The California Court of Appeals held in Gillette v. Franchise Tax Board that the Multistate Tax Compact is a valid interstate compact and that California is bound by its provisions, including the election to use the equally weighted three factor apportionment formula. Similar cases have been brought in many Compact member states, resulting in some states repealing their membership in the Compact. We invite you to review these developments and consider the impact they may have on the Compact.
California was a signatory state to the Multistate Tax Compact, which includes a provision that obligates member states to offer taxpayers the option of using an equally weighted three factor apportionment formula or the state’s alternative formula. California adopted a double weighted sales factor in 1993. Gillette elected to use the equally weighted three factor apportionment formula. The California Franchise Tax Board asserted the 1993 law change superseded the formula election, making the state formula mandatory. The California Court of Appeal held California is bound by the Compact and the election provision unless it withdraws from the Compact.
Amicus briefing in Gillette v. Franchise Tax Board was completed on January 22, 2014. The next step is for the court to set a date for oral argument. The court is not required to set a hearing date before the end of the current term. A decision will be due 90 days after oral argument, unless the court grants itself an additional 60 days.
IBM v. Department of Treasury - On July 14, 2014 the Michigan Supreme Court, in a 4-3 decision with one justice issuing a separate concurring opinion, held that IBM was entitled to use the Compact's elective three factor apportionment formula to calculate its 2008 Michigan Business Tax Liability.
Anheuser-Busch v. Department of Treasury - The Michigan Supreme Court denied application for leave to appeal, stating that the questions presented should be considered by the Court of Appeals before being reviewed by the Michigan Supreme Court. As a result, the case was not consolidated with IBM v. Treasury.
Kimberly-Clark v. Commissioner - In December of 2013, Kimberly-Clark filed a Notice of Appeal with the Minnesota Tax Court requesting a refund of corporate franchise taxes based on its election to apportion income under an equally weighted three factor formula pursuant to the Multistate Tax Compact as codified under Minnesota statute. On February 10, 2014 the Commissioner of Revenue filed its Return and Answer to the Notice of Appeal, setting forth seven affirmative defenses.
On February 11, 2014 Health Net filed with the Oregon Tax Court a Motion for Summary Judgment.
Amicus briefs are due on June 17. The Oregon Tax Court heard oral arguments on July 22, 2014.
Note that in Oregon, cases move directly from the Tax Court to the Oregon Supreme Court.
A Texas trial court denied a taxpayer’s motion for summary judgment requesting the court confirm its right to apportion margin using the three factor formula provided in the Compact. The Graphic Packaging v. Combs case was dismissed in a similar fashion to the way a California court dismissed Gillette in that it did not explain the basis of the decision. PwC’s insight on the decision is here: Multistate Tax Compact Update - Texas trial court dismisses taxpayer’s Compact election challenge