California - Taxpayers may elect to apportion income under the Multistate Tax Compact's equally weighted three-factor formula

July 2012


California was a signatory to the Multistate Tax Compact, which includes a provision that obligates member states to offer taxpayers the option of using: (1) an equally weighted sales, property, and payroll apportionment factor or (2) a state's alternative formula.California adopted a double-weighted sales factor in 1993. The taxpayers in this case asserted that the Compact, and its codification under California law, provided them an election to use an equally weighted apportionment factor for tax years at issue since 1993.

On July 24, 2012, in a 3-0 decision, a California Court of Appeal held that the Compact is a valid interstate compact binding California to provisions that include the equally weighted apportionment provision, which is codified under California law.Having entered into the Compact, California cannot, by subsequent legislation, unilaterally alter or amend its terms.California can avoid the application of the apportionment election only by repealing the statutory provision adopting the Compact, thereby withdrawing from the Compact.Since California has not withdrawn from the Compact by repealing the statute, the equally weighted apportionment election is available to taxpayers.[The Gillette Company et. al. v. Franchise Tax Board, Cal. Ct. of App., No. A130803, 7/24/12]

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