In 1966, the California Legislature adopted the Uniform Division of Income for Tax Purposes Act (“UDITPA”), a model law which had been promulgated in 1957 by the National Conference of Commissioners on Uniform State Law. UDITPA contained a corporate apportionment formula consisting of equally weighted payroll, property and sales factors. In 1974, the California Legislature adopted the Multistate Tax Compact (“Compact”), which incorporates UDITPA nearly word for word. However, in 1993, the California Legislature enacted a statute which moved away from an equal weighting of the payroll, property and sales factors to require corporate taxpayers, with certain exceptions, to apportion income using a double-weighted sales factor. The Gillette Company filed suit in California against the California Franchise Tax Board (“FTB”), arguing it was entitled to elect to use an equally weighted apportionment formula, notwithstanding the California Legislature’s attempt to require use of a double-weighted sales factor, because the Legislature had not and could not amend the Compact and had not repealed the Compact. Gillette lost in the California trial court, and then appealed to the Court of Appeal, First District. Along the way, a number of other cases presenting the same issue were procedurally consolidated with Gillette.
On July 24, 2012, the Court of Appeal (“Court”) issued its published and precedential decision in Gillette. The Court held the Compact is a valid multistate compact and that California is bound by it and its apportionment election provision unless and until California withdraws from the Compact by repealing its enactment in California. Further, the Court held that California cannot vary the terms of the Compact, so long as it is a part of California law. Accordingly, Gillette was entitled to elect to use the equally weighted formula provided in the Compact.
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