpillar’s ultimately constitutional basis challenge23of the cad.24_

21 Compare ns 12 and 20. 22 Kasischke, tax, Computation Michigan single See business supra at 1084. 23Ironically, Caterpillar originally challenged also the fairness of 2). (see formula n the three-factor 24 argument regard Caterpillar to its dis- has made some brief 413 Dep’t Caterpillar v Opinion of the Court

III. ANALYSIS challenge considering the constitutional When reviewing presented by deci begin case, in this we our the lower courts sions of analysis by regard recognizing that, to such guided by issues, several well-established arewe inquiry. principles Johnson of law that frame our Harnischfeger Corp, 102, 112; 323 414 Mich (1982). challenged Legislation that is on 912 NW2d presump grounds in a "clothed constitutional is_ Grey constitutionality.” Cruz v Chevrolet tion of Corp, 117, 398 Mich Iron Div of General Motors (1976). presumed 127; A 247 NW2d 764 statute showing to the con constitutional absent a clear trary. Parts, Auto 410 Lehnhausen v Lake Shore (1973). 1001; "[I]t 35 L Ed 2d 351 US 93 S Ct give presumption duty of the Court to constitutionality it as a statute and construe ap contrary clearly constitutional pears.” People unless 511, 536; 392 Mich McQuillan, v (1974). presumption 221 569 The of consti NW2d strong respect tutionality especially with taxing Dep’t Treasury, Ludka v statutes. (1986), citing App 250, 264;

Mich NW2d O’Reilly Wayne App Co, 582, 591; 323 116 Mich (1982). great legislatures have NW2d State formulating discretionary latitude in taxes. Wis Penney Co, 435, 444-445; 61 S consin v J C 23(a) 23(c), clearly emphasized favor of subsection in its but has subsection challenge Similarly, to the in this case. the lower court analysis constitutionality entirely on of the cad’s focuses subsection 23(a). Caterpillar, Treasury, unpublished opinion of the Inc v (Docket 13, Claims, July 84-9664-CM and Court of 87-11109-CM). decided Nos. any the Court of Claims made times that 23(c) judgment judgment explicit of final reference to subsection are its order 11, 1989, August of final and in its clarification entered entered August 1989. 414 Mich 400 Opinion op the Court (1940).25 246; L must legislature

Ct 85 Ed 267 "The questions necessity, determine all of State discre or in tax and in policy ordering apportion tion a (4th ed), it. 1 67. And the ing Cooley, Taxation § no concern judicial tribunals of the State have policy by with the of State taxation determined (4th ed), 1 67.” legislature. Taxation Cooley, § C F Smith Co 659, 670; Fitzgerald, v 270 Mich 259 (cited (1935) Stockler NW 352 support for 640, 644; Dep’t Treasury, App 75 Mich 255 Sheehan, See also Bowerman v 718 [1977]). NW2d (1928). 242 97-98; Mich A taxpayer NW challenging grounds tax on constitutional must strong presumption overcome favor of the formulary. It Constitution is not a does not demand of of of rigid categories precision states strict observance of technical nor phrasing power in their exercise of the most basic government, purposes that of taxation. For constitutional operating challenged decisive issue turns on the incidence of a pursue policies, tax. A state is free to rassed its own fiscal unembar Constitution, by practical operation if of a tax power opportunities the state has exerted its in relation to afforded, given, protection which it has it has which being orderly, benefits which it has conferred the fact of an society. civilized analysis merely ap This a reformulation the classic proach taxing power of this Court to the of the states. Law 276, 280; rence v State Tax Commission US 52 S Ct [286 (1932)].Ambiguous general phrases L Ed 1102 intimations of opinions circumstances, significance torn from the of concrete long years, or even occasional deviations over a course of confusing complexities prob unnatural view the of tax lems, do not alter the nature of the limited function of this best, responsibil Court when state taxes come before it. At ity lenges for courts to the Constitution in a policy-making. devising just productive sources of revenue chal legislators. Nothing helpful the wit of can be less than go beyond extremely limited restrictions that places upon inject the states and to themselves negative merely way processes into the delicate of fiscal guard against imprisoning We must be on taxing power of the states within formulas that are not com pelled by alizations represent judicial gener merely the Constitution but exceeding they the concrete circumstances which profess to summarize. op Treasury Opinion op the Court point specif-

taxing validity and out with statute’s provision icity the constitutional is violated. Licensing Dep’t Mut Life Ins Co of & Penn Regulation, v App 123; 162 Mich 412 NW2d 668 (1987); Metropolitan Auth’y Huron-Clinton v Bd of Supervisors Counties, 1, 12; 1 of Five 300 Mich (1942); Young Arbor, 430 Ann NW2d v 267 Mich (1934). taxing 241, 243; 255 579 A NW statute " 'clearly palpably violate[ ] must and be shown ” the fundamental law’ before it will be declared O’Reilly, supra citing 592, unconstitutional. at Lansing, 566, 576; Thoman v 315 24 Mich NW2d (1946). principles mind, 213 With these essential challenge presented we address the constitutional in this case. cognizant Court, The United States principles equally these essential mindful of responsive dictates, to Commerce Clause has four-pronged established test to determine whether a state tax violates the Commerce Clause. Complete Brady, Transit, 274, Auto Inc v 430 US (1977). 279; 1076; S Ct 51 L Ed 2d 326 A state scrutiny tax will withstand under a Commerce challenge Clause and will be held to be constitu tionally four-pronged valid under the test articu (1) Complete provided lated Auto that the tax: is applied having activity to an nexus substantial (2) (3) taxing apportioned, fairly state, with the against commerce, does not discriminate (4) fairly provided by related the services apply four-pronged the state.26We now this test the cad. 26 Complete decision, Auto four-pronged Since the test has been See, e.g., Trinova, supra, applied 818; (1989); on numerous n 2 111 S Ct occasions. Sweet, Goldberg 582; 252; v 488 US 109 S Ct 102 L Ed 2d 607 Corp Treasury, Jersey Amerada Hess v New of the 490 Trucking 66; 1617; (1989); American US 109 S Ct 104 L Ed 2d 58

Ass’ns, Scheiner, Louisiana, supra; Maryland 725; Inc v 451 US 101 (1981). 2114; L S Ct 68 Ed 2d 576 Mich op Opinion the Court

A. SUBSTANTIAL NEXUS prong Complete The first Auto test re- quires through tous determine whether the sbt provisions applied having activity to an Michigan. requisite a substantial nexus with "The supplied [Caterpillar] 'nexus’ is if avails itself of privilege carrying the 'substantial on business’ Corp within the State . . . .” Mobil Oil v Comm’r Vermont, 425, 437; Taxes 445 US 100 S Ct (1980). Corp 1223; 63 L Ed 2d See also Exxon Dep’t Revenue, Wisconsin 220; (1980). Furthermore, S Ct 65 L Ed 2d 66 contingent upon "[t]he fact that a tax is events brought pass destroy without a state does not the nexus between such a tax” and business activi- supra Penney, ties with the state. J C 445. at always "[Visible territorial boundaries do not es- taxing power tablish the limits of a state’s or jurisdiction. jurisdictional ... If there is some conductor, fact or event to serve as a the state’s the reach of taxing power may objects be carried to beyond of taxation its borders.” Miller Bros Co v Maryland, 340, 347 342-343; 535; US 74 S L Ct 98 (1954). impose Thus, 744 Ed to allow a state to activities, tax on interstate there must be some minimal connection between those activities and taxing Mfg Bair, state. See Moorman Co v 437 (1978); 267, 273; US Container 98 2340; S Ct 57 L Ed 2d 197 Corp Bd, 159, v Franchise Tax US (1983); 165-166; 2933; 103 S Ct L77 Ed 2d 545 supra, Oil, Mobil 445 US 436-437. To establish the requisite constitution, nexus under it must simply be determined whether there exists "some link, definite connection, some minimum between [the state and activities] the business it seeks to supra Bros, tax.” Miller at 344-345. See also Nat’l Dep’t Hess, Bellas Revenue, Inc v Illinois 386 Dep’t Caterpillar Opinion op the Court (1967); 753, 1389; 18 L Ed 2d 756; 87 S Ct US Equali Geographic Society v California Bd Nat’l zation, 1386; 51 L Ed 2d 561; 97 S Ct 430 US (1977). as set forth It clear from the facts portion of its that conducts this case persuaded Michigan.27 Thus, we are business link, mini some some definite there exists Caterpil Michigan connection, between mum There to tax. seeks business activities lar’s fore, provi through find that the sbt we having activity applied a substantial an sions nexus with Michigan. Having that a concluded exists, the first connection sufficient plainly Complete prong satis Auto test is of the fied.

B. APPORTIONMENT FAIR prong Com- turn next to the second We plete whether Auto test to determine apportioned. fairly provisions Fair only are of the sbt requires that each state- activity. Gold- of interstate business its fair share berg Sweet, 252, 260-261; 109 S Ct (1989). apportion- L Ed 2d 607 The function portion of a multistate determine what ment company’s fairly activity attrib- can be business taxing of Trea- Trinova v uted to the state. (1989). sury, 141, 157; 445 See 433 Mich NW2d Dep’t Revenue, 488 US also Shell Oil Co Iowa (1988). This 278; L Ed 2d 186 19; 109 S Ct 102 goal, in both "is often an elusive determination theory Corp, supra practice.” at Container 27 during years Caterpillar’s activities business following: employment through of from 1984 consisted of the Michigan, representatives were residents of two to five sales who tooling ownership patterns unrelated third- iised interest production parts party Michigan suppliers in the manufacture truck, leasing Caterpillar, and the sales purchased by of a forklift shipped Michigan. products into Mich Opinion op the Court apportionment However, 164. while formula can- guarantee perfect result, "the constitution requires perfect perfect neither a formula nor a apportionment.” supra, Trinova, 433 Mich 162. separate geographical accounting Moreover, has computa- been held to offer no better solution to activity. tion of taxation of interstate See Con- Corp, supra legisla- Therefore, tainer at 181. state tures have been allowed wide latitude determin- ing apportionment provides whether formula respective best method available to their states in deciding to tax how the state’s fair share of inter- activity. supra Moorman, state business at 272-273. Supreme long up- The United States Court has constitutionality apportion- held the of formula e.g., supra; See, Moorman, ment. Butler Bros v McColgan, 501; 701; US 62 S Ct 86 L Ed 991 (1942); Sons, Hans Carolina, Rees’ Inc v North (1931); 123; 385; US 51 S Ct Bass, 78 L Ed 879 Gretton, Ratcliff & Comm, Ltd v State Tax 266 US (1924); 271; 45 82; S Ct 69 L Ed 282 Underwood Typewriter Chamberlain, Co v 113; 254 US 41 S Ct (1920). upholding 45; 65 L Ed 165 In the constitu- tionality apportionment, formulary "the United require States Court has refused use of one formula to the exclusion of all others.” supra, Trinova, Furthermore, 433 Mich 157. essentially

Court has "declined to undertake legislative tionally establishing 'single task of constitu- ” Goldberg, mandated method of taxation.’ supra Michigan Dep’t at 261. See also Trinova Treasury, 358, —; 111 S Ct 112 L (1991). require- Ed 2d 884 constitutional apportionment ment for is that it be fair. Con- Corp, supra. tainer

A determination whether is fair given required recently analyz- in a ing case has most components compo-

two of fairness. The first Caterpillar Opinion of the Court tax. of the the structure focuses on of fairness nent component be This the tax structure requires that internally consistent, internally "To be consistent. every if State so that structured tax must be multiple impose taxa- tax, no an identical were Goldberg, supra 261, or, in at result,” tion would percent of one hundred words, more than no other activity taxpayer’s taxed. would be business the 23(a) Caterpillar of the Under subsection cad, percent of its hundred for one receive a cad would property, personal tangible acquired among divided property in which has the states 23(c) Similarly, payroll.28 under subsection hun- for one a would receive cad, property. acquired percent Under real of its dred subsection

23(c), Caterpillar a would receive acquired property it all of the real state for each in that state.29 therefore, conclude, that We component consistency is satis- of fairness internal fied. apportion- component fairness for

The second relationship the fac- between ment focuses on apportionment and the determine tors used to component being apportioned. activity requires This that is externally apportionment con- be that the requires consistency External sistent. "reason- of factors used

choice activity component ably reflects the in-state Goldberg, supra being [apportioned].” 262. Sub- at 23(a) appor- a two-factored uses section are factors used formula. The two tionment theory payroll factor. The factor and specific factors, as to use these the decision behind acquisition opposed factors, is that to other likely capital where a located to be is most (employees) payroll company’s property are 23(a), ante, pp 410-412. of subsection See discussion 23(c), ante, p 412. discussion of subsection See Mich Opinion op the Court located. The sales factor used in the three-factor premise formula is excluded on the while taxpayer’s productive (capi- capacity investment assets) taxpayer’s existing tal ment in follows the invest-

property necessarily labor, it does not pp ante, follow the location of its sales. See 411- persuaded reasoning provided 412. We are that the theory this makes it clear that the choice of 23(a) factors used in subsection of the cad reason- ably capital acquisitions reflects related to Michi- gan activity. business concluding, deciding

In so arewe apportionment two-factor formula best reflects the component capital acquisitions tangi- in-state of of personal property, obliged ble nor are we to make supra, Trinova, such a determination. See 111 S Ct appor- 834. We need find that the two-factor reasonably tionment component formula reflects the in-state capital acquisitions tangible per- of of property. sonal To make this determination we are required not precise to find that the formula results component capital

or actual in-state of acquisitions tangible personal property. of Formu- provide only rough las that have been found to approximation upheld. supra Moorman, have been supra, at 272. Trinova, See also 833; S Ct Corp Jersey Dep’t Amerada Hess v New of Trea- sury, 66, 75; 1617; US 109 S Ct 104 L Ed 2d 58 (1989). apportionment inherently Indeed, formulas component overreflect or underreflect the in-state activity being of the interstate business taxed.

Despite imprecision, this the United States Su- preme consistently Court has held that such for- reasonably component mulas reflect the in-state activity being the interstate business taxed. See supra Moorman, at 272-273.

