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.
Bringing a semblance of order to the prior proceedings, the Michigan Court of Appeals reversed the Michigan Court of Claims ruling that defied the remand instructions from the Michigan Supreme Court. International Business Machines Corp. v. Dep’t of Treasury, Dkt. 327359 (Mich. Ct. App. July 21, 2016). The appellate court’s ruling would result in granting to International Business Machines Corp. (“IBM”) a total of nearly $6 million in Michigan Business Tax (“MBT”) refunds for the company’s 2008 tax year.
On December 31, 2015, the California Supreme Court issued its long-awaited opinion in Gillette Co., et al. v. Franchise Tax Board, 363 P.3d 94, addressing whether The Gillette Company and several other California corporate taxpayers (collectively, “Gillette”) were permitted to elect to use the Multistate Tax Compact’s evenly-weighted, three-factor apportionment formula comprised of property, payroll, and sales factors (“MTC Formula”) in lieu of the three-factor apportionment formula with a double-weighted sales factor (i.e., property, payroll, and double-weighted sales factors) subsequently enacted by the state (“Double-weighted Sales Formula”) in 1993. The California Supreme Court held that the California legislature not only had the power to override the Compact election contained in the California statutes, but that it also intentionally exercised that power when it statutorily mandated the use of the Double-weighted Sales Formula. This holding would result in a denial of the taxpayers’ refund claims of approximately $34 million, which were premised on the election and application of the MTC Formula to their franchise tax returns filed between 1993 and 2005.