Multistate Tax Compact declared nonbinding in California

By S. Laney Griffo | Oct 21, 2016

CALIFORNIA – The Gillette Company is out of options in their case against California Franchise Tax Board after the United States Supreme Court denied their appeal.

WASHINGTON – The Gillette Company is out of options in their case against California Franchise Tax Board after the United States Supreme Court denied their appeal.

The question involved with this case was whether Gillette could pay its taxes using the Multistate Tax Compact three-factor apportionment formula or if it was required to use California’s four-factor apportionment formula.

Multistate Tax Compact ruled nonbinding   Shutterstock

The Multistate Tax Compact was first created in 1966 because taxpayers were frequently being doubled-taxed by being required to pay taxes in multiple states. The compact originally had 10 states join including California, Oregon, Michigan, Minnesota and Texas. It used a formula that calculated tax by looking at property, payroll and sales taxes that could unilaterally be applied to taxpayers in all of the states who were part of the compact.

In 1993, California opted to change its formula to double weight sales when calculating tax. This different formula raised red flags for Gillette in 2012.

“The taxpayers at Gillette said, ‘We’re paying a lot of taxes in California when we don’t even have facilities there,’” Mark Nachbar, principal at Ryan, an award-winning global tax services firm, told the Northern California Record.

Gillette took the California Franchise Tax Board to the California Court of Appeals to decide whether the Multistate Tax Compact was binding or rather just advisory to states. The court of appeals ruled the tax compact is binding.

The decision was reversed by California Supreme Court. “Taxpayers recognize that the Compact does not have the force of federal law. It was never ratified by Congress as required under the compact clause,” the decision states.

Nachbar has a different insight as to why the court ruled the way they did. “The decision was an economic decision,” Nachbar said. “The state would have to pay billions of dollars back to taxpayers.”

Gillette filed a writ of certiorari to the United States Supreme Court, but it denied hearing the case.

“The Supreme Court doesn’t like to hear business cases, especially state tax cases,” Nachbar said.

“P&G is disappointed that the Court did not grant review of the issues in this case,” the Gillette Company said in a statement.

In the Michigan Supreme Court, a similar case was heard and the court ruled the tax compact is binding. However, the Michigan Legislature decided to retroactively pull out of the Multistate Tax Compact.

With one court ruling the tax compact is binding and another court ruling against the compact, the future of the Multistate Tax Compact is up in the air.

“We’ve got two contradicting decisions at the state supreme court level and the United States Supreme Court doesn’t want to hear the case,” Nachbar said.

Similar cases are being heard in Texas, Oregon and Minnesota. Taxpayers in those states are still able to file claims until decisions are handed down. However, Nachbar believes that like California, those states will likely find that the compact is nonbinding due to economic reasons.

The California Franchise Tax Board said in a statement they are “developing guidance for any potentially affected taxpayers, and will release that shortly.”

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