Therefore, because we have found that the two- apportionment reasonably factor formula reflects Opinion of the Court acquisitions Michigan component capital Caterpillar, property tangible personal made of a the use three- not determine whether we need produce formula would factor precise a determination fair or result. Such more appropriately to the Michi- left and more is better supra, Legislature.30 gan Trinova, Ct 111 S See supra. Moorman, 23(c), the sole factor consid- subsection

Under physical apportioning loca- is the ered previ- acquired. property As stated of the real tion ously p opinion, ante, was in this this done property obvious, of real because location directly in real because investment productive capacity. find, on the We related reasoning, this the choice factors basis 23(c) reasonably in subsection used capital acquisitions to related reflects consistency activity. Thus, the external business component of is satisfied. fairness supra, Trinova, 160, this Court

In Mich stated: apportionment test for fair is not whether [T]he inadequate

a formula results or even inaccurate apportionment. The test the use whether particular method of results being attributed to this state activity business appropriate proportions” is "out which of all has taxpayer’s activity, business or "led intrastate grossly result.” distorted showing fairly that a tax is The burden taxpayer. apportioned Trinova, is on the See su pra, Trinova, 832, 111 S Ct 433 Mich 158. See also Corp, supra. Moorman, No facts Container any presented in substantial this case evidence n 25. See Mich Opinion op the Court misappropriation any or such distorted result. apportion- Therefore, we find that methods requirements satisfying ment under the cad, consistency of both internal and external consis- tency, apportionment. meet Thus, the test for fair prong Complete we conclude that the second of the Auto is satisfied. test

C. DISCRIMINATION prong Complete turnWe next to the third provisions Auto test to determine whether the against of the sbt discriminate interstate com- merce. Interstate commerce is not immune from may constitutionally state taxation and be made to pay way. Complete supra. Auto, its However, See prohibits protec- "the Commerce Clause economic regulatory designed is, tionism —that measures by [unduly] benefit in-state economic interests bur- dening competitors.” Energy out-of-state New Co Limbach, of Indiana Ct 269, 273-274; US 108 S (1988). 1803; 100 L Ed 2d 302 See also Boston Exchange Stock Comm, v State Tax (1977). 329; 97 S Ct 50 L Ed 2d 514 A tax prong Complete violates the third of Auto test facially discriminatory, discriminatory if it is has a purpose, unduly burdening or has the effect of supra Hess, commerce. See Amerada at 75.

1. FACIAL DISCRIMINATION any taxpayer, The cad is available for whether a company company multistate activity or a whose business entirely Michigan is allocated to in-—an company. state 23(a) This is true under both subsections 23(c). Caterpillar point Therefore, cannot any treatment of in-state and out-of-state com- Caterpillar of Opinion the Court of discriminatory panies Tri- on its See face. that supra, nova, 111 S Ct 835.31 PURPOSE

2. DISCRIMINATORY provided in sub- that the claims cad 23(a) discriminatory the two- because section apportionment considera- formula excludes factor tion of the sales in the three-factor

factor used tax- to calculate the formula used payer’s apportioned sbt. When under the base using formula for the two-factor the reasons parts of the in the various formula the three-factor finding of a reviewed, it is that a clear sbt are enacting purpose discriminatory 23(a) for subsection required. three used factors payroll apportioning the tax base under sbt— 'appear property factor, factor, factor —" and sales large very reflect share in combination to a ” generated.’ Trinova, value is activities which original). supra, (emphasis in Like- 111 S Ct apportioning wise, the factors two used tangible personal property capital acquisitions 23(a) payroll factor, under subsection — appear reasonably in-state reflect factor — tangible per- component capital acquisitions part opinion, property. ante, of our sonal See iii(b) apportioning pp 417-422. Formulas used provided and a deduction value-added tax base capital constitutionally acquisitions re- are not quired no identical. There is constitutional be taxing provisions requirement of a that different way any symmetrical. Therefore, we be in statute different the use two cannot conclude 31Although analysis was on review of in Trinova based the Court’s provisions specifically, the as and not on the sbt whole provisions expressly were relevant stated Court Court’s Trinova, constitutionality. analysis See review of the sbt’s supra, 835-836. 111 S 826 and Ct Mich Opinion op the Court apportionment formulas in the sbt evidences any purpose. discriminatory 23(c) Caterpillar urges also that subsection discriminatory promote because it was enacted to Michigan. supra, Trinova, investment In 111 S Ct the United States Court held promotion development and investment of business in does not violate the Com- merce Clause. goal It laudatory design in the of a tax promote system provide investment that will

jobs and prosperity taxing to the citizens of the state.- States are free to their "structure] systems encourage growth development of intrastate commerce and industry.” Boston Exchange, supra, Stock 429 US 336-337. discriminatory purpose

Therefore, we do not find 23(c). in the enactment of subsection conclude, We Court, as did the Trinova that "all contemporaneous concerning passage evidence suggests benign motivation, the sbt combined practical with a need to increase revenues.” Tri supra, nova, Furthermore, S Ct 835. we do not "any inspired find evidence that sbt was as a way export import tax burdens or tax reve Id., nues.” Thus, S Ct 836. we conclude and specifically discriminatory purpose more find no the enactment of the cad.

3. DISCRIMINATORY EFFECT discriminatory Even if a tax statute is not on its face and was not enacted with the intent to dis- against commerce, criminate it can still be held to violate the Commerce Clause if it is discriminatory found to have a effect on interstate 23(a) Caterpillar commerce. claims that subsection Caterpillar op Opinion Court Michigan- favoring discriminatory effect of has the non-Michigan- expense companies at the based companies. Caterpillar this claims discrimi- based design directly to the unfair related nation is support In formula. the two-factor argues claim, the two-factor that of its against cer- discriminates formula companies who do not like itself tain multistate part predominant of their facilities have a comparison employees their receive a smaller sales, who therefore appor- in the if the factor was included than sales formula. tionment Supreme that Court has held

The United States provision on of a tax the different effects when solely companies from the differ- different result companies’ the nature these ences between from of their activ- and not the location businesses (i.e., state), no there exists or out of ities state discriminatory See on interstate commerce. effect supra Hess, at 78. See also White Amerada Reynolds (Ala, Co, 373, 558 So 2d 389-390 Metals 1989). Similarly, discriminatory effect does encouragement from of in-state business result like fair 23(c). provided by Armco, See subsection Hardesty, 638, 645-646; 467 104 S Ct Inc v US (1984), L Boston 2620; 81 Ed 2d 540 Stock Exchange, supra 336-337. at provisions at does not contain aimed [sbt] consequences upon

imposing tax multi- adverse speaking, taxpayers Generally as a state class. consequences taxpayer to a multistate overall dependent upon the nature of its business will be eligible whether it is elects activities and and. itself the tax reduction incentives afforded avail taxpayers under [Pollock, Multistate [sbt], Act, L R Single Wayne Tax Business (1976).] Mich Opinion of the Court agree analysis. per- Thus, We with this we are discriminatory suaded commerce was no on effect imposed Caterpillar by on virtue of the cad.

The Court of Claims ruled that the cad has a discriminatory effect on interstate commerce. The discriminatory court stated that effect of the consistently cad has been held to be unconstitu- Supreme tional the United States Court as violative observe, of the Commerce Clause. We however, that the Court of Claims arrived at its thorough analysis decision without a full and of all prongs Complete four court, Auto test. The any therefore, rendered its decision without refer- apportioned. fairly ence to whether was Furthermore, we observe that the decision of the Court of Claims was announced before the decision of the United States Court in Trinova and therefore did not have the benefit of the analysis. Trinova

The Trinova Court fouñd that the sbt32 did not against discriminate interstate commerce in viola- distinguishing Clause, tion of the Commerce sbt from other taxing statutes it that has held to be unconstitutional. The Court stated that under Michigan tax, there is no treatment of in-state companies discriminatory and out-of-state on its that noting face, that such facial discrimination Westinghouse found, however, was in Electric Corp Tully, Exchange, v Boston Stock and Halli- Cementing supra. Reily, burton Oil Well Co v supra, Trinova, 111 S Moreover, Ct 835. the Court recognizes in Trinova stated that while that the requires "Commerce Clause more than mere facial " neutrality,” id., and that 'the Commerce Clause deeper meaning may implicated has a be even though provisions state ... do not allocate tax 32See n 31. Opinion op the Court in a man and outsiders insiders

burdens between ” citing discriminatory,’ id., facially ner that supra Trucking Scheiner, at Ass’ns American requirement is fair 281, apportionment” of that "[t]he content meaning’ 'deeper "[t]he Trucking is embodied refers American which apportionment, requirement ex as of fair the pressed consistency.” external of internal and tests Corp, 835. See also Container S Ct 11 ("in supra commerce at 171 principle has . . . the antidiscrimination context practice required much in addition not in apportionment”). requirement of fair fairly appor- Having cad was found that reviewed, having States the United tioned Supreme interpretation prior of its Court’s own Exchange, Westinghouse, Boston Stock decisions Trucking, Halliburton, we find our American discriminatory holding decision, is no there Caterpil- imposed on effect on interstate commerce prior to be consistent with lar virtue of the cad, case. case law on issue and warranted this this discriminatory, facially sum, In is not purpose discriminatory or have nor does the Complete prong Therefore, effect. third test is Auto satisfied.

D. FAIR TO SERVICES PROVIDED RELATION prong Complete Auto test The fourth through sbt the the issue whether raises provisions provided fairly to the services related Goldberg, supra by Michigan. 266-267, the In at provided explana- an Court United States tion of what the fourth requires. prong The Court stated: that a purpose of test is to ensure

The this 400 Mich Opinion of the Court placed State’s upon [companies] tax burden not who do not from provided by benefit services the Montana, State. Commonwealth Edison [Co 609, 627; 2946; (1981)]. US 101 S Ct 69 L Ed 2d . . . may partic- imposed tax which be on a ular interstate transaction need be limited not by the cost of the services incurred the on State 627, account particular of that Id. at n 16. activity.

On the contrary, may "interstate commerce be required providing to contribute to the cost of all governmental services, including those services from arguably which it- receives no direct ” Ibid, (emphasis 'benefit.’ in original). The fourth prong Complete Auto test thus focuses on range the wide of provided benefits to the tax- payer, just precise activity the connected to Indeed, the activity Term, at issue. last McNamara, in DH 32; [Co, Holmes Ltd v (1988)], 108 S Ct 100 L Ed 2d 21 we noted receipt that a taxpayer’s police protec- of and fire tion, transit, public the use of roads and mass advantages the other society civilized satisfied requirement fairly that the tax be related to provided by benefits taxpayer. State to the Caterpillar’s Michigan business activities dur- ing years through 1984 consisted of the following: employment of from two to five sales representatives Michigan, who were residents ownership patterns tooling interest third-party suppliers used unrelated production parts pur- in the manufacture and by Caterpillar, leasing chased of a forklift products shipped truck, and the sales into Mich- igan. light Caterpillar’s activity In business Michigan, we find has received the society” Michigan pro- benefits of a "civilized Goldberg, vides, as characterized Court supra. through Therefore, we find that the sbt Dep’t 429 J. C. by Dissenting Opinion Cavanagh, to the services related fairly provisions Thus, prong of the fourth Michigan.

provided Complete Auto test is satisfied. the

IV. CONCLUSION acquisition capital find that the summary, In we (c) 7.558(23)(a), deduction, 208.23(a), (c); MSA MCL Act, it in effect as was Business Tax Single of the all us,33satisfies challenge the before relation Complete Auto test. Therefore, of the prongs four Com- not violate the the cad does we hold Thus, I, 8, we Clause, Const, cl 3.34 US art merce § of Claims and decisions of the Court the reverse not address the need Appeals. the Court of We on the Com- our decision remaining issues because is dispositive. Clause issue merce JJ., concurred Mallett, Boyle, Griffin, Riley, J. with Corp In Trinova (dissenting). C.J.

Cavanagh, Treasury, 141; 433 445 NW2d 428 Mich 112 L (1989), 818; 111 S Ct Ed 2d aff’d States Su- (1991), this the United 884 Court and upheld apportion- Court the three-factor preme Tax Single Business Michigan’s ment formula n 8. See 34Furthermore, cad does not violate it can be concluded that a State the Amendment. "For the Due Process Clause of Fourteenth commerce, Four Due . . . Process Clause to tax teenth Amendment imposes requirements: a 'minimal connection’ two State, taxing and a rational the interstate activities and between relationship to the State and the income attributed between the Oil, supra, enterprise.” 436-437. Mobil US values of intrastate The first and second encompass Complete prongs Auto test of the Therefore, requirements because of the Due Process Clause. these test, necessarily Complete prongs Auto four satisfies all satisfies the Hess, supra. process. requirements of due See Amerada Mich Cavanagh, C. J. Dissenting Opinion presents question Act (sbt).1 This case the distinct light apportion- underlying whether, sbt ment, merly (cad) provision the different for- formulas applied capital acquisition deduction against

of the sbt2 discriminate interstate commerce in Clause, violation of Commerce Const, I, §

US art cl 3.3 majority apportion- concludes against ment does not discriminate interstate com- My Brickley merce. apportionment Brother concludes that the personal property component

of the appor- discriminate, of the does but that cad property component of tionment the real not. does agree regard Brickley’s with Justice with result I apportionment personal property cad, to the although analysis. significantly

on the basis of different contrary I believe, also to the results majority, Brickley both Justice and the the the that proper requires analysis the conclusion property apportionment equally real uncon- cad stitutional. my apportionment applied view,

In formulas personal property both to the real ture in interstate clearly the it majority in Trinova. See Commerce Clause true that the three-factor is thus Court Legislature would not 77. For the has now been The MCL MCL 1991 PA cad, however, challenged may plainly inapposite. was not response majority appears 208.23(a), intends 208.45; the Court in Trinova addressed and appear commerce. See amended the three-factor sake of 128; have cad presented ante, apportionment to the lower court decisions in this case. MSA see superseded by to be relevant and the challenge, (c); already upheld convenience, apportionment suggest, also pp MSA 7.558(45), 423, n 10. with majority’s Trinova, 7.558(23)(a), suggest as n any challenge sbt itself discriminated of the part amendments to the issue in this case. suggestion I henceforth as enacted before 1991 PA L112 citation of Trinova in this of the overall scheme of the formula in 1991 PA (c), 426, the United States present Ed 2d 911-912. as enacted before n to the adopted by apportionment refer plainly 32. rejected tense, If this apportionment erroneous. this a claim that See 1991 even is what the 77, The opinion Supreme but Legisla- 77. against against though regard Court It is The this sbt, PA PA to Dissenting Opinion Cavanagh, C.J. against components inter- of the discriminate inevita- their face and their on commerce state apportionment scheme, Indeed, the effect. ble light underlying carefully analyzed when applied itself, formula sbt example of subtle but classic to be a revealed protectionism forbidden economic respectfully dissent. I therefore Clause. Commerce ANALYSIS I. COMMERCE CLAUSE A. GENERAL PRINCIPLES recently sum- Court The United States jurisprudence as Commerce Clause its marized follows: Con- of the United States Clause Commerce Congress have provides that shall

stitution Power . "[t]he . among . . regulate . . Commerce [t]o I, 8, long- 3. . . Art cl It is . .” the several States § that, reading literal evinces a while a established Congress, Clause power the Commerce grant of power the States to directly limits the also commerce. "This against interstate discriminate prohibits aspect Clause 'negative’ of Commerce is, regulatory mea- protectionism economic —that inter- designed in-state economic to benefit sures competitors.” When burdening out-of-state ests against inter- clearly discriminates a state statute down, commerce, unless the it will struck state discrimination is be demonstrably justified by a valid In- protectionism. unrelated to economic factor simple deed, amounts the state statute when per rule "virtually se protectionism, a economic Oklahoma, v applied. [Wyoming invalidity” has (1992). L 22 —; 789; 112 117 Ed 2d 502 S Ct US Citations omitted.] prohibi- established, course, that

