The dispute in California over taxpayers’ ability to elect to use the evenly weighted, three-factor (i.e., property factor, payroll factor, and sales factor) business income apportionment formula provided by the Multistate Tax Compact (the “Compact”) has come to an end. On October 11, 2016, the US Supreme Court denied the taxpayers’ petition for certiorari in The Gillette Company, et al. v. California Franchise Tax Board, et al., No. 15-1442 — one of the most highly publicized MTC apportionment election cases.
On July 24, 2012, a California Court of Appeal held that California taxpayers could elect to use the Compact’s three-factor apportionment formula, despite the fact that California moved to a mandatory four-factor apportionment formula (property, payroll, and double-weighted sales) in 1993. However, the California legislature did not formally withdraw from the Compact until June 27, 2012. The appeals court ruled that California, as a member of the Compact for the periods at issue, was bound to offer taxpayers the Compact’s three-factor formula election. For many taxpayers, the evenly-weighted Compact formula resulted in a smaller California apportionment factor when compared to the double-weighted sales factor formula.
The taxpayers’ victory ultimately would not stand. Nearly three-and-half years later, on December 31, 2015, the California Supreme Court unanimously reversed the appeals court and held the Compact election adopted in the California statutes was merely state law subject to change at the legislature’s discretion, not a binding, interstate contract that prevented California’s adoption of the double-weighted sales factor formula.
The US Supreme Court’s decision to deny certiorari means that the California Supreme Court’s ruling stands and that the Compact election was not available to California taxpayers. The US Supreme Court’s ruling also has broader implications beyond California. Among many issues, the Court’s silence leaves unanswered the question of when an interstate compact constitutes a binding contract between states versus a non-binding advisory agreement.
Going forward, it remains to be seen how the US Supreme Court will address additional Compact apportionment election certiorari petitions from other states. In Minnesota and Michigan, the states’ highest courts have already ruled against the taxpayers in their own Compact apportionment election cases, Kimberly-Clark Corp. v. Commissioner of Revenue (Minnesota) and Gillette Commercial Operations, N.A. v. Department of Treasury (Michigan). The taxpayer in Kimberly-Clark filed its certiorari petition with the US Supreme Court on October 20, 2016, arguing “the case for review is stronger” than in Gillette (California) because Kimberly-Clark “turns on the meaning of the unmistakability doctrine” which is a “source of widely acknowledged confusion.” The taxpayer in Gillette (Michigan) has until November 21, 2016, to file its certiorari petition.
Two additional noteworthy MTC apportionment election cases are currently pending in Oregon and Texas. In Oregon, oral arguments were recently heard in a taxpayer’s appeal to the Oregon Supreme Court, following the Oregon Tax Court ruling in favor of the state in Health Net, Inc. v. Dep’t of Revenue, Case No. TC 5127. In Texas, briefing is wrapping up in a taxpayer’s appeal to the Texas Supreme Court, following a Texas appellate court’s ruling in favor of the state in Graphic Packaging Corp. v. Hegar, Case No. 03-14-00197-CV.
Contact the Author: Drew Hemmings