California, Gillette and the Multistate Tax Compact

Nov 03, 2016
Nov 03, 2016
0 min. read

FTB provides guidance following denied U.S. Supreme Court petition

UPDATE (11/3/16): the Franchise Tax Board (FTB) released FTB Notice 2016-03 - Processing of Cases Raising the Compact Election Issue After the United States Supreme Court Denied the Petition for a Writ of Certiorari in The Gillette Company v. Franchise Tax Board. Notice 2016-03 supersedes FTB Notices 2012-01 and 2016-01, which are now withdrawn. Now that the Gillette litigation has effectively concluded with the U.S. Supreme Court denying further review, the FTB will take the following actions in cases pending before the FTB where the taxpayer attempted to make an election based on the Multistate Tax Compact's (MTC) apportionment formula:

  • The FTB will begin to process refund claims. Taxpayers should expect to receive formal notices in response to their claims for refund over the next several months.
  • The FTB will place administrative protests that include the compact election issue into active status and resume working those cases in the normal course of business.
  • The FTB will process audits involving the compact election issue in the normal course of business.
  • Taxpayers may make tax deposits, or may pay proposed deficiency assessments, to stop the accrual of interest.
  • Penalties will be imposed as appropriate on a case-by-case basis.
  • Taxpayers with pending MTC cases before the FTB should contact their tax advisors for additional guidance. 

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.

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