A California appeals court in late July 2012 held that a taxpayer could apportion its income to California using the Multistate Tax Compact’s evenly weighted three-factor formula, despite statutory language mandating the use of a three-factor double-weighted sales formula for general corporations, .
The Gillette Co. v. Franchise Tax Board, No. A130803 (Cal. Ct. App. July 24, 2012).
On August 9, 2012, the California appeals court ordered a rehearing—on the court’s own motion—in
Gillette, and vacated the July 24 decision.
Summary of July 2012 decision
The appeals court’s original decision was based on federal law regarding interstate compacts and its view that when California became a signatory to the Multistate Tax Compact, it entered into a binding agreement that, absent repeal of the compact in its entirety, obligated it to offer multistate taxpayers the option of using the Compact’s allocation and apportionment provisions. See
California lawmakers enacted the Multistate Tax Compact in 1974 (codified at Cal. Rev. & Tax. Code § 38006). The compact provides that taxpayers have the option of using the UDITPA allocation and apportionment rules or using state-specific apportionment provisions.
In 1993, the California legislature amended Cal. Rev. & Tax. Code § 25128 to provide that “notwithstanding” Cal. Rev. & Tax. Code § 38006, all business income for general corporations “shall” be apportioned to the state using a double-weighted sales factor formula.
After the decision was issued in the case, the Franchise Tax Board (FTB) filed a petition for rehearing, and requested that court revisit:
- Whether the court had construed the meaning of the words “notwithstanding any other provision of law” and “shall” in Cal. Rev. & Tax. Code § 25128 consistently with well-settled principles of statutory construction, and
- If the court had done so, whether Cal. Rev. & Tax. Code § 25128—i.e., California’s method of disposing of the Compact election—was unconstitutional
Concurrently, counsel for the taxpayer filed a request to modify the opinion on the basis that:
- The court’s opinion included language suggesting that California had not withdrawn from the Multistate Tax Compact at the time the opinion was issued.
- California Senate Bill (S.B.) 1015, enacted June 27, 2012, raises a question as to whether California had withdrawn from the Multistate Tax Compact at the time the opinion was issued (note that there is a question as to whether S.B. 1015 itself is valid).
Accordingly, counsel for the taxpayer suggested changes to the opinion to reflect that California had not withdrawn from the compact at the time of the trial court’s decision and submission of the case to the court.
The appeals court granted neither the FTB’s petition for rehearing, nor the taxpayer’s request for modification. Rather, the court ordered a rehearing in the case “on its own motion and for good cause.”
It is unclear as to what will ultimately occur as a result of the rehearing. Tax professionals generally agreed that the original decision was well-reasoned and that it very clearly conveyed that a party to an interstate compact could not unilaterally amend, revoke, or nullify any provisions in the compact.
As such, it would be appear to be difficult for the court to reach a different conclusion on that issue.
Further, the court has not requested any additional briefing from the parties or amicus curiae.
In the interim, affected companies still need to actively evaluate, both in California and other full member compact states, how to file their 2011 returns and the potential benefits of filing amended returns.
For more information, contact a tax professional with KPMG’s State and Local Tax practice:
Doug Bramhall, (480) 459-3491
Scott Salmon, (202) 533-4202
John Harper, (213) 593-6704
* * * * *
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Back to top