October 6, 2015
In its morning session today (October 6) in San Francisco, the California Supreme Court is scheduled to hear arguments in an important state tax case, Gillette Company et al., v. Franchise Tax Board. The case concerns how companies could "apportion" income to California for tax purposes in prior years. (The California Channel reportedly is airing a feed of at least part of the morning session, when the court also will hear arguments in a case concerning a possible 2016 state ballot measure.) Corporate tax apportionment has been an active area of tax law in recent years, with various changes, including the passage of Proposition 39 in 2012.
Case Summary in Court Documents. In its case summary for the Gillette case, court staff note that this appeal involves the following issue: "Were multistate taxpayers required to apportion business income according to the formula set forth in Revenue and Taxation Code section 25128 as amended in 1993 or could they elect to apportion income according to the formula set forth in former Revenue and Taxation Code section 38006 pursuant to the adoption of the Multistate Tax Compact in 1974?"
Hundreds of Millions of Dollars At Stake. State bond documents contain summaries of many major litigation items against the state. In a recent preliminary official bond statement, the state noted that six actions have been filed "contending that the Legislature's modification of Revenue and Taxation Code Section 25128, which implemented the double-weighting of the sales factor in California's apportionment of income formula for the taxation of multistate business entities, is invalid and/or unconstitutional." Parties in these cases include Kimberly-Clark Worldwide, Procter & Gamble Manufacturing Company & Affiliates, Sigma-Aldrich, RB Holdings (USA), Jones Apparel Group, and Gillette, "now consolidated in one matter, collectively referred to as Gillette Company v. Franchise Tax Board," the bond statement says. The statement continues: "Plaintiffs contend that the single-weighted sales factor specified in Section 25128 prior to amendment was contained within the Multistate Tax Compact and therefore cannot be modified without repealing the legislation that enacted the Compact." An adverse ruling in these cases would affect multiple taxpayers and, according to the executive branch's bond statement, "create potential exposure to refund claims in excess of $750 million." The trial court ruled for the state in these matters, but, on appeal, the trial court judgment was reversed by the Court of Appeal. Thereafter, the Supreme Court granted the state's petition for review being heard today, after which a decision is expected in the coming weeks.
2012 Legislative Action. On June 27, 2012, following the appellate court's oral argument in Gillette, the Legislature passed and the Governor signed into law SB 1015. SB 1015, according to the Legislative Counsel's Digest, repeals "all provisions related to the Multistate Tax Compact." The bill also provides "that the repeal of the Multistate Tax Compact in this bill shall not be construed to create any inference that a change in interpretation with respect to the compact or any reference to the compact prior to its repeal is implied by this bill," the digest said. A footnote in the appellate decision said that SB 1015 and related issues were not then before the court.