On December 31, 2015, the Supreme Court of California ruled in Gillette Company v. Franchise Tax Board that the Multistate Tax Compact (“MTC”) is not a binding reciprocal agreement. As a result, taxpayers are unable to elect to use a three-factor apportionment formula, as prescribed by the agreement.
In 1993, California enacted legislation requiring taxpayers to use a double-weighted sales factor apportionment formula notwithstanding any provision of the MTC, of which California was still a signatory state. In subsequent years, six multistate corporate taxpayers, including Gillette, filed refund claims after electing to use the three-factor apportionment formula, as allowed by the MTC. The California Franchise Tax Board (“FTB”) denied the claims, and the taxpayers filed a law suit against the FTB. California formally rescinded its membership in the MTC in 2012. Meanwhile, the Gillette case remained in litigation, eventually reaching the Supreme Court of California.
The California Supreme Court ruled that the law enacted by California in 1993 was intended to repeal the State’s 1974 adoption of the MTC. Furthermore, the Court ruled the MTC is a model code and not a binding reciprocal agreement. Therefore, taxpayers may not rely upon provisions included in the MTC, including the election to use a three-factor apportionment formula.
The Gillette ruling will result in the denial of protective refund claims filed by California taxpayers who relied on the election to use three-factor apportionment, as allowed by the MTC. On a national scale, the ruling weakens the authority of the MTC and could be used as persuasive authority in other State Courts which must address similar compact adoption issues. Accordingly, taxpayers should reevaluate tax positions taken based on reliance on the MTC, especially in states in which there is pending MTC litigation.
GBQ SALT professionals are available to assist in understanding the Multistate Tax Compact and its applicability to specific taxpayer situations.