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.

    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 The California Franchise Tax Board asserted the 1993 law change superseded the formula election, making the state formula mandatory.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?


    On December 31, 2015, the California Supreme Court held that California law precludes taxpayers from relying on the Multistate Tax Compact’s equally-weighted three-factor apportionment election provision. The Court reasoned the Compact was not a binding reciprocal agreement and the California Legislature was not required to allow the Compact’s election provision.​

    On October 11, 2016, the US Supreme Court issued a summary disposition order which included a denial of the certiorari petition in Gillette Co., et al. v. CA Franchise Tax Board, et al., No. 15-442 (10/11/16).

    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.

    On April 28, 2015, the Michigan Court of Claims ruled that IBM could not make the election because the state in 2014 retroactively repealed the Compact effective January 1, 2008. The Michigan Court of Appeals has set oral arguments for July 12, 2016.

    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. On January 27, 2015 the Michigan Court of Appeals vacated a court of claims order holding the Multistate Tax Compact binding on the state and remanded the case for the court of claims to determine whether the legislation that retroactively repealed the compact applies to the case.

    Gillette Commercial Operations v. Department of Treasury - On September 29, 2015 the Michigan Appellate Court upheld the state’s retroactive repeal of its membership in the Multistate Tax Compact. The court determined that the Compact was not a binding contract under state law and therefore the retroactive repeal did not violate state or federal contract clauses. The court also held that the retroactive repeal did not violate state or federal due process clauses for a number of reasons, including the determination that taxpayers did not have a vested right in the state’s tax laws.

    Furthermore, the court found the legislature had a legitimate purpose for retroactively repealing Compact membership. The court determined that Michigan’s participation in Multistate Tax Commission activities during the years at issue did not impact the propriety of the retroactive repeal.

    On June 24, 2016 the Michigan Supreme Court denied the consolidated appeals of Gillette and 50 companies challenging the state's retroactive repeal of the Multistate Tax Compact.

    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. Oral arguments were held before the Minnesota Tax Court on March 19, 2015.

    On June 22, 2016 the Minnesota Supreme Court ruled that the legislature's repeal in 1987 of the equally weighted three factor formula election found in Articles III and IV of the Multistate Tax Compact was permissible.

    On December 12, 2016, the US Supreme Court denied the petition for certiorari in Kimberly-Clark.

    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.

    On September 9, 2015, in a summary judgment order, the Oregon Tax Court held that a taxpayer could not make the Multistate Tax Compact’s equally-weighted three-factor apportionment election. The taxpayer challenged the state’s 1993 law change providing that Oregon’s single sales factor apportionment provisions control when they are inconsistent with Compact apportionment provisions. The court found that the law change did not violate the state or federal Contract Clauses because the Compact did not constitute a binding state contract due to the absence of consideration and “unambiguous terms to create a statutory contract."

    Oral arguments were heard before the Oregon Supreme Court on September 19, 2016. A recording of the arguments can be found at

    On July 28, 2015, the Texas Court of Appeals, Third District, determined in Graphic Packaging v. Combs that the Texas Franchise Tax is not a tax imposed on net income for Multistate Tax Compact purposes and therefore the Compact’s three-factor apportionment formula provisions were not available to the taxpayer.

    On December 14, 2015, Graphic Packaging Petitioned the Supreme Court of Texas for review.