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U.S. Supreme Court Denies Review of Gillette State Apportionment Case from California

Contributor: Andrew Ebneter, Partner, Tax & Business

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The U.S. Supreme Court ("USSC") has denied certiorari in Gillette Co. v. Franchise Tax Board, where the California high court's holding required corporate taxpayers to adhere to statutorily mandated income apportionment formulas without an option to elect a three-factor formula.

On October 11, 2016, the USSC denied certiorari in Gillette Co. v. Franchise Tax Board. As such, the California Supreme Court's ruling in Gillette remains California law, prohibiting corporate taxpayers from electing a three-factor apportionment formula under the Multistate Tax Compact ("MTC") for reporting California income, and requiring the use of apportionment formulas adopted by California statute (e.g., double-weighted sales or single sales factor apportionment, depending on the tax year).

Background on the MTC and the Gillette Case
The MTC was drafted in 1967 by state tax administrators and other state leaders in order to promote uniformity and compatibility of income tax systems across its member states, while eliminating the need for federal congressional action to achieve these goals. California enacted the MTC in 1974. The MTC included a provision requiring member states to allow taxpayers the opportunity to elect to use an equally weighted three-factor apportionment formula (i.e., property, payroll, and sales) instead of a state's statutorily imposed formula. Note that the election of a three-factor formula in a traditionally single sales factor formula state usually resulted in smaller state apportionment percentages (and lesser tax) by allowing property and payroll factors (typically with lower "in-state" factors, but higher "everywhere" factors) into the overall calculation. This inclusion of additional factors tended to dilute the overall apportionment percentage where in-state sales were significant.

In 1993, California adopted a double-weighted sales factor formula ( "statutory formula") to replace its three-factor formula, and between 1993 and 2005, Gillette filed its returns in accordance with the statutory formula. Beginning in 2006, however, Gillette filed refund claims with the state, electing the three-factor formula per its right under the MTC, instead of utilizing the statutory formula. The California Franchise Tax Board ("FTB") denied these claims and asserted the 1993 law change superseded the three-factor formula election option, and the California trial court ruled in the FTB's favor. On October 2, 2012, however, the California Court of Appeal ("CCA") reversed and held that the state of California, as a member of the MTC, was required to allow the three-factor election.

Higher Court Holdings
On December 31, 2015, the California Supreme Court reversed the CCA and held that California law precludes taxpayers from relying on the MTC's three-factor apportionment election provision. Per the Court, the MTC was not a binding reciprocal agreement among member states and therefore was not binding on California. Further, the Court found that the California Legislature did not intend for the state to be bound by the MTC's election provision. As discussed above, this decision prompted Gillette to petition for USSC review, which was ultimately denied.

Legal Action in Other States
Although the MTC apportionment election litigation has concluded for California purposes, similar litigation is occurring in Colorado, Michigan, Minnesota, Oregon and Texas. Notably, Kimberly-Clark Corporation, the taxpayer in the Minnesota litigation, filed for USSC certiorari review on October 20, 2016.

Should you have any questions related to this case or how state apportion rules may affect your business, contact your Marcum State and Local Tax Professional.

 
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