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

Heading: the cad for personal property

Text: In Westinghouse Electric Corp v Tully, supra , the Supreme Court considered a credit New York offered for using New York facilities for exporting goods to other countries: the greater the New York-based exports, compared to a company's total exports, the greater the credit the company was offered. The Supreme Court unanimously invalidated the credit. The Court found that the credit not only `provide[d] a positive incentive for increased business activity in New York State,' but also it penalize[d] increases in ... shipping activities in other States. Id. at 401 (internal quotation and citation omitted). The penalty, the Court found, arose because New York decreased the incentive it awarded for in-state activity as out-of-state activity increased. This effect occurred because increases in out-of-state activity lowered the relative percentage of New York-based exports to the company's total exports. Id. at 400, n 9. Summing up its analysis of the credit, the Court wrote: [T]he credit is awarded in a discriminatory manner on the basis of the percentage of a [company's] shipping conducted from within the State of New York. Id. at 402, n 9. Because a company's tax would increase if it took advantage of an incentive offered by another state, New York impaired the free flow of interstate commerce and clogged competition among the states for the export trade. In deciding the case, the Court noted that the opinion might cast doubt on investment credits generally. Because all investment credits reward in-state activity while denying a reward to out-of-state activity, it might be suggested that discrimination necessarily results. Denying the validity of this interpretation, the Court wrote: We reiterate that it is not the provision of the credit that offends the Commerce Clause, but the fact that it is allowed on an impermissible basis, i.e., the percentage of a specific segment of the corporation's business that is conducted in New York. Id. at 406, n 12. The rule emerging from Westinghouse Electric Corp is clear-cut: Basing a deduction on a change in a subset of a company's instate activity relative to its total activity is unconstitutional. [6] Applying this rule to the CAD for personal property leads to the conclusion that it is invalid. The amount of the deduction is determined by multiplying the cost of the asset by a percentage defined as the average percentage of property and payroll a company has in Michigan. This percentage, reflects only a portion of a company's economic activity in Michigan. As such, the formula falls for the same reason as the credit in Westinghouse Electric Corp: it lowers a company's incentive as it acquires and locates more property or payroll outside of Michigan. A simple numerical example should illustrate this effect. Suppose a company purchases a new asset in another state costing $100,000. It has 50 percent of its property and payroll in Michigan before the purchase. By placing the asset in another state, the percentage of its Michigan property and payroll will necessarily decrease. If the percentage decreases to 45 percent, the company only receives a $45,000 deduction, suffering a penalty of $5,000. If, however, the company places the new asset in Michigan, the percentage of Michigan property will increase. Instead of suffering a $5,000 penalty, the company will receive a $5,000 bonus. If the company continues to purchase new assets and to place them out of state, the amount of its deduction for each new purchase decreases because its percentage of Michigan property and payroll decreases. Worse, the CAD for personal property can punish economic efficiency and growth. If the relative amount of property and payroll in Michigan decreases because a company grows, the effect is the same as when the company purchased a new asset: a lesser deduction for activity qualifying for one because it grew in other states and not in Michigan. [7] Just as it was in Westinghouse Electric Corp, this method of granting a credit is unconstitutional. The Attorney General and amici curiae defend the CAD for personal property with four arguments. None, however, show how the CAD can escape the rule of Westinghouse Electric Corp. First, the Attorney General argues that the Commerce Clause does not require the state to use symmetrical formulas to apportion the tax base and the CAD for personal property. While not requiring symmetry, the Commerce Clause does require that the statute not be discriminatory. Westinghouse Electric Corp v Tully, supra , clearly holds that formulas that lower the amount of a deduction because the percentage of a company's property and payroll in state decreases relative to its total property and payroll are discriminatory. The CAD for personal property is such a formula. It is, therefore, unconstitutional. The Attorney General's argument does not even address this syllogism. Secondly, the Attorney General suggests that the CAD for personal property is available to all taxpayers. This observation is as irrelevant as it is correct. All taxpayers can qualify for a CAD for personal property. The amount of the CAD, however, is determined by the percentage of a company's property and payroll in Michigan, relative to its total property and payroll. But, as Westinghouse Electric Corp makes clear, the federal constitution does not permit the deduction to be offered on that basis. This characteristic means that the CAD is available on different, less favorable terms to companies depending on the amount of their interstate activities. The constitution does not permit such distinctions. The Attorney General's final two contentions are more substantial. The first suggestion is that providing a credit on the basis of the percentage of in-state property relative to a company's total property and payroll benefits all companies that increase their in-state business. But [t]he fact that this discrimination is in favor of nonresident, in-state sales which may also be considered as interstate commerce, does not save [the statute] from the restrictions of the Commerce Clause. Boston Stock Exchange v State Tax Comm, supra at 334 (citation omitted). One of those restrictions is a prohibition of percentage-based deductions. A deduction granted on this basis necessarily penalizes increases in out-of-state activity. Absent such a penalty, a credit is constitutional, but the CAD for personal property inevitably decreases the incentive offered for Michigan activity as interstate activity increases. This the state may not do. The Attorney General's last argument attempts to make a virtue out of necessity. It is suggested that limiting the deduction according to the relative percentage of a company's in-state property closely approximates that company's business activity generally. Michigan does have a strong and legitimate interest in not being overly generous with the CAD for personal property. Westinghouse Electric Corp, supra at 399. That interest, however, does not justify using a segment of the company's activity to apportion the deduction. By using a formula based only on a company's property and payroll in Michigan as compared to property and payroll elsewhere, the SBT guarantees that companies moving assets out of state suffer a discriminatory penalty. This penalty renders the CAD for personal property, MCL 208.23(a); MSA 7.558(23)(a), unconstitutional.