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On December 31, 2015, the California Supreme Court issued its ruling in the major corporate tax case, Gillette Company et al., v. Franchise Tax Board. (We discussed the Gillette case in an earlier blog post here.) The case concerned a 1993 change to state tax law and whether multistate corporations (1) were required to apportion (attribute) business income to California for taxation pursuant to that 1993 law or (2) could elect to apportion business income according to a 1974 state action to adopt the Multistate Tax Compact. Between 1993 and 2005, six multistate corporations paid taxes to the state under the new 1993 formula, but then sought a refund, arguing, as the court described it, "that the Compact gave them the right to choose between the new (1993) legislative formula" and the approach affirmed in the 1974 state action. The court's opinion (here) generally rules in favor of the state Franchise Tax Board's position, thereby upholding the ability of the California Legislature to change state tax law in its 1993 action. The opinion appears to prevent a large state budget hit of hundreds of millions of dollars in corporate tax refunds, which we described in our earlier blog post.

Following is a key passage of the state Supreme Court opinion, which references the Legislature's action in 1993 to create a "new" apportionment formula in the Revenue and Taxation Code:

The FTB contends section 25128(a)’s new apportionment formula should control, arguing that when member states entered the Compact their intent “was to allow them to change their state laws to establish alternate mandatory apportionment formulas.”  Taxpayers do not dispute that the Legislature has authority to enact an alternate formula.  They argue instead that the Compact explicitly permits election and the Legislature is bound to allow it.  This case turns on whether the Legislature is so bound.  We conclude it is not and California’s statutory formula governs. 

In a San Francisco Chronicle news story, counsel for the corporate litigants indicated their intent to appeal the decision to the U.S. Supreme Court.


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