On January 16, 2013, the California Supreme Court granted the Franchise Tax Board’s (FTB) petition for review in Gillette Company v. California Franchise Tax Board, and will likely hear arguments sometime this spring. We have previously covered the Gillette case here, here, and here.
On October 2, 2012, the California Court of Appeal’s upheld the taxpayer’s right to elect to apportion and allocate income to California using the Multistate Tax Compact (Compact). The Compact, contained provides for an equally-weighted three-factor apportionment formula (property, payroll, and sales), rather than the three-factor formula with a double-weighted sales factor under Cal. Rev. & Tax. Code § 25128. The FTB recently issued guidance regarding: (1) how taxpayers may file a protective claim for refund for prior tax years pertaining to the Compact Election, and (2) whether taxpayers that use the Compact Election on a timely filed original return for the 2011 taxable year run the risk of incurring the Large Corporate Underpayment Penalty pursuant to Cal. Rev. & Tax. Code § 19138.
This case has ramifications beyond California and will likely impact most multistate businesses. Currently 18 states have adopted the Compact, which in turn created the Multistate Tax Commission in 1967 and is charged with the following:
•· Facilitating the proper determination of State and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes;
•· Promoting uniformity or compatibility in significant components of tax systems;
•· Facilitating taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; and
•· Avoiding duplicative taxation.
A setback in the California Supreme Court would certainly be a blow to multistate taxpayers who must deal with myriad state tax laws. Conversely, if the Court upholds the decision, other states that have adopted the Compact should take note that they might be precluded from changing their laws to deviate from the Compact without giving taxpayers a right to elect back into the Compact.
Since the issue before the Court is somewhat novel, it is anticipated that the FTB’s arguments will take aim squarely at the Court of Appeal’s decision since it does not rely heavily on established precedent.
Click here to read the California Court of Appeal’s decisions.
To access case updates and briefs click here.