Gillette and the Future of Income Tax Apportionment

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Gillette has sent shockwaves through the state tax community. Unexpectedly, a California Court of Appeal ruled that a taxpayer could elect to file income tax returns using UDITPA’s three-factor apportionment rather than California statutory apportionment because California signed the Multistate Tax Compact, which provides for optional apportionment using UDITPA. The court’s decision has nationwide ramifications and likely impacts most multistate businesses. The decision also raises a host of interesting questions. Perhaps most obviously, what will happen next in California? California has repealed its membership in the Multistate Tax Compact and has signed retroactive legislation designed to bar taxpayers from filing refund claims electing to use UDITPA apportionment. Moreover, the California FTB is likely to appeal the decision to the California Supreme Court. Accordingly, the war may be far from over in California. What impact will Gillette will have in other states? Nineteen jurisdictions are currently full members of the Multistate Tax Compact. Litigation could potentially ensue in those jurisdictions on the same issue (if it has not already). From a tax planning perspective, a question is how aggressively to read Gillette. In Gillette, the taxpayer sought three-factor apportionment, but there may be other reasons for taxpayers to seek to take advantage of UDITPA apportionment and allocation besides wanting to take advantage of UDITPA’s three-factor apportionment formula.

Educational Objectives:
• The history of the Multistate Tax Compact and why states decided to sign it 
• The Gillette litigation and the main arguments raised by Gillette and the FTB 
• What California SB 1015 was designed to do and whether there are arguments that it does not achieve these objectives; 
• Litigation and administrative rulings on the Gillette issue in other states 
• Several potential advantages/opportunities of being able to elect to file corporate income tax returns using UDITPA’s apportionment and allocation scheme; 
• Several potential advantages and disadvantages of filing refund claims in different states in response to Gillette; and 
• The potential review of the Gillette decision by the United States Supreme Court.



Kendall L. Houghton is a nationally recognized expert whose practice focuses on state and local tax planning, tax controversies and unclaimed property/escheat matters. She leads the Alston & Bird SALT practice. She previously served as general counsel to the Council On State Taxation (COST), where she filed U.S. Supreme Court briefs in cases impacting state taxation of multistate commerce and led a tax policy initiative addressing taxation of Internet transactions. Ms. Houghton has represented clients on a multi-jurisdictional basis with respect to significant tax disputes; negotiated favorable settlements with state and local jurisdictions; developed and advocated state tax policy and legislative positions that benefited client interests; and collaborated with clients to design transactional and organizational structures that have optimized direct and indirect tax burdens. Ms. Houghton also advises clients with respect to unclaimed property/escheat compliance, voluntary disclosure initiatives, planning opportunities, single- and multi-state audit defense, and litigation of state unclaimed property assessments. 

Ms. Houghton is co-author of Bloomberg BNA’s Multistate Tax Management portfolio entitled “Unclaimed Property.” She is a Georgetown University School of Law instructor and a featured speaker at national state tax conferences and schools hosted by COST, TEI, IPT, and the Unclaimed Property Professionals Organization, Georgetown University School of Law and the New York University School of Law. 


Matthew P. Hedstrom is a senior associate based in the New York office. He focuses his practice on state and local tax planning and controversy and addresses clients’ multistate tax issues, including state income tax apportionment, tax base, business/nonbusiness income determinations, telecommunications and sales/use tax nexus, sourcing and taxability issues and unclaimed property matters. Matthew also advises clients on the state and local tax implications of restructuring, mergers, acquisitions and dispositions, including multistate compliance, voluntary disclosure, planning, audit defense and legal opinions. He also has tax controversy experience at the audit, administrative and appeals level in several jurisdictions. 

Matthew has been published on a wide variety of state tax topics in different journals, including State Tax Notes andJournal of Multistate Taxation and Incentives. He regularly speaks on state and local tax matters and has spoken at events hosted by Council On State Taxation (COST), the Tax Executives Institute (TEI), New York University’s Summer Institute in State and Local Taxation and Bloomberg BNA, and the Unclaimed Property Professionals Organization. Matthew is also the Managing Editor of the State and Local Tax Edition of the American Bar Association’s Tax Lawyer. 


Jeffrey S. Reed is an associate at the New York office. He focuses his practice on state and local taxation. Jeff represents businesses and individuals in audits and state tax litigation before courts and administrative bodies throughout the United States. He has represented clients in state tax controversy matters in over 30 state and local tax jurisdictions. Jeff has experience with all phases of state tax controversy, including audits, administrative hearings, trials and appeals. He also regularly advises clients about the potential state tax consequences of complex transactions.