On Thursday, December 31, 2015, the Supreme Court of California issued its decision in Gillette Co. v. Franchise Tax Board. The court reversed the California Court of Appeal and held that the Multistate Tax Compact is not a binding compact between its member states. Accordingly, the California legislature had the authority to, and did in fact, replace the state’s equally weighted apportionment formula with a double-weightedsales formula in 1993.

Despite following an identical test to determine whether an interstate compact is a binding reciprocal agreement, the California Court of Appeal and Supreme Court of California clearly saw the case very differently. Both courts used the analytical framework provided by the U.S. Supreme Court in Northeast Bancorp v. Board of Governors FRS to analyze the binding nature of the Compact but reached opposite conclusions. In particular, the supreme court found that the Compact satisfies none of the three “classic indicia” of binding interstate agreements under Northeast Bancorp: (1) state enactments that require reciprocal action for their effectiveness; (2) conditional consent by member states in which each state is not free to modify or repeal its participation unilaterally; and (3) the presence of a joint organization for regulatory purposes. This is in stark contrast to the prior court of appeal opinion, which concluded that the Compact had these three indicia and, therefore, was a binding agreement.