It is well against commerce of discrimination tion 432 440 Mich Dissenting Opinion Cavanagh, C.J.

applies regulatory legislation. to tax well as as leading One of the earliest Commerce Clause cases discriminatory imposed involved a license on goods vendors made out of state. The United tax, States ing struck Court down the hold- designed Commerce Clause was guard against discriminating "all the evils of State legislation, favorable the interests of one State injurious to the interests of other states and previous adoption countries, which existed . . . Missouri, the Constitution .” Welton v Wall) (23 (1876). 275, 281; US 23 L Ed 347 It is also well established that the Commerce generally operates Clause to forbid distinct two types may of discrimination. States not discrimi nate between economic entities on the of in basis e.g., status, see, state or out-of-state Milk Dean Co Madison, 349; v 295; US 71 S 95 L Ed Ct (1951) (discrimination against pro out-of-state milk ducers); Nippert Richmond, v 416; 327 US 66 S Ct (1946) (license 586; L90 Ed 760 tax on sales effectively discriminating against solicitation out- distributors), may they of-state nor discriminate goods, services, between economic the basis of or activities on origin or in-state out-of-state or loca e.g., (dis Wyoming supra tion, see, Oklahoma, against state); crimination coal mined out of New Energy Limbach, Co of 269; Indiana 486 US (1988) (discrimination 1803; S Ct 100 L Ed 2d 302 against produced state); ethanol out Boston Exchange Comm, Stock v State Tax 318; (1977) (discriminatory S Ct 50 L Ed 2d 514 resulting tax on securities transfers from out-of- sales). state type Either of discrimination will run afoul of Nippert, the Commerce In Clause.4 the Court in- suggest any bright-line 4 I do not there is division between by Opinion Dissenting Cavanagh, C.J. tax on door-to-door municipal license validated the effect discrimina- because had salespeople as com- out-of-state distributors torily burdening in engaged local businesses to established pared 429-432, solicitation, even see US similar hinged in no on whether though way the tax or sold were of in-state out-of-state goods being Exchange, Boston Stock origin. Conversely, state tax on discriminatory down Court struck resulting from out-of-state securities transfers it did not though, respects, certain sales even and out-of-state resi- between in-state discriminate argument rejected The Court specifically dents. it merely valid to the extent that the tax was over out-of- favored in-state sales nonresidents nonresidents. sales those same state this favor The fact that discrimination nonresident, con- may which also be in-state sales commerce, does save sidered as interstate [it] A from State assure restrictions of the Commerce Clause. discriminatory taxes no more use may commerce that nonresidents direct their than to assure businesses within State only in intrastate commerce. residents trade [429 omitted; emphasis US 334-335. Citation added.] THE STATE IN B. PURPORTED INTEREST DOMESTIC PROMOTING DEVELOPMENT Brickley rely very The and Justice majority of the opinions heavily language on some they contrary, types ulti- discrimination. On the these two broad thing. mately ultimate the same concern amount much against interstate commerce Clause is with discrimination Commerce is, protectionism. Interstate interstate economic as such—that commerce cannot ties, with commercial enti- be carried out without interstate inevitably be "out-of-state” entities from however—which will discriminatory on viewpoint burdens the latter of some state —and inevitably burden the former. Mich Dissenting Opinion by Cavanagh, C.J. Supreme United States Court to the effect that the promotion of in-state investment and economic development generally speaking, imper- not, an goal. pp missible Riley, J., state ante, See 425- post, pp My colleagues 426; Brickley, J., 480-481.

rely principally passages on in three United States Supreme opinions: Exchange, Court Boston Stock Hardesty, 336-337, Armco, 429 US Inc v 467 US (1984), 638, 645-646; 104 S Ct 81 L Ed 2d 540 Trinova, and appears 112 L Ed 2d 912. Because this issue my colleagues’ analysis

to dominate and my colleagues conclusions, and because I believe have misconstrued the United States regard, Court’s case law in this I discuss this issue in some detail. seem, Trinova value, would at face to afford the

greatest support my colleagues’ position. to Court there stated: It is a laudatory goal design in the of a tax system promote provide investment that will

jobs and prosperity to the citizens taxing state. States are free to their "structure] systems encourage growth development and of intrastate commerce and industry.” L Ed [112 912, quoting 2d Boston Exchange, Stock 336.] sweeping language, Such if taken out of context green light isolation, would seem to flash a protectionism. language to economic But this can only properly be understood in context. In the first place, passage Trinova, Court in in the con- taining quoted language, simply disposing was apportionment, of a claim that the three-factor sbt although nondiscriminatory otherwise on its face effect, its had an unconstitutional discrimi- natory purpose speech by as revealed in a former Blanchard, Governor who stated "that the sbt was Dissenting Opinion Cavanagh, C.J. ' development promote the and invest- "to enacted ’ ” Michigan.” Trinova, ment of business within simply holding 912. 112 L 2d The Court was Ed purpose, broadly with- stated beneficial such dis- more, unconstitutional out did not establish crimination. generalized inappropriate

It is to read lan- such right promote guage endorsing a in-state state’s development to discriminate as a license economic against commerce, the Court has when emphatically uniformly condemned otherwise such many ways in There are discrimination. develop- promote might domestic which a state discriminating way against any in ment without example take easiest commerce. To the interstate simply area, reduce its in the a state could tax activity on uniform rate of taxation all business apportioned fairly to, state, in, or conducted regard entities, in state to all both with economic emphatic long line Given and and out of state. con- Court case law of United States demning against in- that discriminate state taxes only commerce, think fair conclusion I terstate legitimate that, drawn is however that can be promote general may it be a state terms pursue goal development, may not that domestic by against discriminate out-of- of taxes that means economic ac- entities or interstate state economic Exchange, on which Boston Stock tivities. passage

above-quoted relied, stated: Trinova prevent States today does not Our decision encourage structuring systems tax from their development growth of intrastate com- that do hold a State industry. Nor we merce for a share of may compete other States with commerce; competition lies at the such policy. hold that heart of a free trade We may competition no State discrimi- process 440 Mich 400 Dissenting Opinion Cavanagh, C.J. natorily products tax the manufactured or the operations performed business in any other State. Emphasis US 336-337.

[429 added.] Armco, In the Court addressed a Virginia West gross receipts sales tax that exempted companies engaged in manufacturing in West Virginia, thereby disfavoring manufacturers based out of state that wished to sell products their in West Virginia. The justification asserted for the exemp- tion was that West Virginia imposed separate higher tax on manufacturing conducted Virginia. West Virginia that, West argued unless an out-of-state company subject gross re- ceipts tax could demonstrate it was also sub- ject to a manufacturing tax in the state or states where it manufactured goods, its to the extent the overall tax burden on the out-of-state company exceeded the overall burden on in- state company, no improper discrimination would be established. See 467 US 639-644. The Court rejected argument this and struck down the tax as face, discriminatory on its stating: Any other rule would mean that the constitu-

tionality on the other Virginia’s of West depend laws would shifting complexities of the tax codes of 49 States, and that the validity of the taxes imposed on each taxpayer depend would on the particular other States in it operated. which at [Id. 644-645.] Most relevant to present purposes, the Court continued: true,

It is out, as the . . . points amicus curiae that Armco would be faced with the same situa- (or tion complains of here if Ohio some State) imposed other a only upon tax manufactur- by Dissenting Opinion Cavanagh, C.J. ing, Virginia imposed while only upon West a tax situation, wholesaling. In that Armco would bear taxes, Virginia two while West sellers would bear only one. But such a result would not arise from impermissible against discrimination interstate encouragement commerce from but fair of in-state business. US [467 645.][5]

Thus, the Court indicated that a state may indeed fashion its tax promote laws to its domestic econ- "compete omy with other States for a share of commerce,” Boston Stock Exchange, but 336-337, only ways a US uniformly affecting given type of economic activity, without dis- any treatment criminatory out-of-state entities or activities. words, In Armco, other according Virginia West could repeal its manufacturing altogether in order compete, but it could not grant domestic manufacturers a discriminatory exemption gross from its tax.6 receipts

This conclusion has been repeatedly emphasized verbatim, quote, passage The Court then went on to from Exchange quoted Boston Stock that I have above. Id. at 645-646. 6Metropolitan Ward, 869; Life Ins Co v 105 S Ct 84 L Brickley (1985),although Ed 2d 751 regard, cited Justice in this see post, 480-481, pp clearly supports my argument and conclusion. While Equal Ward involved Protection Clause rather than Commerce Clause analysis, analyses the Court noted that both involve a consideration legitimacy of the state’s asserted interest. The difference is Equal analysis demanding that state Protection Clause is less in that the law, supported interest, legitimate upheld if if the law any interest, relationship bears rational to that whereas under Com interest, analysis legitimate, weighed merce Clause the state if against imposed Ward, the burden on interstate commerce. See Ward, US 881. In discriminating the Court struck down a state tax against companies rejected out-of-state insurance the state’s business, promoting reliance on its asserted interest holding: domestic promotion State, by of domestic business within [The]

discriminating against foreign corporations that wish com- pete there, by doing legitimate purpose. business is not a state at [Id. 880.] 440 Mich 400 438 Dissenting Opinion by Cavanagh, C.J. opinions. other United States Court

Quotations from two cases decided in the Court’s most recent term should suffice to underscore my In point. Management, Chemical Waste Inc v Hunt, —; 2009; 504 112 L US S Ct Ed 2d 121 (1992), Court, after reciting a number of its earlier decisions condemning discrimination under Clause, the Commerce stated: may striking To this list be added cases down a discriminating commerce, against

tax even the use of exhaust interstate designed encourage where such tax was thereby ethanol and reduce harmful emissions, Energy New Co of [Indiana Limbach, supra], support inspection or to of for- For in eign cement to ensure integrity. structural cases, legitimate all of these presumably goal "a sought illegitimate was to be achieved isolating means of the State from the national economy.” L Ed 2d 131-132. Some citations [119 omitted; emphasis added.] Foods, And in Kraft General Inc v Dep’t Iowa Finance, —; Revenue & 112 S Ct (1992), Court, L Ed 2d in striking down yet tax, another discriminatory state declared: compelling justification, Absent a ... a State may legitimate goals not advance its by means facially against foreign discriminate com- merce. L Ed 69. Emphasis 2d [120 added.][7]

C. DIRECTLY APPLICABLE CASE LAW The principle that a state may impose a tax against discriminates commerce against While Kraft involved a state tax found to discriminate foreign commerce, commerce rather than interstate the relevant present analysis, purposes, is identical. Dissenting Opinion, Cavanagh, C.J. long repeatedly by a line of

has reaffirmed been e.g., See, States Court decisions. United Dep’t Corp Jersey of the v New Amerada Hess Treasury, 1617; 104 L Ed 66; 490 109 S Ct 2d US (1989); Energy Limbach, v 58 New Co of Indiana Trucking supra; Scheiner, Ass’ns, Inc v American (1987); 266; 2829; 97 L Ed 2d 226 483 US 107 S Ct Imports, Dias, 263; 104 S Ct Ltd v 468 US Bacchus (1984); Armco, 3049; 82 L 200 Inc v Har Ed 2d Corp supra; Westinghouse Tully, desty, Electric v (1984); 388; 1856; 80 L 388 466 US 104 S Ct Ed 2d Maryland Louisiana, 725; 2114; 101 Ct v S (1981); Exchange v 68 L Ed 2d 576 Boston Stock supra; Comm, State Tax Halliburton Oil Well Cementing Reily, 1201; 83 Ct 10 Co v US S (1963); Nippert Richmond; v L Ed 2d 202 Welton supra. Missouri, case, course,

The instant like all the cases presents above, cited this familiar issue within its unique own closely factual context. The two cases most Westinghouse point appear

on would to be Corp supra, very Tully, Electric and the recent Foods, decision Kraft General Inc v Iowa supra. Finance, cases, of Revenue & Each of those case, like the instant involved a state tax that through operation discriminated of certain tax credits or deductions.

