California Multistate Tax Compact Election

On December 31, 2015, a California Supreme Court decision ended a 6 year long debate regarding the State’s Multistate Tax Compact (“Compact”) election (Gillette Company v. Franchise Tax Bd., No. S206587, Dec. 31, 2015).  While Gillette has indicated it will appeal to the United States Supreme Court, the professional community is mixed on whether the Court will grant certiorari.  The full California Supreme Court ruling can be found here: http://www.courts.ca.gov/opinions/documents/S206587.PDF

By way of background, the Multistate Tax Compact was originally drafted as a model law in 1966 by a widely representative group of state officials, including tax administrators, attorneys general, state legislators and a Special Committee of the Council of State Governments.  The Compact became effective, under its terms, on August 4, 1967. The Compact is an advisory compact, in that actions taken under its authority have only an advisory or recommendatory effect on its member states. California enacted and became a member of the Compact in 1974.

Prior to 1993, California law required the use of an evenly weighted three-factor apportionment formula (same as per the Compact). In 1993, the California Legislature decided to replace the three-factor formula with a double-weighted sales-factor formula.

In 2010, The Gillette Company (and others) sued and argued that California’s enactment of the double-weighted sales-factor apportionment formula did not override or repeal the Compact’s formula and that they were permitted to elect to use the Compact formula.  They asked for $34 million in refund claims for prior taxable years, basing its calculations on an evenly weighted three-factor apportionment formula.

The trial court dismissed Gillette’s suit for refund, stating that the Compact’s apportionment formula was repealed. In October 2012, (after some interesting procedural matters occurring in the months prior) the California Court of Appeal reaffirmed its prior opinion while clarifying that California’s requirement to use the double-weighted sales factor was an “unconstitutional impairment of contract” during the tax years at issue to the extent it sought to override and disable California’s obligation under the Compact.

Now, the California Supreme Court has reversed the Court of Appeals.  With its unanimous decision, the Court held that the Compact is not a binding contract among its members and California was not bound by its provisions.

Similar cases have been brought forth and are at various stages of appeal in Michigan, Minnesota, Oregon and Texas.