On August 9, 2012, the California Court of Appeal “on its own motion and for good cause” vacated its decision and opinion issued on July 24, 2012 in Gillette v. Franchise Tax Board, and ordered a rehearing. The Franchise Tax Board (FTB) dismissed the taxpayer’s request for refund based on an election to apportion income according to the three-factor Multistate Tax Compact (MTC) formula. In the July 24th opinion, the Court of Appeal gave corporations relief from a California state law that gave double weight to sales, thereby increasing corporate income taxes on out-of-state corporations while giving those based in California possible relief from taxes. The vacated opinion held that, absent a complete or specific repeal, the MTC was binding on member states and a member state could not prevent taxpayers from electing into the MTC’s three-factor apportionment method.
The rehearing was held and the Court of Appeal is standing by its earlier decision: the FTB construction is invalid, the MTC election was not repealed, and the taxpayers could elect to apportion income under the MTC three-factor method.
On rehearing, the California Court of Appeal reaffirmed its earlier vacated holding in Gillette v. Franchise Tax Board. The Court of Appeal concluded that the 1993 amendment that attempted to repeal the MTC election was invalid and the taxpayer could elect to apportion under the three-factor MTC formula.
The Court’s opinion after rehearing is substantively similar to the original July 24th opinion. There are, however, a couple of notable changes to the opinion. Among the changes, the October 2, 2012 opinion notes that the enactment of California Senate Bill No. 1015 on June 27, 2012, which intended to repeal the MTC election, was not before the Court. The Court noted:
On June 27, 2012, after the oral argument in this case, the Governor signed into law Senate Bill No. 1015, which states: “Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code is repealed.” (Stats. 2012, ch. 37, § 3, eff. June 27, 2012.) Senate Bill No. 1015, and any issue concerning its effect or validity, were not before this court.
In a discussion of statutory construction, the Court also recognized that it was the “clear import” of the legislature to override the MTC election and mandate exclusive use of the double-weighted sales formula. The Court found that such a construction of the statute was invalid.
Finally, the Court bolstered the decision of the original July 24, 2012 decision, holding:
The Legislature did not repeal, amend or reenact any part of the Compact at the time, and thus neither the public nor the legislators had adequate notice that the intent of this amendment was to eviscerate former section 38006.
To read the Court of Appeal’s opinion on rehearing click here.
