Corporate Close-Up: With Texas Ruling, Compact Litigation Draws to a Close

As first reported by Paul Stinson in the Daily Tax Report: State on Dec. 27, 2017 (subscription required), the Texas Supreme Court put what is likely one of the final nails in the coffin of years of litigation concerning the Multistate Tax Compact (the Compact). In Graphic Packaging Corp. v. Hegar, Tex., No. 15-0669, 12/22/17, the court handed the state a resounding victory, ruling that Texas Franchise taxpayers cannot elect three-factor apportionment under the Compact in lieu of the Franchise Tax’s single-factor formula.

The ruling should end meaningful litigation on the issue in any states that still have ongoing litigation. The Texas Supreme Court joins high courts from California, Michigan, and Minnesota in concluding that the Compact is not a binding interstate compact that prohibits modification by member states.

Graphic Packaging’s prospects of success in applying for certiorari before the U.S. Supreme Court are slim at best, given that the high court has turned down multiple applications from California, Minnesota, and Michigan taxpayers.

With that in mind, where does the remaining Compact litigation stand? Arkansas is one state in which litigation has remained largely under the radar. In earlier comments to Bloomberg Tax, Matthew Boch, an attorney with Dover Dixon Horne, PLLC in Little Rock, noted that Arkansas has tabled disputes over three-factor apportionment at the administrative level pending the outcome of the litigation in other states.

With that litigation now largely resolved, practitioners should expect Arkansas to proceed with denying those appeals. Whether material litigation will result following the administrative process is unclear, but taxpayers’ chances of succeeding in Arkansas where they have ultimately failed in other states seems unlikely.

As Stinson also noted, Oregon is the other state with outstanding Compact litigation. The Oregon Tax Court ruled back in 2015 that taxpayers were not entitled to use the Compact’s three-factor formula after the legislature had repealed the statute. The Oregon Supreme Court heard oral arguments in September 2016 and is still active in post-argument briefing. It is unclear when to expect a ruling in the case.

While not out of the question, taxpayers should not expect a different result in Oregon than the one in Texas or any of the other states that have considered the issue.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will Oregon surprise with a ruling in favor of taxpayers?

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