Taxpayers Face Long Road in MTC Compact Litigation

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Cannon-Marie Green and Christopher Bailey

Nov. 10 — Oral arguments in Gillette before the California Supreme Court last month indicate that taxpayers seeking to elect to use the three-factor apportionment method under Article IV of the Multistate Tax Compact face an uncertain future and have a long, uphill battle if they are to ultimately prevail.

With the California Supreme Court set to rule on the case by Jan. 4 and similar cases pending in Michigan, Minnesota, Oregon and Texas, the case is being closely watched by both taxpayers and the states (2015 Weekly State Tax Report 16, 11/6/15). Although the California Court of Appeals ruled for the taxpayers in Gillette, it seems unlikely that the ruling will stand (2012 Weekly State Tax Report 10, 7/27/12).

The California Supreme Court had their minds made up going into oral arguments, Marty Dakessian, a partner in the Los Angeles office of Reed Smith, told Bloomberg BNA Nov. 5.

“It's not as though the questions were slightly tilted in the state's favor,” said Dakessian. “It's not like they asked Gillette 10 questions and they asked the state five.” However, “almost every question seemed directed at Gillette and the tone in which the questions were asked” was not good for the company.

“I don't have a lot of faith that Gillette will pull this out,” he said.

According to Dakessian, who co-authored the amicus curiae brief filed in Gillette on behalf of the Institute for Tax Professionals, the court placed value on the separation of powers argument put forth by the state over the taxpayer's argument that the compact is a binding agreement among the states.

Even if Gillette prevails, taxpayers face a long road in MTC compact litigation because these are not typical tax cases.

History, Purpose of Compact

Gillette, and amicus briefs supporting Gillette, laid out an extensive history of the Multistate Tax Compact as well as the motivations behind its adoption by California and other states in the 1960s and ́70s.

Their argument was that the states had agreed to bind themselves through an interstate compact to a common set of rules regarding the apportionment of income for multistate taxpayers. Once the threat of federal intervention had passed, the states couldn't alter the compact's terms.

Unfortunately, the court wasn't “overly impressed with this context and did not find it relevant based on the question[s asked], Dakessian told Bloomberg BNA.

Gillette argued in its briefing that this “wasn't the typical tax case … [but had] more to do with the impact of compacts between various states.”

Gillette also argued during briefing that the U.S. Supreme Court decision in U.S. Steel Corp. v. MTC is controlling and that well-established compact law stops states from unilaterally changing the terms of a compact.

Dakessian said that the California court immediately cut off such an argument, telling counsel for Gillette “[w]e're not talking about other compacts. Each compact stands on its own.”

Challenging Legislative Authority

“I think the additional lift that taxpayers have [in these cases] is that they are asking the judiciary to curtail the authority of the Legislature,” Dakessian said, noting that at its core, that's what we are asking the court to do in the Gillette case.

Dakessian cited Howard Jarvis Taxpayer Association v. Padilla, which was heard immediately before Gillette by the same court. The case involves a challenge to the Legislature's authority to submit an advisory question relating to campaign finance to voters as part of the 2016 electoral process.

“Again, in the Howard Jarvis case, you have a situation where [taxpayers] are asking the California Supreme Court to curtail the authority of the Legislature,” said Dakessian. “[T]he common theme is [concern] about the separation of powers and a court unwilling to tell the Legislature what it can and can't do.”

The oral argument went as badly for Howard Jarvis as it did for Gillette, he said.

According to Dakessian, “[t]here's a lot of dollars at stake and the court can't help but be influenced by the separation of powers overlay in this case.” However, he added that in his opinion, “it is exactly the role of the California Supreme Court [to] circumscribe the authority of the Legislature when appropriate.”

Uncertain Future

The implications of a ruling against Gillette are severe for the commission, which argued that the very interstate compact that it's charged with administering wasn't binding upon any of the participants.

Asked what a victory for the state would mean going forward, Dakessian said “I think for the MTC, it means that the compact is meaningless.” And “without the core of the MTC there is nothing left.”

The compact was created to promote uniformity amongst state corporate income tax regimes, but Dakessian pointed out that a victory for California doesn't advance that objective, but instead undermines it.

“[T]hat was probably the most frustrating aspect of oral arguments,” Dakessian said. The whole purpose of state compacts in general “was the pink elephant in the room. That was the $64,000 question that the court really punted.”

U.S. Supreme Court?

Should Gillette be turned back by the California Supreme Court, Dakessian is unsure if the U.S. Supreme Court will wade into the matter.

“There's going to have to be a reason for the U.S. Supreme Court to want to take a look at this,” said Dakessian, adding that “by and large the [compact litigation] has not gone well for taxpayers.”

Unless Gillette results in a split among state courts on the compact issue, the U.S. Supreme Court likely won't grant certiorari. With cases also pending in Michigan, Minnesota, Oregon and Texas, Gillette may not be the right case to take to the high court.

To contact the reporter on this story: Cannon-Marie Green and Christopher Bailey in Washington at and

To contact the editor responsible for this story: Ryan Tuck at

For More Information

For a discussion of the election to use the three-factor formula under the Multistate Tax Compact, see 1150-2nd T.M., Income Taxes: Principles of Formulary Apportionment, at 1150.02.B.