Westinghouse challenge to a involved a New export imposed York franchise income tax on companies.8 company’s A New York tax base is 8Specifically, imposed corporate the tax was on entities defined Corpora tax International Sales under federal code as "Domestic corporation qualifies substantially all tions” or "discs.” "A as a disc if gross receipts export-related.” its assets and are 466 US 390-391. As tax; subject explained, a to federal income the Court rather, disc is not portion of the disc’s income is attributed to the disc’s purposes. struc shareholders for federal tax Because of the different laws, however, ture of New York’s tax New York either had tax, subject franchise or else not tax discs at all. See discs to its state time, At York was concerned "that state id. at 391-392. the same New Mich Dissenting Opinion by Cavanagh, C.J. generally apportioned according ato three-factor a.9 analogous upheld formula to that in Trinov The Westinghouse Court noted that New York’s (its formula "business allocation percentage”) Westinghouse, was not at issue in previously upheld. and, indeed, had been See Westinghouse US 398-399. At issue was an providing amendment York New law for a gross receipts export tax credit "limited to from products 'shipped regular place from a of business ” taxpayer of the [New York].’ within Id. at 393. explained, "[t]he As the Court result credit is to lower effective tax rate on the accumu lated . . . applicable ... income of the otherwise 30%

franchise rate.” Id. Because the benefits of the tax credit increased or decreased in proportion percentage company’s to the of the gross receipts exporting goods derived from from compared company’s York, New as to the total gross receipts exporting goods, company from the argued, agreed, and the Court that the credit higher in resulted effective tax rates on New York- apportioned companies exporting income for those percentage products a smaller of their from New thereby discriminating against companies York, greater proportion with a of out-of-state business. 400-401, See id. at n 9. significantly present purposes,

Most the state argued Westinghouse limiting that the tax exports shipped credit from New York was discourage taxation of discs would their formation in New York and discourage export goods also the manufacture of within the State.” Id. concerns, conflicting at 392-393. In order to accommodate these New imposed attempted discs, York its franchise tax on but to offset tax burden with the credit described in the text. id. at 393- See 394. 9 company’s York-apportioned A New tax base is on calculated average percentages corporation’s property "the basis of of the of the situated, earned, payroll income distributed within the State.” n 5. Caterpillar by Dissenting Opinion Cavanagh, C.J. way justified that the tax credit to ensure as that, applied only New was taxable to income place. is similar to the first This York in the upon by argument primarily the state relied apportionment is a of the that this case: ensuring taxpayers rough, way like fair, if extent benefit from Michigan. they actually do business argu- Westinghouse rejected New York’s Court credit of the tax ment the calculation because already York’s business took into account New percentage. allocation In'computing credit, allowable the statute requires [company] in its business to factor percentage. procedure . . . This allevi- allocation ates ous with its tax gener- overly the State’s fears that will be adjustment credit, for once the export multiplying the . . . credit allowable percentage [company’s] has allocation business fairly accomplished,the tax credit has been

been apportioned accumulated apply only to the amount of York. . . . income taxable to New standpoint apportionment of fair From the credit, adjustment York to both of the credit the additional export . . . ratio reflect the inaccurate and New duplicative. 399.] [Id. at case, course, formu- In this any "duplicative” applied to the are not las they Caterpillar contends that other formulas. But in the con- "inaccurate” sense are nevertheless Westinghouse. contends demned that if is to ensure that the state’s concern proportion in of the cad are limited benefits company in Michi- does of business that a amount gan, simply satisfy concern the state could applying for- the same three-factor applied already to the to the cad mula Mich Dissenting Opinion by Cavanagh, C.J. part fully Thus, n, I as discuss more in sbt.10 justification extent the state’s asserted apportionment for the cad apportion tois the benefits of the Michigan-related Westinghouse business, simply indicates that this asserted state interest justify discriminatory does not nature and effect of the chosen formulas. challenge

Kraft involved a to Iowa’s business challenge alleged only income tax. While the dis- against foreign crimination rather commerce than commerce, domestic interstate the relevant Com- analysis fully applicable pres- merce Clause for purposes. defining subject ent In the income generally purposes taxation, chooses, Iowa convenience, to follow the definitions federal tax applying law. One of the results of the federal definitions to Iowa’s tax structure was that Iowa parent doing company allowed a business Iowa Iowa-apportioned to deduct from its tax base divi- incorporated dends received from subsidiaries States, the United but not dividends received from incorporated foreign countries, subsidiaries un- activity less the dividends reflected business in the Kraft, United States. See 120 L Ed 2d 65-66.

Because the inevitable effect of Iowa’s deduction scheme to was increase the effective rate of taxa company’s Iowa-apportioned tion on a income foreign when it received dividends from subsidiar reflecting foreign activity, ies business as com pared to when it received dividends from domestic subsidiaries, the Court concluded that the Iowa fact, Legislature responded already In has to the lower court by amending provision decisions in this case so that the apportioned manner, precisely beginning years is after this with tax 208.23(c); 30, 77, September 1989. See 1991 PA MCL MSA 7.558(23)(c), 208.23(c), (d). (d); 7.558(23)(c), and 1991 PA MCL MSA 11Obviously, given the ultimate tax rate on a effective base relatively allowed, lower whenever a deduction from that tax base is relatively higher whenever a deduction is not allowed. 443 by Dissenting Opinion Cavanagh, C.J. against foreign "facially com

tax discriminates Foreign Com merce and therefore violates 120 2d 69.12 merce Clause.” L Ed together, Westinghouse and Kraft indi- Taken in violation of cate that a state tax discriminates opera- if, of the the Commerce Clause as result deductions, tion of credits or the effective rate appor- imposed on the income or other tax base varies on the basis of the out-of- tioned to state (or foreign) taxpayer status of the or related state degree entity, business or on basis (or foreign) activity commerce, so as in interstate domestic) (or to favor in-state commerce and dis- (or foreign) hope I favor out-of-state commerce. As part appendix, ii and in the demonstrate precisely discriminatory effects of the these are at issue this case. II. OF THE THIS CASE APPLICATION ANALYSIS TO majority correctly cites Com this case Inc v plete Brady, Transit, 274; Auto 430 US 97 S (1977), general 1076; Ct 51 L Ed 2d 326 for the applied challenge analysis to a framework of to a state tax under the Commerce Clause. As the recently reaffirmed, United States Court a court against

will sustain a tax a Commerce Clause challenge activity with a substantial nexus with inate State, against ^[2] so fairly apportioned, long interstate as the "tax commerce, ^{[3] [1]} does not discrim- applied ^[4] taxing to an fairly on the basis of the out-of- Kraft illustrates how discrimination (or inextricably foreign) entity state discrimination the Court noted: "The flow of value between Kraft and status of a business is tied (or foreign) against commerce as such. As foreign its commerce; foreign clearly includes this flow subsidiaries the constitutes dividends, which, acknowledges, foreign subsidiary them as Iowa foreign 66. commerce.” 120 L Ed 2d selves constitute Mich Dissenting Opinion Cavanagh, C.J. provided the State.” related services Dakota, [Quill Corp —; v North S Ct (1992), quoting Complete 119 L Ed 2d Auto, 430 US 279.] Caterpillar Court, does not contend before this however, the as modified the sbt, cad, lacking any activity taxes nexus” "substantial Michigan, with not Michigan. Caterpillar apportionment nor does it contend that the tax is provided

"fairly by” related to the services challenge also does not the applied personal formulas property property components real and of the cad ground formulas, on the that either of those taken appor- alone, would not constitute a fair method of tioning Caterpillar’s activity business attributable Michigan.13 Thus, first, second, to prongs the and fourth Complete analysis

of the Auto are not at issue in this case.14 is, Caterpillar appear That does to contend that it would be impermissible Michigan apportion to both the sbt and the cad on activity physically the basis of whether the relevant economic place Michigan, ment of the real takes geographical apportion in consistent with the strict property Caterpillar appear cad. Nor does to contend impermissible apportion that it would be on the basis of a two-factor formula both the sbt and the cad including only property and factors, payroll apportionment personal consistent with the of the Rather,

property Caterpillar’s argument essence is that cad. Michigan, having apportion chosen to the sbt itself on the basis of the the where the factor), (including apportion three-factor formula the sales cannot formulas, cad on the basis different and inconsistent against result is discrimination interstate commerce. regarding apportionment,” "taxing The discussion of issues "fair values,” nexus,” extraterritorial "substantial and "fair relation to provided,” by majority Brickley, services Riley, J., ante, 483-484, both the and Justice see 416-422, J., pp 427-429; Brickley, 471, 479-480, post, pp point precise is therefore beside the and confuses the properly "fairly apportioned” issue separate question light before us. Whether the cad ais apportionment, from whether the cad considered underlying apportionment, facially inevitably sbt against alleged by discriminates Caterpillar. interstate commerce the manner See, Hess, e.g., ("[e]ven Amerada US 75 if a tax is fairly apportioned, may against commerce”); discriminate interstate (“ Westinghouse, '[f]airly apportioned’ 466 US 399 and 'nondiscrimina terms”). tory’ synonymous are not Caterpillar Opinion Dissenting Cavanagh, C.J.

Caterpillar’s only this Court is before contention conjunc- formulas, apportion- underlying three-factor tion with improperly itself, discriminate ment of the sbt specifically against commerce, predominantly against out- itself as entity engaged in interstate commercial of-state princi- governed by the This issue commerce.15 part ples i. set forth and case law taxpayer personal property cad, Under the speaking, generally from its is, Michigan-apportioned allowed to deduct depreci-

tax base the costs during personal property accrued able given year personal property year. for a average according apportioned payroll taxpayer’s factors.16 apportionment, Leaving effect of aside the regard personal property without is available acquired personal property or is the to whether placed state. Because into in state or out of service per- property all real and factor is based on the during property tax owned or rented sonal necessarily year,17 however, it be affected—and will resulting apportionment from the formula Furthermore, prohibition that a of extraterritorial while it is true Clause, part as well as reach of the Commerce taxation is the broad (Scalia, J., Trinova, Clause, see, e.g., 112 L Ed 2d 913 the Due Process concurring judgment), plausible no claim of extraterritorial in the presented by was this The sbt itself is or could be case. taxation upheld against precisely involves in Trinova. This case such a claim Obviously, apportionment deductions from the sbt. of certain reach, improperly related tax of the in if tax itself is not extraterritorial a can, however, They it as a result cannot render so. deductions apportionment used, against inter- it formulas cause to discriminate state commerce. 15 striking course, Caterpillar any decision also contends that Of retroactively apply it apportionment and that should down the addressing appropriate remedy. But I am be entitled to an should here only the central constitutional issue. 7.558(23)(a), 208.23(a); 1991 PA as enacted before MSA See MCL 77. 7.558(46). 208.46; MSA See MCL Mich Dissenting by Opinion Cavanagh, C.J. average will property payroll and factors thus also be whether by newly acquired affected — personal placed to the cad is into property subject in service state or out of state.

Thus, clear, statute, that on the face of the similarly companies two otherwise invest that situated equal-value personal in amounts of new property during year the tax will receive different depending degree deductions under the on the cad, they physically Michigan to which in are based (as begin property with measured and factors), payroll depending they on whether personal newly acquired property invest state or out of state. a in Furthermore, it is clear that greater resulting deduction, in a lower effective Michigan-apportioned base, tax rate on the (1) company pre- afforded both to is more dominantly begin with, in based as compared company predominantly to a more based (2) investing company state, out of the new personal property compared state, as to a com- pany investing personal property the new out of discriminatory state. These effects are illustrated hypothetical examples numerical set forth appendix, in the i(a) ii(a).18 tables explanation. The first effect needs little Because personal property directly average proportion tied to the payroll Michigan, and a situated it is obvious Michigan-based predominantly company will reap greater any a far benefit from investment (whether state) personal property state or out non-Michigan-based predominantly than will a (with company Michigan-apportioned the same 18My hypothetical examples reliance on like those set forth in the appendix supported by Westinghouse, where the Court relied on hypothetical examples inevitably similar to illustrate the discrimina 9 (tables a, tory character and effect of a tax. n state See US c). b, and by Opinion Dissenting Cavanagh, C.J.

base) making The second investment.19 identical an indirect, no less but and is more subtle effect per- in investment an in-state Because inevitable. (however always property increase will sonal personal property slightly) the thus factor and the apportionment property formula, an while cad always both decrease investment will out-of-state personal prop- investing company in numbers, a greater up reaping always erty a end will state .similarly property personal a situ- than will cad making equivalent company investment an ated out of state.20

according would likewise based "Michigan-based thus proportion case, by personal property pany deduction, regardless the the source of the that different is the fact exclusively sured ence in effective company’s physical cals ing according erty deduction, resulting reduce it. natory of-state investment. apportioned The Of Of payroll apportionment holding the difference in state would as measured resulting company” problem course, course, effect, definition, physical the in identical is held to the three-factor to the three-factor But in that just that the to the amount on the location of the factors). tax base constant property companies is that even gain in this in identical effective even with the as as measured company” base of primary constant, by than would tax rates the amount of the deduction investing base. See persists apportionment if the if any effective tax would increase of the in- or out-of-state (to greater regard, it causes the tax base and structured case, are allowed to deduct different factors. personal property Michigan-apportioned problem discriminatory payroll of the tax base thus cad were as measured personal property personal property lesser even sbt hinging solely out appendix, by both company a more and the source deduction from a sbt the three-factor formula. resulting formula, investing of state would when the tax base rates factors. degree) the deduction and company’s of the deduction is divorced formula, with the or decrease deduction, tax rates predominantly as measured tables following by effect identified The in a increase apportioned the three-factor formula on the location of a more i(A) personal of this second discrimi physical were character of the com- problem would discriminatory differ- following any given tax base while following given apportionment, (to either equal proportion, a lesser "non-Michigan- 11(A) vary (hypotheti- so as to focus apportioned predominantly personal prop investment in base as mea- is not amounts, an in- or out- apportioned apportioned apportioned in the But in that any given Michigan, Michigan- property precise degree) simply vary- from text, and but the 400 Mich by Dissenting Opinion Cavanagh, C.J. property taxpayer is, Under the real the cad, generally speaking, allowed to deduct from its Michigan-apportioned depreci- tax base costs of property during year. real able accrued the tax property cad, however, The real is limited to property "physically Michigan.”21 located in "apportionment” property of the real to Mich- igan strictly dependent is thus on the in- or out-of- property state location of the in which the tax- payer depend invests, and does not on the relative taxpayer.22 in- or out-of-state status of the clear, statute, It is on the face of the two similarly companies otherwise situated that invest equal during year in real value the tax will receive either a substantial deduction or no depending prop- all, deduction at on whether that erty is located in state or out of state. Further- resulting substantially more, deduction, in a Michigan-appor- lower effective tax rate on the company base, tioned tax is afforded to a investing Michigan compared property, in real as similarly company investing to a situated in out-of- property. discriminatory state real illustrated set forth in the This effect is hypothetical examples numerical

appendix, tables i(b) ii(b).23 personal property prop- Thus, both the and real investment, proportion greater to increase or in decrease than the base, Michigan-apportioned increase or decrease thus causing vary depending the final effective tax rate to on whether investment is made in state or out of state. 7.558(23)(c) 208.23(c); MCL MSA as enacted before PA 77.

with natory It slightly greater property, non-Michigan-based company tax See But see n 23. 23Furthermore, appears base) making appendix, regard effect, in terms of effective tax that a tables analogous benefit predominantly Michigan-based company an identical personal property 1(b) hypothetical examples from a to the first ii(b), (with investment and n 34. given rate, cad, the same discriminatory investment that is not than will a reveal a second discrimi Michigan-apportioned initially effect identified predominantly Michigan real will property. obvious. gain real Dissenting Opinion Cavanagh, C.J. applied apportionment erty formulas, when conjunction with three-factor higher imposition itself, in the result sbt Michigan-apportioned tax tax rates on effective companies regard either that are with base non-Michigan predominantly direct or that based compared Michigan, as investments outside their companies predominantly that are Mich- inside or that their investments based direct converge igan. discriminatory so as These effects especially preferential rate to a tax afford an Michigan, Michigan-based company that invests non-Michigan-based company compared to a as Michigan. invests outside that discriminatory

