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Will the states that have repealed the Compact but re-enacted all provisions except for Articles III and IV still be considered “members” of the Compact and be able to continue to participate in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.

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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?

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.

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.

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.

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 19, 2015, the Minnesota Tax Court ruled on summary judgment that the state’s repeal of Articles III and IV of the Multistate Tax Compact does not violate the US or Minnesota contract clause constitutional provisions. The matter may be appealed directly to the Minnesota Supreme Court.

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 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.