Opinion ID: 1613623
Heading Depth: 1
Heading Rank: 3

Heading: the cad for depreciable real property

Text: The CAD for real property offers a deduction of the cost of depreciable real property located in Michigan in the year of acquisition. The purchase of depreciable real property in other states does not qualify for the deduction. MCL 208.23(c); MSA 7.558(23)(c). Caterpillar attacks the CAD because it encourages companies to locate assets in Michigan by lowering the effective cost on intrastate transactions. The Supreme Court has, however, unequivocally indicated that encouraging intrastate investment does not violate the Commerce Clause when nondiscriminatory means are used. Because the CAD for real property treats all acquisitions of real property in Michigan without regard to a company's interstate activity, I would find the CAD constitutional. The constitutionality of the CAD for real property depends on whether it facially discriminates against interstate commerce. Facial discrimination results when a statute creates two categories of jurisdictional activity, one that is composed of intrastate activity and one that is composed of interstate activity, and imposes a burden on the interstate activity not shared by intrastate taxpayers. See e.g., Kraft General Foods, Inc v Iowa Dep't of Revenue & Finance ; Maryland v Louisiana ; Boston Stock Exchange v State Tax Comm, supra . [8] The inquiry is essentially the same when a statute providing a credit is challenged. Westinghouse Electric Corp v Tully, supra . The question is whether two companies engaging in the qualifying activity receive the same credit regardless of their interstate activity. If they do, the statute does not discriminate. If, however, an interstate enterprise receives a lesser credit because it operates in interstate commerce, the credit is unconstitutional. Once the statute is found not to discriminate facially, the inquiry shifts to whether it, in effect, taxes extraterritorial value. Trinova Corp v Michigan Dep't of Treasury, supra . To resolve this question, one looks to whether the tax is fairly apportioned. [9] Trinova Corp, supra; Container Corp of America v Franchise Tax Bd, 463 US 159; 103 S Ct 2933; 77 L Ed 2d 545 (1983). If it is fairly apportioned, the tax cannot tax extraterritorial value because no extraterritorial value is available for taxation. The tax would therefore be constitutional. The CAD for real property does not discriminate against interstate commerce. If a company acquires new depreciable real property in Michigan, it receives a CAD equal to the cost of that asset. This is true whether the company is overwhelmingly multistate or overwhelmingly intrastate. [10] The company's status as an interstate or intrastate enterprise is wholly irrelevant to the operation of the tax. Although Caterpillar does not dispute the uniform application of the credit, Chief Justice CAVANAGH in dissent does. He observes that when a company acquires an asset in Michigan it receives a deduction and that when a company acquires an asset in another state it does not. From this, he concludes that the CAD facially discriminates. [11] I do not share this view for two reasons. First, it is entirely permissible to grant a credit using instate activity as a criterion. As the Chief Justice discusses in detail, the Supreme Court has never said that providing incentives for the growth of intrastate industry violates the Commerce Clause. In fact, the consistent theme of the Court's decisions has been that such incentives promote free trade among the states. As the Supreme Court noted in Trinova Corp v Michigan Dep't of Treasury, supra , 112 L Ed 2d 912, It is a laudatory goal in the design of a tax system to promote investment that will provide jobs and prosperity to the citizens of the taxing state. States are free to `structur[e] their tax systems to encourage the growth and development of intrastate commerce and industry,' quoting Boston Stock Exchange v State Tax Comm . Far from threatening interstate commerce, investment incentives enhance the competition that lies at the heart of a free trade policy. Boston Stock Exchange v State Tax Comm, supra at 337; Metropolitan Life Ins Co v Ward, 470 US 869; 105 S Ct 1676; 84 L Ed 2d 751 (1985). Encouraging intrastate industry is not an impermissible purpose. [12] Additionally, the Court has emphasized that providing credits to encourage particular kinds of in-state activity is constitutional. As the Court paused to note in Westinghouse Electric Corp v Tully, 466 US 406, n 12, the only recent case to consider a tax credit specifically, 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. If the Chief Justice's analysis is correct, this statement is incorrect because any credit necessarily creates a difference between those who qualify for it and those who do not qualify for it. This kind of difference is not constitutionally significant. More importantly, Chief Justice CAVANAGH'S analysis hinges on a faulty comparison of in-state, jurisdictional activity and out-of-state, nonjurisdictional activity. For the purposes of the Commerce Clause, these activities are noncomparable. The essential prohibition of the Commerce Clause is that a state may not treat jurisdictional activity differently simply because one company operates in interstate commerce and another does not. Two cases illustrating this proposition are Maryland v Louisiana and Kraft General Foods, Inc v Iowa Dep't of Revenue & Finance . In Maryland v Louisiana , the Supreme Court considered a challenge to a Louisiana tax, known as the First-Use Tax. The tax was imposed on all natural gas refined in Louisiana. Additionally, the tax provided credits for numerous uses of natural gas consumed in Louisiana. Louisiana had thus effectively distinguished between two types of natural gas: interstate natural gas (which, by definition, cannot be consumed in Louisiana) and domestic natural gas. The Court struck this statute down unanimously because Louisiana had taxed two types of jurisdictional activity differently and reserved the higher rates for interstate commerce. The Court compared treatment of jurisdictional activity; it did not compare treatment of natural gas refined in Texas and shipped interstate with the credits Louisiana offered, as the Chief Justice's analysis suggests would have been appropriate. The most recent case illustrating this analysis is Kraft General Foods. In that case, the Supreme Court considered whether Iowa's taxation of dividends paid by a foreign corporation to an Iowa parent corporation but exemption of dividends paid by a domestic corporation to an Iowa parent corporation was constitutional. The Court invalidated the tax using the same analysis it had in Maryland v Louisiana . Iowa had divided the activities within its jurisdiction into two categories and treated the category containing foreign dividends less favorably than the category containing domestic dividends. When analyzing whether a tax is discriminatory, then, the proper inquiry is whether the state treats types of activity within its jurisdiction differently because of some interstate element. Armco, Inc v Hardesty, supra . If so and the interstate group bears a burden from which the intrastate group is exempted, the tax is unconstitutional. The CAD for real property simply does not discriminate facially. The final question is whether the CAD for real property has discriminatory effects. This analysis focuses on whether the tax is a means to export tax burdens or import tax revenues. Trinova Corp v Michigan Dep't of Treasury, 112 L Ed 2d 912. As the Supreme Court has noted, however, a tax does not have a discriminatory effect if it is fairly apportioned. Trinova Corp, supra. This conclusion follows directly from the concept of fair apportionment. If a tax is fairly apportioned, it distinguishes accurately between value-added properly attributable to Michigan and value-added properly attributable to other states. Container Corp of America v Franchise Tax Bd, supra . In other words, the burden of the tax is imposed only on value-added attributable to Michigan. [13] As such, extraterritorial value is not taxed, and Michigan does not export burdens or unfairly import revenues. Because the SBT generally is fairly apportioned, the CAD for real property does not import revenue or export burdens to other states. Absent either facial discrimination or a discriminatory effect, I would find the CAD for real property to be constitutional. The federal constitution prohibits Michigan from penalizing interstate commercial activity. The CAD for personal property is awarded on an impermissible percentage basis. As such, it provides an incentive for investing in Michigan and punishment for investing elsewhere. The CAD for real property is different. Any company purchasing depreciable real property in Michigan receives the deduction for the asset's full cost no matter whether the company operates in several states or operates only in Michigan. I conclude, then, that the CAD for real property is constitutional while the CAD for personal property is not. In view of the majority's resolution of this issue, I will not speculate at this juncture about what an appropriate remedy might be.