A Close Shave: California Court of Appeal Rules on Multistate Compact Election


On October 2, 2012, the California Court of Appeal issued an opinion on rehearing in The Gillette Company et al. v. Franchise Tax Board, reversing in full the trial court’s decision in favor of the Franchise Tax Board (FTB). 207 Cal.App.4th 1369 (Op. on Rehearing, Oct. 2, 2012). Consistent with its original opinion, the Court held California’s ratification of the Multistate Tax Compact (Compact or MTC) was a valid contract and therefore the State was bound by the provisions of the Compact during the years at issue, including an election available to corporate taxpayers to apportion income using the Compact’s equally weighted, three-factor apportionment formula.

The court’s Opinion on Rehearing includes two important changes. First, the court acknowledged California’s recent legislative repeal of all provisions related to the Compact (this repeal occurred subsequent to submission of the case by the court after oral argument), expressly noting that any issue concerning the effect or validity of such legislative repeal was not before the court. Second, the court unambiguously held that California’s double-weighted sales factor statute (Cal. Rev. & Tax. Code § 25128) was at least in part unconstitutional during the years at issue.

The Original Opinion: The Franchise Tax Board Gets Creamed -

On July 24, 2012, the court issued its original opinion in Gillette, ruling in favor of the taxpayers in the consolidated appeals.

Gillette and five other corporate taxpayers filed suits for refund in 2010, arguing that California’s double-weighted sales factor apportionment formula in section 25128 of the California Revenue and Taxation Code, as amended in 1993, did not “override” the Compact’s election to apportion using a three-factor apportionment formula.

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