Corporate Close-Up: Minnesota Adds New Chapter to ‘Gillette’ Apportionment Saga


A continuing issue across the country for taxpayers with multistate income has been whether they can elect to use the Multistate Tax Compact’s evenly weighted three-factor apportionment formula. . The decision by the Michigan Supreme Court in IBM v. Michigan Dept. of Treas. was notable for allowing taxpayers to elect to use the three-factor formula because the MTC had not been expressly repealed for the tax years in question. Michigan’s legislature responded by expressly repealing the MTC for the tax years at issue.

As discussed in Bloomberg BNA’s 2015 State Tax Advisory Board Roundtable, several other states are still litigating the issue. . California, Texas and Oregon all have cases pending related to the effectiveness of the compact and election to use its apportionment formula. The Minnesota Tax Court has reached a decision in their case, Kimberly-Clark Corp. & Subsidiaries v. Comr. of Rev.

In Kimberly-Clark, the taxpayers argued that for tax years 2007 through 2009 they should be allowed the use of the MTC’s apportionment formula because the compact was a binding contract on the state of Minnesota requiring the state to allow the election if it had not entirely withdrawn from the compact. The commissioner argued that the 1987 repeal of the sections of the compact allowing the use of the three-factor formula (while still remaining a member of the Compact) was valid.

The tax court, hearing the case en banc, ruled in favor of the commissioner, stating that taxpayers would not be allowed to use the three-factor apportionment formula in the compact. The court reasoned that government contracts must be construed where possible to avoid relinquishment of sovereign powers of the state under the unmistakability doctrine established by the U.S. Supreme Court. Allowing the compact to dictate how the state’s tax policy works where there has been a valid legislative act repealing a portion of the compact related to apportionment and no unmistakable promise in the compact not to alter or repeal the election of this formula would violate Minnesota’s sovereign power to tax. 

The ruling’s result differs from the case in IBM, and, significantly, the rationale behind the rulings is different. In IBM the failure of the legislature to expressly repeal the MTC apportionment provisions for the tax years in question was the deciding factor, rather than the unmistakability doctrine and the nature of the Compact itself. “The IBM decision was ruled in favor of the taxpayer on what I believe was essentially state statutory grounds and didn’t really address the compact issue, notwithstanding the fact that the concurring opinion and the dissenting opinions all spent most of their discussion talking about the compact issues,” said Joseph Huddleston, executive director for the Multistate Tax Commission in Washington, D.C., at the Bloomberg BNA Roundtable.

With further litigation pending, the power of the MTC to dictate tax policy in the member states remains an issue. It remains to be seen how much power the MTC actually has in its member states outside Minnesota, even where portions of it have been repealed.

The text of the Minnesota Tax Court’s opinion can be found here

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should taxpayers be permitted to use the MTC’s three-factor apportionment formula even when it has been repealed?

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