These facial and inevitable effects interpreted Clause as contravene Commerce notably Supreme Court, most the United States i(c).24 part Westinghouse That the Kraft See general disputed case, tax, tax on as in this is a activity, income, value-added, or other business targeting directly than a tax rather transactional products, is or out-of-state interstate activities analysis. [at irrelevant to our issue The franchise Westinghouse] a tax on income of a aggregated from transactions. business It its business be a State can circumvent cannot may has that "a tax The United States Court held discriminatory, facially has if it is violate the Commerce Clause intent, burdening unduly discriminatory the effect of interstate or has Hess, 75. the tax at issue is Amerada Because commerce.” discriminatory effect, I need in its both on its face and inevitable discriminatory pur it with an illicit consider whether pose. was enacted any it has n 29. I need to consider whether But see Nor do discriminatory meaning” implicating "deeper effect indirect requirement apportion fair Clause in the Commerce "embodied Trinova, Brickley, J., 912; post, p 483. As cf. I ment.” L Ed 2d noted, alleges any already I do not believe even have apportion impropriety "fair in the cad related to the analysis, prong I therefore believe Clause ment” Commerce any is extraneous and serves discussion of that issue properly presented. n 14. from the See distract us issue Mich Dissenting Opinion by Cavanagh, C.J. prohibition against of the Commerce plac- Clause ing burdensome taxes on out-of-state transactions by burdening those transactions with a tax that aggregate levied rather is the franchise tax— —as than on individual [Westing- transactions. house, 466 US 404.] discriminatory Nor relevant that a effective indirectly operation tax rate results from the being deductions, tax credits or rectly imposed. rather than di- any "We have declined to attach significance constitutional to such formal distinc- tions that lack 405; economic substance.” Id. at see supra. Finally, magnitude Kraft, also discriminatory any

effect is irrelevant; measurable discriminatory effect, small, however is unconstitu- Wyoming tional. Oklahoma, See 117 L Ed 2d ("the Westinghouse, 466 US 407 Court 'need not unequal concluding know how that it is before Tax ”).25 unconstitutionally discriminates’ clearly "When a state statute discriminates against commerce, it will be struck down, demonstrably unless the discrimination is justified by a valid factor unrelated to economic protectionism.” Wyoming Oklahoma, 117 L Ed (citations added). emphasis 2d 22 omitted; As the recently Court stated even more in the context of against foreign discrimination a commerce: "Absent compelling justification, may . . . a State not legitimate goals by facially advance its discriminate . . . .” means that (empha Kraft, 120 L Ed 2d 69 added). sis The Court struck down the discrimina- Brickley Furthermore, agree with Justice I that when a tax is facially discriminatory by analysis, shown to be States of abstract the United required empirical Court has never further evidence discriminatory effect, permitted showing nor has it of facial by empirical purporting discrimination to be overcome evidence to practical tax, taking that the overall effect of the into demonstrate. factors, 470, n 3. account discriminatory. post, p other variable is not See of by Dissenting Opinion Cavanagh, C.J.

tory in "this not a case tax Krañ because is adequately goals the State’s 'cannot be which nondiscriminatory by reasonable served ” Id. alternatives.’ support primary The state interest asserted apportionment the formulas for both the chosen personal property the and real cad Michigan, apportion to the cad to consistent need apportionment company’s tax overall the with purposes of the sbt. While to for base (and may goal legitimate certainly even, it this compelling), completely to assumed, fails be justify discriminatory nature and effect apportionment to has chosen formulas state goal. discrim that All of the demonstrated achieve inatory easily effects have avoided could been components apportioning simply both cad apportion to the same three-factor formula used argued, could the sbt itself. state has not The argue, applying reasonably three- that sbt not apportionment fail to to the cad would factor goal regard. Indeed, the in this achieve its asserted already has amended statute state response case in this lower court decisions provide precisely apportionment an to the for such beginning years after for September 30, 1989.26 accompanying majority’s that The contention See n 10 and text. a value-added tax base apportioning deduc and a used "[formulas constitutionally capital provided acquisitions tion required point. are true, identical,” ante, p possibly is beside to be while possible an it would be to devise I am not sure whether applied to the apportionment formula for the different from by the combination sbt, that would avoid the discrimination created state, however, attempt perfectly currently us. free before any My case does not rest on abstract so. conclusion in this do requirement "symmetrical.” Cf. formulas be J., ante, p Regardless are Riley, formulas used 423. of whether different, operate, they they may in this symmetrical as do or case, against commerce. to discriminate interstate Furthermore, property any personal argument the two-factor Mich Dissenting Opinion by Cavanagh, C.J. goal The state asserts an additional limited to property apportionment: the real agement the encour- Michigan property.

of investment real goal, clearly however, This not "unrelated to protectionism.” goal contrary, economic of theOn encouraging companies in- both and out-of-state direct their investments in real toward to Michigan strong opposed as to outside bears a relationship pro- and obvious to economic tectionism. agree with course, Justice Brickley,

I goal generally speaking, this not, asserted categorically impermissible purpose. Cf. Brickley, post, p part J., perfectly 480. As I have discussed in it is i(b),

permissible promote for a state to in development, state investment and economic but long attempt as as the state does not to do so discriminating against means of interstate com logic merce. It turn would and more than a cen tury upside precedent of United States Court imply, my Brickley

down to as Brother doing, may comes close to that a state discriminate against doing interstate commerce whenever so (as would) inevitably goal promot serves ing development. in-state investment and economic goal, categorically That ply ciently invalid, while not is sim by any imagination, not, stretch of the suffi protectionism” "unrelated economic justify against a state tax that discriminates com merce.27 apportionment might justified way taxpayers be as a to relieve obviously accounting problems,” Riley, J., ante, "burdensome p equally The three-factor formula is unf ounded. taxpayers convenient for to use. analogy A useful ap arises from First Amendment doctrine as plied flag-burning Johnson, in the famous case. See Texas v 397; (1989). 109 S Ct 105 L Ed 2d 342 The state there had asserted, support prohibition flag as an burning, interest of its goal "preserving flag symbol as a of nationhood and unity.” national difficulty concluding Id. at 410. The Court had little Caterpillar of Opinion Dissenting Cavanagh, C.J. keep important in the issue in mind that to

It is goal, validity state’s but the of the is not this case validity at rather cad generalized of "interstate assertions as issue. Just protectionism” to demon- not suffice do economic strate the generalized apportionment, invalidity of the goal "providing of

endorsements industry,” growth intrastate for the incentives Brickley my p upon post, Brother which 480, support go heavily, its no further relies so validity. step back conclusion, it is useful

In appor- discriminatory effect of the consider company practical A broad, terms. in tionment primarily physically based that is like significant pro- state, has a more but that out of portion Michigan, taxed to some in sales Michigan’s added to on the value under extent sbt non-Michigan plants, products on the in its its incorporated Michigan into the sales as of its basis might, taxation While such formula. three-factor improperly glance, "extraterri- seem to be first at upheld Supreme Court torial,” United States theory the "true” that Trinova on the the sbt geographical origin value-added, like that of any with income, cannot be determined business precision. meaningful 112 L Ed 2d 904-911. See Michigan could Rather, held that the Court . Michigan-related reasonably sales that the assume primarily physically company based of a activities significantly value of add outside suppression goal of free 'to the was not this asserted "[un]related that O’Brien, meaning 391 US expression’ States [United within 410, (1968)],” 1673; Ed 2d 672 20 L 88 S Ct expressive disputed support restriction on not therefore could case, goal in this conduct, though goal, like the asserted even validly pur- inherently impermissible, be clearly and could was ("we doubt that ways. do not any See id. at number of sued government 'preserv[e] making legitimate efforts interest has a ”). country’ symbol flag unalloyed of our as an the national Mich Dissenting Opinion by Cavanagh, C.J. products Thus, See 112 L Ed 2d 905-906. sold. impossible-to identify precisely it while how activities, much value is added sales see 112 L appor- may properly 905-908, Ed 2d sbt be part tioned on the basis of where sales occur. theory artificial and un- would be assign geographically company’s realistic to solely value-added on the basis of where the com- productive place, pany’s physically activities take by property pay- the of and as measured location ("[we] complete reject roll. See 112 L Ed 2d 910 the resulting in exclusion of sales as somehow more apportionment”). accurate problem Michigan, having is that chosen to non-Michigan-based compa-

tax with one hand a ny’s productive activities conducted at out-of-state employees equip- factories with out-of-state and Michigan ment, on the of basis sales as calculated three-part formula, under the then turns around refuses, hand, and with the other to allow the company acquisitions property a deduction for of equivalent degree, reflect, that would also to an Michigan company’s contrary, the Michigan sales. On the availability personal limits the property strictly according degree to the to cad company’s property payroll the which overall and Michigan. physically Michigan are located in And availability property the limits of the real according to whether obtained is physically Michigan. company Thus, in located purchases factory that or builds a outside Michi- gan, employees places equipment and hires and factory engage produc- into service in that in by Michigan productive tion, will taxed be on the place factory, activities that take in that to the extent, formula, as reflected in the three-factor products that the are manufactured sold Michi- of by Dissenting Opinion Cavanagh, C.J. any gan.28 company yet not receive And will factory, acquisition of for its deduction ácqúisition its of deduction for will receive a (small only equipment existent, property or non- extent company’s hypothesis) by overall that Michigan.29 payroll are based Michigan relying part By initial on sales relying exclusively purposes, on while taxation Michigan property payroll for relevant deduc- Bkickley’s "Michigan disagree does that Justice assertion with I Post, 483, p n any [physically of activities.” out-of-state] not tax those Michigan’s company subject if it sbt, under. even A to taxation 13. Michigan, payroll, production virtually property, as or within has long no course, themselves are as it has sales. Of sales some activity” "productive adds a form Trinova to be deemed some products 112 L Ed 905-906. But value sold. See 2d requirement precise rejected any clearly that the amount Trinova actually for taxation in-state sales be calculated value added above, Rather, purposes. that value-added is not Ed including discussed in the text Trinova concluded as ascertainment,” “subject geographic 112 L value-added, therefore, and, company’s 2d that all of a assignable production, may be to out-of-state that which properly apportioned may formula, to a the basis of the three-factor state on be part proportion relying in-state See 112 L on the sales. ("we rejected outright geographically the idea that Ed 2d assignable [have] apportion production excluded from an costs of must be income”). ment 29Thus, apparent formulas for chosen commerce, against also but discriminate logic apportioning a value-added violate basic economic course, including according nomic eco formula sales. Of a three-factor ground finding illogic that a the not itself a for tax violates sug supports my by indirectly But it conclusion Commerce Clause. cad, apportionment gesting Legislature’s that of the enactment See, protectionism. e.g., motivated economic could Haughey, have been tax, logic single Wayne L R The business economic added): (1976) 1017, (emphasis capital acquisitions necessary compute The deduction capital approximation an and avoid taxation is net costs double Michigan.

purposefully designed to favor located in investments standard, necessary by use was decision to This but multistate made apportionment property-payroll-sales arbitrary, factor for the state econ- desire to stimulate businesses. omy was also a factor. time, was, Significantly, the Office of Revenue and Director of at the Assistant the author Department Michigan Analysis Tax in the Budget. Management †. Id. at n Mich Dissenting Opinion Cavanagh, C.J. purposes, apportionment tion combined scheme of the sbt and the cad economic results classic

protectionism. Predominantly non-Michi- gan-based companies import heavily that into relatively have the worst of both worlds: higher higher proportion tax bases due to their (or Michigan, relatively sales in tent) lower nonexis- pursuant deductions to the cad. In stark predominantly Michigan-based compa- contrast, export heavily nies that to other states have the relatively best both worlds: tax lower bases due proportion Michigan, to their lower of sales in pursuant higher much At deductions cad. beating quote horse, risk again a dead let me once Wyoming Oklahoma,

from L117 Ed 2d 22: simple "[W]hen the state statute amounts to eco- protectionism, 'virtually per nomic se rule of applied.” invalidity’ has

III. THE ANALYSIS OF JUSTICE BRICKLEY THE

AND MAJORITY agree my I with Brother conclusion Brickley’s personal property cad regard invalid under the Commerce Clause. With property apportionment, to the real however, I respect, believe, with all due that Justice Brickley majority governing and the law misconstrue the case United States Court. Justice suggests the real Brickley simply provided wholly valid it "is because inde- pendent company’s of a character.” p majority, Post, likewise, 471. The relies on a law published review article in 1976 that asserts: provisions "The does not contain aimed at [sbt] imposing consequences upon adverse tax multi- taxpayers speaking, state as a Generally class. consequences overall to a multistate taxpayer Opinion by Dissenting Cavanagh, C.J. upon dependent nature of its business will be quoting p Pollock, 425, [Ante, . . . activities Single taxpayers Business under the Multistate (1976).] Wayne Act, L R Tax attempted fact, to I demonstrate In have as "impos[e] apportionment part ad- does ii, the taxpayers consequences upon multistate verse taxpayers primarily compared or class,” to as a as Michigan. exclusively More fundamen- based necessary tally, to however, it is not demonstrate against or interstate discriminates that a tax taxpayers group in it to as order for multistate discussed, I Clause. As have violate the Commerce holding in- or char- constant out-of-state even company, dis- acter of the against economic activities. interstate criminates would be sufficient invalidate This alone quoted review author of the law scheme. The Stock did not have the benefit Boston article following year, Exchange, supra, decided the that even both which the Court clarified when involve favored and disfavored business activities commerce, out-of-state entities Commerce Clause designed is violated discrimination [such] to "direct commerce to businesses quoted 334-335, . . . .” 429 US within the State fully part i(a). more unequivocal language in Boston

