Multistate Tax Compact

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.

The journey of the MTC's joint audit program
In this September 2013 article, Michael Herbert and Bryan Mayster explore the journey of the Multistate Tax Commission's joint audit program in light of the Commission’s early purpose of fighting for uniformity, efficiency, and compatibility of tax laws governing multistate businesses.

The Impact of multistate tax compact withdrawals on the joint audit program
Will the states that have repealed the Compact but re-enacted all provisions except for Articles III and IV still be considered “members” of the Compact and be able to continue to participate in the joint audit program?

200 Years of interstate cooperation: Could a state tax case be the end
At issue in Gillette is much more than a state tax matter. The decision will have ramifications for the over 200 existing interstate compacts addressing matters as wide ranging as environmental control to interstate transfers of violent criminals.

The Multistate Tax Compact – A Promise Forgotten
A Promise Forgotten - As the myriad of tax, legal and constitutional issues the Gillette case has created weave their way through the courts and state capitols, interested parties would do well to look back at the reasons for the Compact's adoption.

US Supreme Court sheds light on compact debate
In Tarrant Regional Water District v. Herrmann, the US Supreme Court upheld the principle that interstate compacts are contracts construed under contract law principles and may pre-empt state statute. A compact’s express terms are the best indication of the parties’ intent. If the express terms of the compact are ambiguous, other interpretive tools may be used to shed light on the intent of the Compact’s drafters.

1 2 3 4 5

Gillette in brief

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.

What's Next for the Compact Litigation Cases?

California
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.

Michigan
IBM v. Department of Treasury - Oral arguments were heard on January 15, 2014. A decision is expected no later than July 2014. The argument was summarized by Caltax in the attached document.

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.

Minnesota
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.

Oregon
On February 11, 2014 Health Net filed with the Oregon Tax Court a Motion for Summary Judgment. Note that in Oregon, cases move directly from the Tax Court to the Oregon Supreme Court.

Texas
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