State and Local Tax Update
Court Of Appeals Upholds Large “Claw-Back” Of Tax Incentive
The Michigan Court of Appeals upheld a ruling that awarded a city over $4 million in damages from a business that discontinued operations in the city. In 1999, Owens-Brockway Glass Containers, Inc. (Owens) received a 12-year Industrial facilities property tax (IFT) abatement from the City of Charlotte for a facility that Owens proposed to upgrade. The agreement, entered into as part of the deal, included a “claw-back” clause that required Owens to repay any abated taxes if the facility was closed during the term of the abatement. In 2010, Owens ceased operations, released almost all of its employees and proceeded to remove equipment. At the request of the City, the State Tax Commission revoked the IFT abatement and the City sent Owens a tax bill for over $4 million. Owens filed a complaint with the circuit court, which awarded the damages to the City.
On appeal, the Court of Appeals rejected Owen’s claims and upheld the award. Owens claimed the facility was not "closed"; and, even if it was, the claw-back or liquidated damages clause in the agreement was inappropriate and unenforceable. Owens claimed that such a clause is only appropriate when damages relating to a breach are difficult to calculate. According to Owens, the actual damages were easy to calculate and the claw back penalty in the agreement was disproportionate to any real harm to the City. The Court of Appeals disagreed, finding that because the facility was no longer capable of converting raw materials into an end product, it met the definition of “closed” and the liquidated damages clause was enforceable.
While few businesses contemplate that their facilities will be relocated or closed within the time a tax abatement agreement is in effect, the reality is that it happens fairly frequently. This case serves to remind businesses to give due care to drafting, negotiating and reviewing incentive agreements.
Michigan Supreme Court Denies Motion for Rehearing in IBM
On November 14, 2014, Michigan Supreme Court denied the Michigan Department of Treasury’s Motion for Rehearing in IBM v Department of Treasury and held that IBM could elect to use an apportionment procedure using sales, payroll and property in calculating its Michigan Business Tax (MBT) Liability, rather than only sales as the MBT dictates based on an interstate arrangement Michigan entered into with other states in 1970, when it enacted the "Multistate Tax Compact.” The 2008 tax year was involved in IBM. The Legislature attempted to amend the Compact in 2011 to remove the election and, in September 2014, the Legislature purported to retroactively repeal the Compact effective January 1, 2008. Many questions remain to be resolved, such as whether other taxpayers can secure refunds given the Legislature’s actions and whether a State can repeal a Compact retroactively. These questions are likely to get resolved in cases currently pending before the Michigan Court of Appeals and Court of Claims.
If you have any questions about the topics in this alert or any other SALT matter, please contact one of our State and Local Tax attorneys or professionals.