In view of that disagree Exchange, I Brickley’s Justice Stock with permissible grant entirely "it assertion that using activity Post, in-state as a criterion.” credit p relying fact, 480. In on the in-state status of an activity precisely economic transaction or was in both the Court struck down as invalid what Exchange Westinghouse, supra. Boston Stock analogies colleague heavily My on the be relies regard Westinghouse and this case with tween Mich Dissenting Opinion by Cavanagh, C.J. personal property cad, but seems to overlook analogies regard the even more obvious with property parallels the real cad. While the with Westinghouse overdrawn, should not be as that operating differently case involved a tax credit Westing- here, from the tax deduction at issue squarely rejected house New York’s decision to tie geographical the benefits of its tax credit to the (inside York) location New from which the tax- payer exported goods. Similarly, Michigan has property chosen to tie the benefits of its real (inside geographical Michigan) to the the real tion. location property potentially subject to the deduc- light incorrect, I think it is of Boston Stock Exchange Westinghouse, suggest that facial discrimination under the Commerce Clause results categories

when a statute creates tional activity jurisdic- two activity, one composed is of intrastate composed and one that is of interstate activity, imposes a burden on the interstate ac- tivity by not shared taxpayers. [Brickley, intrastate post, p J., 478.] Exchange Westinghouse, In both Boston Stock both the favored and disfavored activities could be characterized commerce,” as "interstate and both the favored and disfavored entities could be char- taxpayers.” yet acterized as "interstate And they Court struck down the taxes at issue because discriminated in favor activities directed toward taxing discrimination, state. all, Such after very protec- essence of "interstate economic tionism.” Brickley

Justice states that "the cad for real property Michigan acquisitions property treats all of real regard company’s

without to a Dissenting Opinion J. C. Cavanagh, very acquisi p activity Post, . 478. But the . . Michigan, opposed property as outside tion of type Michigan, of "interstate constitutes inside activity” against protected discrimination property Obviously, the real Commerce Clause. "regard” indeed, it relies exclu does have sively to— acquired upon —whether Michigan. Relying ex or outside inside clusively geographical criterion on that in-state New in this than was York’s no more valid case which ex on the in-state location from reliance ports Westinghouse, shipped or New were location securi York’s reliance on in-state Exchange.30 in Stock sales Boston ties Brickley’s Finally, I must take issue with Justice regard my analysis that assertion with "hinges comparison faulty on real cad activity jurisdictional out-of-state, in-state, activity,” pur- nonjurisdictional the "[f]or and that poses Clause, are these activities Commerce my noncomparable.” p Post, I 481. As believe perfectly analysis clear, unlawful dis- makes necessarily obviously "any true credit creates a it is that While qualify who who for and those do not difference between those qualify the kinds of it,” J., 481, suggest post, p it is to that Brickley, untenable discriminatory that exist in this differences treatment apportionment that cad invalid under the regard tax case—and Commerce Clause—would render any necessarily to exist with Westinghouse that "it is or deduction. The Court’s statement credit not 466 puted Clause,” provision the credit that offends the Commerce 12, precisely analogous proposition, n undis is that US case, nothing wrong there with cad itself in this is only problem cad, Clause. The is under the Commerce analogously Westinghouse, apportioned an "on to the tax credit justify impermissible Just York as a basis.” Id. as New could actually "subsidy export a tax commerce” credit neutral York, id., against exports shipped from outside New see discriminated so Michigan justify tax as a investment incentive a cannot neutral against companies apportioned choos so as discriminate deduction ing companies a Michigan, against direct investments toward not to their Michigan, imposing predominantly outside based more companies’ Michigan-apportioned higher on effective tax rate such value-added. Mich Dissenting Opinion by Cavanagh, C.J. crimination that I discern in this case consists of discriminatory the different and effective rates imposed company’s concededly on a tax base sbt Michigan’s jurisdiction. within The effective tax hinges part company’s rate on a choice to direct Michigan away its commerce toward or from Mich- igan. Michigan "jurisdiction” Whether would have purposes away for tax over the commerce directed irrelevant; from this case does not directly involve a transaction tax aimed at governing Rather, disfavored commerce. as the Michigan may indicates, case law not discriminate against by varying such commerce the effective imposed portion compa- rate of tax on that of the ny’s concededly value-added that within Michi- gan jurisdiction. ’s

My majority’s analysis difficulties with the run deeper. majority grips even does not come to discriminatory with the facial effect of the apportionment. my points Brickley As Brother out, the "[t]he mere fact that cad is available for any taxpayer,” p (emphasis J., ante, Riley, added), wholly infirmity fails to alleviate the formulas, which render facially "available” on terms that discrim against inate interstate commerce. See Brickley, post, pp J., 476-477. majority correctly states that United States Court has held

[t]he when the provision different effects of a tax on companies different solely result from the differ- ences between the nature companies’ of these businesses and not from the location of their activ- (i.e., state), in ities state or out of there exists no discriminatory effect on commerce. [Ante, p 425.] Opinion by Dissenting Cavanagh, C. J. part attempted n, I demonstrate have

But as do at issue the tax scheme effects” of the "different companies’] activi- [the the location "from result just nature of the different ties,” not from postulated, Indeed, I have taxed business activities. examples hypothetical my analysis in the companies similarly appendix, en- situated in the activity, types gaged with of business identical being only the in- or out-of-state differences companies activities. or their character REMEDY ISSUE AND THE ISSUE IV. THE RETROACTIVITY dissenting posture, my I will In view attempt re- with conclusion a definitive to reach remedy gard retroactivity I issues. would or principle general in McKes- forth set note Regulation, Corp Dep’t of Business v Florida son 110 L Ed 2d 18, 43, 27; S n 110 Ct 496 US (1990): tax as illegality In order to cure [a] ultimately col- the State must originally imposed, no period for the lect a tax contested against inter- discriminates respect impermissibly state commerce.

V. CONCLUSION respectfully stated, I I have the reasons For dissent. C.J. J., Cavanagh,

Levin, concurred with Mich 400 Dissenting Opinion Cavanagh, C.J.

APPENDIX PREDOMINANTLY NON-MICHIGAN-BASED IMPORT COMPANY I. A HYPOTHETICAL, EFFECT OF PERSONAL PROPERTY INVESTMENTS A. Following

At the outset $100,000 personal property investment,

in state out of state Total sbt Tax Base $1,000,000 $1,000,000 $1,000,000 Total Real $1,000,000 $1,000,000 Property $1,000,000 Michigan In 300.000 300.000 300.000 Michigan Outside 700.000 700.000 700.000 Total Personal $1,000,000 Property $1,100,000 $1,100,000 Michigan In 300.000 400.000 300.000 Michigan Outside 700.000 700.000 800.000 Total Payroll $1,000,000 $1,000,000 $1,000,000 Michigan In 300.000 300.000 300.000 Michigan Outside 700.000 700.000 700.000 Percentage: Sales Michigan In 90% 90% 90% Outside 10% 10% 10% Sbt Factor Property 0.3 0.3333 0.2857 Sbt Payroll Factor 0.3 0.3 0.3 Sbt Sales Factor 0.9 0.9 0.9 3-Factor'Apportionment 0.5 0.5111 0.4952 Apportioned Tax $500,000 Base $511,111 $495,238 Apportioned cad: Real Property $0 $0 $0 Personal Property $31,667 $29,286 $0 Adjusted Tax Base $500,000 $479,444 $465,952 (at rate) Tax $11,750 2.35% $11,267 $10,950 Effective Tax Rate31 2.3500% 2.2044% 2.2111% advantage Discriminatory of in-state investments:32 or 0.0067% $34 31 I.e., by apportioned amount of tax divided tax base. comparison, tables, This following three; as used in this table and the compares the effective tax rates in columns two and the dollar figure equals the difference paid between the amount of tax in column

two and paid amount would been have if rate in applied apportioned column three tax base in column two. Dissenting Opinion Cavanagh, C.J. OF PROPERTY INVESTMENTS EFFECT

B. REAL Following real $100,000 At the outset investment, property

out of state

in state $1,000,000 $1,000,000 $1,000,000 Base

Total sbt Tax $1,100,000 $1,100,000 $1,000,000 Property Total Real Michigan In 300.000 400.000 300.000 Michigan Outside 800.000 700.000 700.000 $1,000,000 $1,000,000 $1,000,000 Total Personal Property Michigan In 300.000 300.000 300.000 Michigan Outside 700.000 700.000 700.000 $1,000,000 $1,000,000 $1,000,000 Total Payroll Michigan In 300.000 300.000 300.000 Michigan Outside 700.000 700.000 700.000 Percentage: Sales Michigan In 90% 90% 90% Michigan 10% Outside 10% .10% 0.3 0.3333 0.2857 Factor Sbt Property 0.3 0.3 0.3 Factor Payroll Sbt 0.9 0.9 0.9 Factor Sales Sbt 0.4952 0.5 0.5111 3-Factor Apportionment $495,238 $511,111 $500,000 Tax Base Apportioned Apportioned cad: $100,000 Real Property $0 $0 Personal Property $0 $0 $0 Adjusted $495,238 $411,111 $500,000 Tax Base rate) (at $11,638 $9,661 $11,750 Tax 2.35% Rate 2.3500% Effective Tax 1.8902% 2.3500% advantage Discriminatory $2,350 or in-state investment: 0.4598% Mich 400 Cavanagh, C. J. Dissenting Opinion PREDOMINANTLY EXPORT COMPANY MICHIGAN-BASED II. A HYPOTHETICAL, EFFECT OF PERSONAL PROPERTY INVESTMENTS A. Following $100,000

At the outset personal investment, out of state state Total sbt Base $1,000,000 Tax $1,000,000 $1,000,000 Total Real Property $1,000,000 $1,000,000 $1,000,000 Michigan In 700.000 700.000 700.000 Michigan Outside 300.000 300.000 300.000 Total Personal Property $1,000,000 $1,100,000 $1,100,000 In'Michigan 700.000 800.000 700.000 Michigan Outside 300.000 300.000 400.000 Total $1,000,000 Payroll $1,000,000 $1,000,000 Michigan In 700.000 700.000 700.000 Michigan Outside 300.000 300.000 300.000 Percentage: Sales Michigan In 10% 10% 10% Outside 90% 90% 90% Sbt Factor 0.7 0.7 0.7143 Property 0.6667 Sbt Factor Payroll 0.7 0.7 Sbt Sales Factor 0.1 0.1 0.1 3-Factor 0.5 0.5048 Apportionment 0.4889 Tax Base Apportioned $500,000 $504,762 $488,889 Apportioned cad: Real Property $0 $0 $0 Personal Property $70,714 $68,333 $0 Adjusted Tax Base $500,000 $434,048 $420,556 (at rate) Tax $11,750 $9,883 2.35% $10,200 Effective Tax Rate 2.3500% 2.0208% 2.0215% advantage Discriminatory of in-state investment: or 0.0007% $4 advantage Michigan-based

Discriminatory status, (1) regard with to in-state investment: or 0.1836% $927 (2) regard with to out-of-state investment: or 0.1896% $92733 comparisons, table, following These as used this table and the compare the effective tax rates in columns two and three with (either equivalent corresponding i[b], rates table i[A] or as appropriate). represent The dollar amounts the difference between the table and the amounts of tax in columns two and three instant corresponding amounts would result if the effective rates corresponding applied appor from the tioned were table the relevant tax bases the instant table. Opinion Dissenting Cavanagh, C.J. PROPERTY INVESTMENTS

B. EFFECT OF REAL Following real $100,000 At outset investment,

of state in state out $1,000,000 $1,000,000 $1,000,000 Tax Base

Total sbt $1,100,000 $1,000,000 $1,100,000 Total Real Property Michigan 800,000 In 700.000 700.000 Michigan Outside 300.000 400.000 300.000 $1,000,000 $1,000,000 $1,000,000 Total Personal Property Michigan In 700.000 700.000 700.000 Michigan Outside 300.000 300.000 300.000 $1,000,000 $1,000,000 $1,000,000 Total Payroll Michigan In 700.000 700.000 700.000 Michigan Outside 300.000 300.000 300.000 Percentage: Sales Michigan 10% In 10% 10% 90% Outside 90% 90% 0.7 0.7143 0.6667 Factor Property Sbt 0.7 0.7 0.7 Factor Sbt Payroll 0.1 0.1 0.1 Sbt Sales Factor 0.4889 0.5 0.5048 Apportionment 3-Factor $488,889 $500,000 $504,762 Base Tax Apportioned Apportioned cad: $100,000 Real Property $0 $0 Personal Property $0 $0 $0 Adjusted $404,762- $488,889 $500,000 Tax Base rate) (at $11,489 $9,512 $11,750 Tax 2.35% Tax 1.8845% 2.3500% Effective Rate 2.3500% advantage Discriminatory or $2,350 of in-state investment: 0.4655% advantage Michigan-based Discriminatory regard or $2934 to investment: status with in-state 0.0057% company enjoy non-Michigan-based Michigan-based a a and Both none) (which investing say, advantage from tois the same tax-rate odd, thus, Michigan- might property. a that It seem out-of-state real non-Michigan- reap greater company than a a benefit would based based investment, given property given company instate real from depend Michi- property apportionment on does not real the factors, payroll property but gan-based in the as reflected status itself. depends exclusively of the investment on location rather Mich Dissenting Opinion Brickley, J. (dissenting). J. case This raises two Brickley, relatively straightforward questions. The first granting companies whether a deduction to on the percentage changes depending upon of a basis company’s Michigan property the amount of a payroll property relative to the total of amount its payroll second, is constitutional. The simi- larly, providing is whether an incentive in the activity form a tax deduction for within Michi- gan, provide declining activity but it scrutiny. states, other can withstand constitutional Because the United States Court has unequivocally basing a declared that deduction on percentage company’s activity of a in-state activity relative to its interstate is unconstitu- question tional, I would answer the first negative. However, because the United States Su- preme consistently Court has also reaffirmed the propriety uniformly incentives, available tax question latter stitutional should be resolved in favor of con-

validity.

i Historically, played the Commerce Clause has important guaranteeing an commerce role in the free flow of

among Adopted response the states. attempts by legislatures many states to But as the effective tax rates in column two of this table and in table I(B) demonstrate, slight discriminatory advantage regard in that undeniably does exist. precise I underlying While am not sure of mechanism this unexpected effect, discriminatory clearly cannot "derive[ ] general . . from J., . the multistate Brickley, formula.” post, p applied n 10. If the three-factor were formula uni- formly apportion cad, both the tax base and the the effective following any given identical, rates regardless contrary real investment would be Thus, company. of the in- or out-of-state character Brickley’s suggestion, discriminatory to Justice this effect formula,” neither validity the three factor can nor "condemn[s] justify explain away the three-factor formula be used to or the effect. id.Cf. Dep’t op Treasury 467 v Brickley, J. Opinion Dissenting advantages,

exploit the Commerce their natural goods a national market created Clause Mond, Sons, Du 336 US Inc v P Hood & H services. (1949). It did this 657; 93 L Ed 865 525; 69 S Ct neutralizing ability to extract wealth of states together linking By the states other states. from economically, Clause fosters the Commerce strong political union. at form in which states blatant

