California, Gillette and the Multistate Tax Compact
U.S. Supreme Court declines to review compact election decision
TAX ALERT |
UPDATE (10/11/2016): On Oct. 11, 2016, the U.S. Supreme Court denied Gillette’s petition for a writ of certiorari to review the California Supreme Court’s decision in The Gillette Company, et al. v. Franchise Tax Board. Therefore, the California Supreme Court’s decision will stand.
In separate Multistate Tax Compact (MTC) litigation out of Michigan, the U.S. Supreme Court recently granted the taxpayers additional time to file petitions for a writ of certiorari to review the Michigan Supreme Court’s June 24, 2016, denial of application for leave to appeal the Sept. 29, 2015, judgement of the Michigan Court of Appeals. The filing deadline was extended to Nov. 21, 2016. For more information on the Michigan MTC litigation, please read our alert, Michigan Supreme Court declines retroactive MTC repeal challenge.
UPDATE (06/07/16): On May 29, 2016, the taxpayers in The Gillette Company, et al. v. Franchise Tax Board case filed a petition for writ of certiorari with the U.S. Supreme Court to review the decision of the California Supreme Court that taxpayers were not entitled to elect to utilize the Multistate Tax Compact’s three-factor apportionment election in calculating franchise tax. State court decisions in Michigan, Minnesota and Texas have come to similar conclusions as the California Supreme Court and litigation on this issue persists in those and other states.
ORIGINAL (01/04/16): On Dec. 31, 2015, the California Supreme Court issued its decision in The Gillette Company, et al. v. Franchise Tax Board, reversing the California Court of Appeal’s 2012 ruling in favor of the taxpayer and holding that the taxpayer was not entitled to elect to utilize the Multistate Tax Compact’s (MTC) three-factor apportionment formula in calculating its franchise tax.
In reaching its decision, the court determined that California’s enactment of the MTC was state law properly subject to unilateral repeal in whole or in part, and was not a binding reciprocal agreement among the MTC member states. Furthermore, the court found that California’s legislature enactment of 1993 legislation requiring the use of a double-weighted sales factor apportionment formula for franchise tax purposes validly superseded the state’s enactment of the MTC apportionment election, and that the MTC formula could not be elected into despite the continued existence of the MTC elsewhere in the state’s tax code.
The California Supreme Court’s ruling and attendant reasoning brings California in line with the decisions of other state courts, including Health Net Inc. v. Dep't of Revenue in Oregon, Graphic Packaging Corp. v. Hegar in Texas, and Kimberly-Clark Corp. v. Commissioner of Revenue in Minnesota, which have consistently ruled in favor of the state on this issue.
The decision of the California Supreme Court is not the end of this saga that has seen so much activity, including states declaring that a taxpayer-favorable outcome will cost billions in tax dollars, the enactment of highly suspect retroactive legislation, and the exodus of member states from the MTC. It is likely that the taxpayer will file a Petition for Certiorari with the U.S. Supreme Court, which could ultimately delay a final decision for another year or more. In the meantime, protective claims should continue to be held in abeyance.