Opinion ID: 1613623
Heading Depth: 1
Heading Rank: 2

Heading: capital acquisition deduction

Text: To better understand the issues implicated in this case, we move next to a discussion of the CAD. It is important to note that the CAD is not an isolated tax statute, but is part of an overall tax scheme that represents a policy choice adopted by the state Legislature. This tax scheme is the SBT. The SBT, enacted by the Legislature in 1975, [9] was new and experimental legislation in this state. Town & Country Dodge, Inc v Dep't of Treasury, 420 Mich 226, 234; 362 NW2d 618 (1984). [10] The SBT is a consumption-type value-added tax. See Mobil Oil v Dep't of Treasury, 422 Mich 473, 496, and n 14; 373 NW2d 730 (1985). It is not, however, a pure value-added tax because it is subject to various exemptions, exclusions, and industry-specific adjustments. [11] Under the SBT, the first step in determining a taxpayer's tax liability is to determine its tax base. This tax base is defined as business income before apportionment subject to certain adjustments. MCL 208.9; MSA 7.558(9). The tax base is then apportioned between Michigan and other states in which the taxpayer conducts business activities. MCL 208.40, 208.41, 208.45; MSA 7.558(40), 7.558(41), 7.558(45). This is done by using a three-factor apportionment formula. [12] After apportionment, the tax base is subject to several additional adjustments. [13] One such adjustment is the CAD. The CAD does just what its name suggests. It provides a deduction for the acquisition of capital assets. Following the general principles of consumption-type value-added tax treatment, the CAD allows the taxpayer's tax base to be reduced by the amount expended during the tax year to acquire capital assets. See Kasischke, Computation of the Michigan single business tax: Theory and mechanics, 22 Wayne L R 1069 (1976). This consumption-type element of the CAD and SBT thereby provides a cash-flow advantage to the purchaser/user of capital assets. The CAD allows the purchaser/user to increase its cash flow by reducing its tax liability through the deduction. Such a tax policy may help to encourage Michigan-related investments and may provide an economic stimulus to certain parts of the business sector due to the increase in cash flow. [14] The deduction provided by the CAD is not applied to the tax base until after the tax base has been allocated or apportioned. MCL 208.23; MSA 7.558(23). Since the tax base after apportionment represents only Michigan business activity, only capital acquisitions related to Michigan business activity should qualify for treatment pursuant to the CAD. The CAD (subsections 23[a] and 23[c]) is designed to accomplish this result. Subsections 23(a) and 23(c) provide methods of apportioning a taxpayer's capital acquisitions so that only those acquisitions that relate to Michigan business activity are included in the CAD. Apportioning the CAD for tangible personal property [15] is accomplished in subsection 23(a). Apportioning the CAD for real property [16] is accomplished in subsection 23(c). [17] Under subsection 23(a), the deduction for tangible personal property is available for any taxpayer, whether a multistate company [18] or a company whose business activity is allocated entirely to Michigan [19]  an in-state company. Furthermore, subsection 23(a) does not limit the CAD for tangible personal property to only those assets located in Michigan. Because tangible personal property is readily transportable, it is not that easy to determine where tangible personal property is actually located, or how or if such location should be or is solely determinative of its proper use in the CAD. The Legislature recognized that it could not reach such a determination without imposing burdensome accounting problems upon the taxpayers and upon the Michigan taxing system itself. In response to these problems, the Legislature, following traditional taxing policy and practice of state legislatures, adopted an apportionment formula to calculate the CAD for tangible personal property related to Michigan business activities. The apportionment formula adopted was a two-factor formula. To figure out the CAD for tangible personal property, the total cost of the tangible personal property acquired during the tax year (regardless of whether it is purchased in Michigan) is multiplied by the average of the property factor and the payroll factor. [20] The two-factor formula used in subsection 23(a) is obviously not the same as the three-factor formula used in computing a taxpayer's tax base attributable to Michigan. [21] The theory behind the use of the two-factor apportionment formula in subsection 23(a) is that the acquisition of the capital is most likely to be located where a company's property and payroll (employees) are located. The sales factor used in the three-factor formula is excluded on the premise that while a taxpayer's investment in productive capacity (capital assets) follows the taxpayer's existing investment in property and labor, it does not necessarily follow the location of its sales. [22] As with subsection 23(a), under subsection 23(c) the deduction for real property is available for any taxpayer, whether a multistate company or a company whose business activity is allocated entirely to Michigan  an in-state company. The method of apportionment, however, is much more simple. Location of real property is obvious and does not involve accounting problems. Moreover, investment in real property is considered to be directly related to productive capacity. Therefore, subsection 23(c) provides a one hundred percent deduction for the cost of real property provided that the assets are physically located in Michigan. The lack of symmetry between the three-factor apportionment formula used for calculating the SBT tax base and the two-factor apportionment formula used under subsection 23(a) of the CAD is ultimately the basis for Caterpillar's constitutional challenge [23] of the CAD. [24]