The most capture tempted other from states to revenues duty. Clause of a The Commerce the exaction goods placing prohibits movement of duties on the engage in states commerce and few in interstate they do, such discrimination. When crude such statutes are matter of course. struck down as a Management, Hunt, Inc v 504 US Chemical Waste (1992); 2009; L 121 Phila 112 S 119 2d —; Ct Ed delphia Jersey, 617; 2531; Ct v 437 US 98 S New (1978). A L 475 more subtle version 57 Ed 2d discriminatory impos duty tax. Instead is a directly, ing relies on a cost the state extra company’s ability pass tax on to its custom company subject to a dis A ers other states. criminatory becomes a conduit for ex tax thus producers tracting and consumers in revenue from explicit duty jurisdictions just had as if an other Corp placed Trinova v on each transaction. been Dep’t Treasury, 358, —; 818; S Ct 498 US 111 (1991) (the Commerce 112 L Ed 2d 913 Clause "attempt capture against taxes defends juris belong right . . to other . revenues dictions”). long recognized Court has danger discriminatory pose political un- taxes Wall) (23 Missouri, 275; 23 L US ion. Welton Ed (1876); Taxing Shelby Dist, Co Robbins (1887). 592; 489; 7 S 30 L Ed Ct attempted to use a tax to a state has Whenever Mich Dissenting Opinion by Bkickley, J. sovereign extract revenue or coerce another’s au thority, the Court has invalidated the statute. Foods,

Kraft General Inc v Iowa of Revenue Finance, & 505 —; US 112 S Ct 120 L Ed 2d (1992); Energy 59 New Co of Limbach, Indiana v (1988); 269; 486 1803; US 108 S Ct 100 L Ed 2d 302 Westinghouse Corp Tully, Electric v 388; 466 US (1984); Maryland 1856; 104 S Ct 80 L Ed 2d 388 v Louisiana, 725; 451 US 101 S 2114; Ct 68 L Ed 2d (1981); Cementing 576 Halliburton Oil Well Co v Reily, 64; 373 US 83 S 1201; Ct 10 L Ed 2d 202 (1963); McLeod v J E Co, Dilworth 327; 322 US (1944). 1023; Conversely, S Ct 88 L Ed 1304 when upheld the Court has taxes, state it has done so using leverage because the state was not its impermissibly divert revenue from other states’ Corp Michigan citizens into its coffers. Trinova v Dep’t Treasury, supra; Dep’t of Revenue v Ass’n Washington Stevedoring Cos, 435 734; US 98 S (1978); 1388; Ct 55 L Ed 2d 682 Standard Pressed Washington Dep’t Steel Co v Revenue, 419 US (1975); 560; 95 706; S Ct 42 L Ed 2d 719 General Trading Comm, Co v Iowa Tax 335; 322 US 64 S Ct (1944); 1028; 88 L Ed 1309 Henneford v Silas Mason, 577; US 524; S Ct 81 L Ed 814 (1936); Telegraph Attorney Western Union Co v General of Massachusetts, 530; 125 US 961; 8 S Ct (1888). Multiplying examples 31 L Ed 790 no useful serves

purpose except to reinforce both logical linkage leverage and historical of the use of invalidity under the Commerce Clause.

Only light background phrases of this can the protectionism,” "discrimination,” "economic any meaning.1 "burden interstate commerce” have warned, eloquently As labels, Justice Cardozo "Catch words and 'protective tariff,’ such lurk in spection subject as the words dangers are metaphors symbols, and must be watched with circum they put guard.” Henneford, lest supra us off our at 586. v Dissenting Opinion Brickley, J. political of a state’s refers to the use phrase

Each to exert its jurisdiction over within power activity its borders. Whether beyond over power activity from the of in-state markets the form of isolation Oklahoma, economy, Wyoming national broader (1992), or 789; 117 L Ed 2d 1 —; 502 US 112 S Ct unequal under in in-state markets participation Corp Tully, Electric conditions, Westinghouse extra- supra, any Clause nullifies the Commerce power exertion of over commerce. territorial from directly of law follow propositions Several of interstate protection the Commerce Clause’s or tax "a transaction enterprise. may No state lines more it crosses state heavily incident when within the State.” entirely than when occurs Armco, Inc v 638, 642; 104 S Ct Hardesty, 467 US Stock see also Boston (1984); 2620; 81 L Ed 2d 540 Comm, Exchange v State Tax 97 S Ct (1977). 599; 50 L Because it is likely Ed 2d Trucking American represent protectionism, Ass’ns, Scheiner, Inc v 266; 2829; 107 S Ct 483 US (1987) (Scalia, J., dissenting), any 97 L Ed 2d 226 commerce imposed cost on interstate selectively license runs afoul of the Commerce Clause. From interstate sales greater by fees borne amounts Missouri, Shelby v Robbins v men, supra; Welton Dist, Taxing supra, Co falling to taxes lump-sum trucking, American heavily more on interstate Scheiner, States v Trucking supra; Ass’ns v United 52, 61, 7; 387; 107 Sperry Corp, 493 US n 110 S Ct that, (1989), through an L Ed 2d 290 to tax codes deductions, un and interlocking system credits commerce, Halliburton equally burden interstate supra; Boston Cementing Reily, Well Co v Oil Comm, supra; Exchange Mary v State Tax Stock Louisiana, Westinghouse Electric supra; land v supra, v Corp Tully, treating no tax has disadvantageously commerce unequally 400 470 Mich Dissenting Opinion Brickley, J. scrutiny

survived under the Commerce Clause.2 simple The rule merce is absolute: Interstate com- may not, made, not be a means export import or the of tax burdens Corp, supra. revenues. Trinova beguiling simplicity

The of these rules makes straying purpose easy. from their and rationale power Because discrimination involves the use of in a once a tax is found to discrimination is irrelevant. Other states’ tax laws political way union, and economic hostile

discriminate, the amount of discrimination, cannot validate Armco Inc Har v desty, supra Hewit, 644-645; at Freeman (1946),3 274; 67 Ct 91 L S Ed because repair damage way these laws no to union improper power. initially caused Furthermore, exercise of discriminates,

if a credit it is irrele fairly vant whether a tax or formula reflects the component Westing activity. in-state of business Corp, supra. inquiry house Electric Such an leading aptly As a scholar remarked: sitting Supreme Aside from Justice Scalia ... no Court would from the that the Justice prohibits the intrastate ness across state lines. dissent view commerce clause heavily taxes that bear more on the interstate than enterprise merely the former does busi- because [Hellerstein, consistency” Is "internal emerging foolish?: on an Commerce Clause restraint Refections taxation, 138, (1988).] L on state Mich R majority indicates that business behavior should never be 410, analyzed in what it describes as a "theoretical vacuum.” Ante at empirical Supreme n 14. The evidence never on United States Court has relied nullify Westinghouse Corp Tully, In a tax law. Electric supra, tax on Court struck down New York’s income (disc) corporations from domestic international sales abstract the tax. Id. at provided by York’s on basis algebraic analysis, any empirical relating not on evidence fact, ignored empirical n 9. In the Court evidence suggesting amicus curiae State of California that New encourage shipping did not from New York. The increased attempts provide empirical Supreme rejected Court has other Louisiana, Maryland supra evidence. v at 760. See also Boston Stock Comm, Exchange supra Hardesty, supra v State Tax at Armco v 645, at n 8. Dissenting Opinion Brickley, J. id. at obscure,” and make'

"serves partic- whether a more difficult the determination protected by ular statute threatens the values Commerce Clause. us involves two specific question

The before single business tax. provided by deductions deduction, acquisition deduction capital One companies is offered to and personal property, on amount of and dependent property pay- is amount elsewhere. roll relative other, offered to property, The the cad for real or intra- companies regardless all of the interstate pur- property they state character of their when Michigan. depreciable property chase real provided impermissible first deduction on an basis, analogous and a deduction has precisely light Court. In been condemned Westinghouse Corp supra, Tully, Electric I would unconstitu- personal property hold the cad for deduction, however, provided tional. The second independent company’s of a wholly not, Because this deduction does character. value, I to,

cannot be made tax extraterritorial hold that the cad for real does not property would violate Commerce Clause.

II portion A'multistate deduct a company may capital acquisition apportioned its costs from its base, a apportioned tax base. To arrive at the .tax provided formula company uses an average This formula is the by statute. factor, factor, property pay- sales

company’s 7.558(45).4 208.45; ad- MSA This roll factor. MCL company’s percentage of a sales made The sales factor is the 7.558(51). Michigan. 208.51; Analogously, property and MCL MSA payroll percentages payroll in Michi- factors are the 400 472 Mich Opinion by Dissenting Brickley, J. company’s gross

justment share of a allocates a required Michigan, Due as tax base to Corp v Quill and Commerce Clauses. Process 1904; 119 L Ed Dakota, —; 112 S Ct North (1992); Mfg Bair, 267; 437 91 Moorman Co v US 2d (1978); Complete 2340; L 197 98 S Ct Ed 2d Brady, Transit, 97 Ct Inc v US S Auto (1977). 1076; 51 L Ed 2d calculating apportioned base, a After its capital acquisi- company deducts the cost of its acquisitions single tions. The depreciable business tax treats personal property property5 and real differently. company may A deduct the entire cost Michigan may property of real located but property of real located deduct none of the cost 7.558(23)(c). 208.23(c); The MCL MSA elsewhere. portion personal property company of the cost of may apportionment depends upon the value of another deduct the three-factor

formula. Unlike average merely formula, of a this formula is payroll company’s property and factors. MCL 7.558(23)(a). 208.23(a); MSA

Caterpillar statutory arrange- contends that this ment is unconstitutional. The cad offered for de- preciable personal property is assailed on two grounds. having suggested company First, that a is larger greater initial investment company hav- receives a ing deduction than a Caterpillar argues Second, a lesser investment. personal property a form of

that percentage-based the cad for specifically deduction condemned 208.46; 7.558(46), 208.49; gan respectively. MCL MSA MCL MSA 7.558(49). 5Technically, company its which formula a uses determine property depends upon the of that for federal deduction income tax a deduction for classification qualifies purposes. Property falling under 26 USC 1250 for 208.23(c); 7.558(23)(c), i.e, pursuant to MCL MSA the cad depreciable property. Depreciable property falling real under 208.23(a); qualifies pursuant for a deduction to MCL MSA § 7.558(23)(a), i.e., tangible personal property. the for Caterpillar Dissenting Opinion Brickley, J. Westinghouse Corp Tully, supra. The Electric challenged separate on encouraging for real cad grounds. contends that productive companies to locate resources Michi- gan violates the Commerce Clause. The first con- personal property correct; tention is percentage-based impermissible an deduction. property, however, for real is available to all companies regardless activity of their in

and does not discriminate violation of the Com- merce Clause.

A. THE PROPERTY CAD FOR PERSONAL supra, Westinghouse Corp Tully, In Electric Supreme a York the Court considered credit New using exporting offered for goods New York facilities for greater to other countries: the New exports, compared company’s to a total York-based greater company exports, the the credit the was unanimously offered. The Court invali- dated the credit. The Court found that the credit

" positive 'provide[d] incentive for increased busi- penal- activity State,’ but also it ness New York shipping in . . . activities in other ize^] increases (internal quotation citation States.” Id. at 401 omitted). penalty, found, Court arose be- it York decreased the incentive cause New activity activity for in-state as out-of-state awarded increased. This effect occurred because increases in percent- activity relative out-of-state lowered the exports company’s age of New York-based Summing up exports. 400, 9. its at n total Id. analysis credit, "[T]he the Court wrote: of the discriminatory on ship- manner credit is awarded percentage [company’s] of a the basis of the ping of New from the State conducted within Mich Dissenting Opinion by Brickley, J. company’s 402, Id. at n 9. Because a York.” advantage if it took of an incentive would increase impaired state, New York offered another clogged com- free flow of interstate commerce and petition among export the states for the trade. deciding the, case,

In the Court noted that opinion might doubt on investment credits cast generally. Because all investment credits reward activity denying while a reward to out-of- in-state state might suggested activity, it be that discrimi- necessarily Denying validity nation results. interpretation, this that offends the Commerce is allowed percentage the Court wrote: "We reiterate provision

it credit is not

Clause, but the fact that impermissible basis, i.e., on an specific segment corpora- of a that is York.” Id. tion’s business conducted New emerging Westing- at n 12. The rule from Corp Basing house Electric is clear-cut: a deduc- change company’s in- tion on a state a subset of a activity activity relative to its total is uncon- stitutional.6 prop-

Applying personal rule this erty it The leads to the conclusion that is invalid. by the multi-

amount of deduction is determined percentage plying the cost of the a defined asset average percentage property payroll of and as the a Michigan. percentage, company has in This re- only portion company’s flects a of a economic important emphasize It to that one looks to the entire tax range activity particu the of economic relevant to a statute define sbt, Regarding range in a lar tax. the is defined terms of sales factor, factor, property payroll personal a and a factor. The cad for property property only payroll on the factor the factor. is based and By focusing only company’s jurisdictionally rele on two-thirds of a activity, the combination of the multistate for vant personal property necessarily the for has the effect mula and condemned in apportioned cad Thus, Westinghouse Corp, supra. Electric a deduction activity generally with the same formula as multistate change activity Michigan. the in the entire in The result would reflect would likely be constitutional. of 475. Dissenting Opinion Brickley, J. Michigan. activity such, falls for As the formula in n Westinghouse i reason as the credit

the same company’s Corp: it incentive as it a Electric lowers payroll property acquires more or and locates Michigan. outside of example simple illustrate numerical should

A purchases Suppose company a new a this effect. asset percent costing $100,000. It has in state another Michigan payroll property in of its placing purchase. By in an- the asset the before Michigan prop- percentage state,, its other erty percentage necessarily payroll If the decrease. will percent, company to decreases suffering pen- $45,000 deduction, a a receives places company alty If, however, $5,000. Michigan Michigan, percentage of in new asset property suffering increase. Instead will penalty, company will receive a $5,000 $5,000 purchase company new bonus. If the continues place state, out of the amount assets and to of its deduction for each new them

purchase decreases Michigan property percentage its because personal payroll property growth. Worse, for decreases. punish efficiency economic and and can If amount of the relative company payroll because a decreases company grows, as when the the effect is the same purchased deduction for a new asset: a lesser grew activity qualifying other for one because Michigan.7 as it was states and not Just grant- Corp, Westinghouse method of Electric this ing a credit is unconstitutional. Attorney curiae defend General and amici

