Corporate Close-Up: With Oral Arguments Set to Begin in California’s ‘Gillette’ Case, MTC Compact Litigation Is No More Than a Close Shave for States

Today, the California Supreme Court will hear oral arguments in Gillette, the long-awaited resolution to the MTC Compact litigation in the California courts. The issue before the court is whether Gillette was entitled to elect to apportion its income according to the three-factor MTC formula codified in former California Revenue and Taxation Code § 38006 or whether it was required to use the double-weighted sales factor enacted in 1993 as Revenue and Taxation Code § 25128.

As Bloomberg BNA’s Laura Mahoney first reported on Oct. 2, 2015 in the Daily Tax Report, this case has the potential to upend multistate corporate income apportionment in several states. Two similar cases were in Michigan and Oregon were decided in September, but it is unclear the extent to which litigation in these other states will affect the outcome of this case.

In Health Net, Inc. and Subsidiaries v. Dept. of Rev., the Oregon Tax Court granted summary judgment in favor of the Department of Revenue, holding that the 1993 provision that disabled the state’s Compact provisions apply to the taxpayer and its claim for a refund of tax was properly denied by the department. The court found that the retroactive repeal of the Compact provisions by the Oregon Legislature violated no procedural or substantive provisions of the Oregon Constitution or the U.S. Constitution. Nor did the repeal violate federal statutory law, the Compact Clause or the Federal Contract Clause.

In another case, Gillette Comm. Operations N. Am. & Subsidiaries, et. al. v. Dept. of Treas., the Michigan Court of Appeals also sided with the state, rejecting constitutional challenges to legislation that retroactively repealed the Compact provisions codified when Michigan enacted the MBT in 2008. The case, which consolidated 50 appeals is expected to be appealed to the state supreme court for a resolution of the separation-of-powers issues implicated, as reported by Bloomberg BNA’s Michael J. Bologna reported on Sept. 30, 2015 in the Weekly State Tax Report.

As the dust settles in Oregon and Michigan, all parties will likely turn their attention to California, and the landmark case considered to have launched MTC Compact litigation after the California Court of Appeal ruled against the FTB in 2012.

Both sides of the California dispute are looking to rulings in other states to fortify their arguments.

A supplemental brief filed by the California Franchise Tax Board argued that the ruling in Oregon support California’s position that MTC members may adopt their own apportionment formulas without violating the compact, Laura Mahoney reported. Specifically, the FTB cites the Oregon Tax Court’s ruling in Health Net to support its position that MTC member states have long understood they can deviate from the apportionment formula in the Compact.

Attorneys for Gillette cite laws in Michigan and North Dakota repealing the Compact or its apportionment provisions as supporting the companies argument that the Compact is a binding contract under which states must allow taxpayers to use the MTC’s three-factor formula.

As a decision in Gillette will be issued within 90 days after oral arguments, the potential impact of the case on MTC litigation across the country looms large. A loss for the states which were, or are, Compact members could result in fiscal disruption. With millions of dollars of potential corporate income tax refunds at stake, it’s uncertain whether the California Supreme Court’s decision in Gillette will be the end or the beginning of a new saga.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think California’s decision in Gillette will be appealed to the U.S. Supreme Court? What is the likelihood that the Court will grant certiorari?

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