The argu- personal property four for with require finding The absolute decrease alone is insufficient personal property unconstitutionality. problem that the cad for percent apportioned every 10 decreases faster than the decrease decreases tax base. For personal property, apportioned in the tax base by percent. 6.6 Mich Dissenting Opinion Brickley, J. None, however, cad can show how ments. Westinghouse Corp. escape Electric the rule argues Attorney First, the General that the Com- require the state to use merce Clause does not symmetrical apportion the tax base formulas personal property. not cad for While and the requiring symmetry, Clause does Commerce require discriminatory. not be that statute Corp supra, Westinghouse Tully, clearly Electric that lower the amount of a holds that formulas percentage company’s of a deduction because property payroll decreases relative to and state discriminatory. property payroll are its total and personal property It such a formula. The cad for is, therefore, Attorney The Gen-

unconstitutional. syllo- argument does not even address this eral’s gism. suggests Attorney

Secondly, that General property personal is available to all cad for the taxpayers. is as irrelevant as

This observation qualify taxpayers for a All can correct. personal property. of the how-

The amount cad, compa- percentage ever, of a is determined Michigan, property payroll ny’s relative to Westing- payroll. property But, as total its Corp clear, the federal con- house Electric makes permit of- the deduction to be does not stitution that means on that basis. This characteristic fered the terms different, favorable is available on less companies depending on the amount of The constitution does their activities. permit distinctions. such Attorney General’s final two contentions suggestion The first

are more substantial. percentage providing credit on the basis company’s total in-state property relative to a companies payroll all benefits "[t]he But fact business. increase their in-state of Dissenting Opinion Brickley, J. nonresident, in of favor that this discrimination may considered as also be in-state sales which statute] commerce, [the does not save interstate Clause.” of the Commerce the restrictions from supra Exchange Comm, State Tax Boston Stock omitted). (citation restrictions of those One at 334 percentage-based prohibition A deductions. of is a penal- necessarily granted on this basis deduction activity. such in Absent out-of-state izes increases penalty, constitutional, the cad but a credit is a property inevitably personal in- decreases for activity Michigan interstate as offered for centive activity may not do. the state increases. This argument attempts Attorney General’s last The suggested necessity. It is virtue out of to make a according limiting the rela- the deduction that property company’s percentage in-state of a tive company’s "closely approximates” business strong Michigan generally. activity have a does being gener- "overly legitimate in not interest Westing- property. personal ous” with the cad for Corp, supra interest, at 399. That house Electric segment using justify however, does not By apportion activity company’s using erty the deduction. company’s prop- prop- on a formula based Michigan compared payroll as guarantees payroll erty elsewhere, the sbt companies moving suffer a assets out of state discriminatory penalty. penalty renders the This 208.23(a); personal property, MSA MCL cad 7.558(23)(a),unconstitutional. PROPERTY DEPRECIABLE REAL FOR B. THE CAD property a deduction offers for real The cad property depreciable located real the cost Michigan purchase acquisition. year in the property depreciable does in other states real Mich Dissenting Opinion by Brickley, J. 208.23(c); qualify for the deduction. MCL MSA 7.558(23)(c).Caterpillar because it attacks encourages companies Michigan to locate assets lowering the effective cost on intrastate trans- however, has, un- actions. The equivocally Court encouraging indicated that intrastate investment does not violate the Commerce Clause nondiscriminatory when the real company’s means are used. Because property acquisitions

for real treats all regard without to a activity, I would find the constitutional. prop constitutionality

The of the cad for real erty depends facially on whether it discriminates against interstate commerce. Facial discrimination categories results when a statute creates two of of of jurisdictional activity, composed one that is activity composed intrastate and one that is activity, imposes interstate interstate ers. See of Revenue & a burden on the

activity taxpay not shared intrastate e.g., Dep’t Foods, Kraft General Inc v Iowa Maryland

Finance; Louisiana; v Exchange supra.8 Boston Comm, Stock v State Tax inquiry essentially The is the same when a statute providing challenged. Westinghouse a credit is Corp Tully, supra. question Electric v The is companies engaging qualifying whether two in the Cavanagh Exchange, supra, Chief Justice reads Boston Stock as being Cavanagh, C.J., inconsistent with this statement. ante at 458. This overlooks how the New York Transfer Tax worked. Most securi places ties are transferred in New York. York New a small tax on happens, each transfer. Before a transfer York divided New York transfers into two a sale or trade occurs. New groups: a non-New York penalized sale or a New York sale. It the non-New York sales with pattern present unfavorable tax rates and terms. The essential is jurisdictional activity groups here: division of into two and unfavora group containing activity. ble treatment for the non-New York The specifically rejected Court the contention that because some might states, thereby investors increasing sell New York instead of in other activity, interstate commercial such clear discrimination justified. Thus, Exchange, text, supra, supports was Boston Stock contradicting instead of it. Dep’t v Dissenting Opinion Brickley, J. regardless activity of their credit receive the same they activity. do, does the statute If interstate enterprise If, however, an interstate discriminate. operates credit because a lesser receives interstate tional. Once nate commerce, unconstitu the credit not to discrimi

the statute is found facially, inquiry it, whether shifts to Corp Trinova effect, value. taxes extraterritorial supra. Dep’t Treasury, To resolve this fairly question, apportioned.9 to whether the tax one looks supra; Corp Corp, Container Trinova Bd, 159; 103 S America v Franchise Tax (1983). fairly If it is 2933; 77 L 2d 545 Ct apportioned, Ed extraterritorial the tax cannot value available value because no extraterritorial therefore be constitu for taxation. The tax would tional. property not discriminate

The real does company against quires commerce. If a ac Michigan, depreciable real new equal a of that asset. it receives This cost company is true is overwhelm whether ingly overwhelmingly intrastate.10 multistate or company’s or status as an interstate intrastate reading of cases not create an inconsis This the relevant does supra, Corp Michigan Treasury, tency Trinova between 66; Corp Jersey Dep’t Treasury, v Amerada Hess New (1989), 1617; Westinghouse Corp 104 L Ed and Electric v S Ct 2d merely principle Tully, supra. The reinforce the latter two cases prohibited, even if value has facial discrimination is extraterritorial directly. former that absent facial not been taxed establishes discrimination, analysis danger the must focus on of extraterritorial taxation. Cavanagh pri points a out he describes as Chief Justice what company "discriminatory deriving mary from whether a effect” Michigan-based predominantly predominantly For multistate. the or percentage personal property, the basis for this effect reflects respect upon cad for the With to the real which deduction is offered.. effect, indicates, proportionate property, the this as he derives from Ante, Ap general change in the multistate formula. 465, ii(b), p light pendix n the decisions of the In numerous 34. formula, upholding Supreme supra, the three-factor States Court United discriminatory. Corp, cannot be labeled Trinova this effect 440 Mich 400 Dissenting Opinion Brickley, J. enterprise operation wholly irrelevant Although Caterpillar dispute the tax. does not application credit, uniform Chief Justice Cavanagh in dissent does. He observes that when company acquires an asset it re company ceives a deduction and that when a acquires an asset in another state it does not. facially this, From he concludes that discriminates. First, I do not share this view for it two reasons. permissible grant entirely using in to a credit activity state as a criterion. As the Chief Justice Supreme detail, discusses Court has never providing, growth said that incentives for the industry intrastate violates the Commerce Clause. fact, In the consistent theme of the Court’s deci promote sions has been that such incentives free among trade the states. As the Court Corp Michigan Dep’t noted in Trinova of Trea supra, sury, laudatory 112 L Ed 2d "It is a goal design system promote in the of a tax to provide jobs prosperity investment that will taxing citizens state. States are free systems encourage 'structure] their growth development of intrastate commerce ” industry,’ quoting Exchange Boston Stock threatening State Tax Comm. Far from commerce, investment incentives enhance competition that "lies at the heart of a free trade policy.” Exchange Boston Stock v State Tax supra Metropolitan Comm, at Life Ins Co v However, could, presence even if of the effect would condemn formula, property. the three-factor not the for real 11 Inote that the Chief Justice’s is framed in discussion terms of net however, Ultimately, effective tax rates. the difference in net effective company qualified tax rates derives from the fact that one for the deduction while another did not. If the Commerce Clause allows deductibility, state to use in-state location as a criterion clearly justified. difference would be of Dissenting Opinion Brickley, J.

Ward, 1676; 84 L Ed 2d 751 470 US 105 S Ct (1985). industry Encouraging is intrastate not an impermissible purpose.12 emphasized

Additionally, that the Court has encourage providing particular of kinds credits activity As in-state paused is constitutional. the Court Westinghouse Corp Electric

to note Tully, only 12, the n recent case specifically, "We consider a tax credit reiterate provision that that it is not of the credit Clause, the fact that offends the Commerce but impermissible basis, i.e., an is allowed on percentage segment corpora- specific of a If tion’s is in New York.” business conducted analysis correct, is this state- the Chief Justice’s necessarily any credit ment is incorrect because qualify who for a difference between those creates it qualify This not for it. kind and those who do significant. constitutionally not difference is importantly, Chief Justice Cavanagh’s More analysis hinges faulty comparison in-state, on a jurisdictional activity nonjurisdic- out-of-state, purposes activity. the Commerce tional For the noncomparable. Clause, are these activities prohibition is of the Commerce Clause essential that activity may jurisdictional a treat state not simply company operates differently because one Cavanagh showing suggests permissible a Chief Justice validity. purpose necessarily This demonstrate constitutional does However, true means the United is States in-state when the are unconstitutional. providing on indicated that a credit based Court has commerce, long penalize activity, as it does not as Westinghouse supra ("[N]ot Corp, at 400-401 is constitutional. Electric 'provide positive only for York tax scheme incentive does the New State,’ penalizes activity York but also it increased business New States”). (Citation shipping activities in other increases in the disc’s omitted.) penalize property in real does not Because cad states, legitimate, activity in it is nondiscrimina creases in tory other this, light question the the In whether incentive. legitimate. purpose Given for real behind above, clearly yes. cases described answer Mich Dissenting Opinion Brickley, J. in interstate commerce and another does not. Two illustrating proposition Maryland cases this are v Foods, Louisiana and Kraft General Inc v Iowa Dep’t of Revenue & Finance. Maryland Supreme

In Louisiana, v Court challenge tax, considered a to a Louisiana known imposed as the First-Use Tax. The tax was on all gas Additionally, natural refined in Louisiana. provided

tax credits for numerous uses of natural gas consumed in Louisiana. Louisiana had thus distinguished effectively types between two of nat- gas: (which, gas by ural interstate natural defini- Louisiana) tion, cannot be consumed in and domes- gas. tic natural The Court struck this statute down unanimously because Louisiana had taxed two types jurisdictional activity differently and re- higher served the rates for interstate commerce. compared jurisdictional The Court activity; treatment of compare it did not treatment of natural gas shipped refined in Texas and interstate with offered, the credits Louisiana as the Chief Justice’s analysis suggests appropriate. would have been illustrating analysis

The most recent case this is Supreme Kraft case, General In Foods.

Court considered whether Iowa’s taxation of divi- paid by foreign corporation dends to an Iowa parent corporation exemption but of dividends paid corporation parent a domestic to an Iowa corporation was constitutional. The Court invali- using analysis dated the tax the same it had in Maryland v Louisiana. Iowa had divided the activi- jurisdiction categories ties within its into two category containing foreign treated the dividends favorably category containing less than the domes- analyzing tic dividends. When whether a. tax is - discriminatory, proper inquiry then, is types activity whether the state treats within its jurisdiction differently because of "some interstate Dep’t Opinion Dissenting Bkickxey, J. Armco, Hardesty, supra. Inc v If so

element.” from which bears a burden group is uncon- exempted, the tax group the intrastate does simply for real property stitutional. facially. discriminate for real whether the cad question The final analysis This discriminatory has effects. "export on the tax is means focuses whether Corp Trinova tax import burdens or revenues.” As Treasury, L Ed 2d 912. noted, however, does a tax has Court fairly if discriminatory not have a effect Corp, supra. Trinova conclusion This apportioned. apportion- concept of fair directly follows from distinguishes apportioned, If a tax it fairly ment. attribut- value-added accurately properly between attrib- Michigan properly value-added able to and of America Corp Container to other utable states. words, Bd, supra. Franchise Tax In other value-added imposed of the on burden tax is such, As Michigan.13 to extraterrito- attributable taxed, not Michigan does rial value is not and Be- import revenues. export unfairly burdens or fairly apportioned, the sbt generally cause or revenue import for real does property facial either states. Absent export burdens other 13 suggests company taxed to a will be The other dissent opera derived out-of-state extent on the value-added from certain however, formula, allocates Ante at 453-454. The three-factor tions. value-added jurisdictions values are so that extraterritorial that to other such, Michigan "a non-Michi taxes not taxed. As gan-based the statement company’s productive activities at out-of-state conducted employees equipment,” id. at factories with out-of-state appear provide for those activities would fails to a deduction then Michigan any To the extent of those activities. incorrect. does not spite company subjected taxation it is such that a believes formula, single change company accurately tax offers in the business three-factor apportion more opportunity to reflect its activities an 7.558(69); 208.69; jurisdictional activity. MSA its MCL Corp Dep’t Treasury, NW2d Mich Trinova (1989). Mich Brickley, J. Dissenting Opinion discriminatory effect, discrimination or a I would property find the cad for real to be constitutional. prohibits Michigan

The federal constitution from penalizing activity. interstate commercial personal property impermis- is awarded on an percentage provides such, sible basis. As an investing punish- incentive for investing ment for elsewhere. The cad for real property Any company purchasing is different. depreciable property Michigan real receives the deduction for the asset’s full cost no matter company operates whether the in several states or operates only Michigan. conclude, then, I the cad for real is constitutional while personal property the cad for not. In view of the majority’s specu- issue, resolution of I this will not juncture appropriate late at this about what an remedy might be.

Case Details

Case Name: Caterpillar, Inc v. Department of Treasury

Court Name: Michigan Supreme Court

Date Published: Jul 31, 1992

Citation: 488 N.W.2d 182

Docket Number: 90999, (Calendar No. 11)

Court Abbreviation: Mich.