Procter & Gamble to High Court: Focus on Tax Compact Terms

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By Laura Mahoney

Aug. 18 — The U.S. Supreme Court should focus on the terms of the Multistate Tax Compact rather than the actions of member states, the companies in the landmark Gillette case said in their final request to the high court for review ( Gillette Co. v. Cal. Franchise Tax Bd., U.S., No. 15-1442, reply brief to petition for certiorari filed 8/16/16 ).

The Franchise Tax Board had “literally nothing to say” about the binding terms of the compact and its tax apportionment formula in its brief filed with the court, but instead is continuing to argue improperly that the actions of the states and nonbinding resolutions show the compact is only an advisory one, the companies said in their Aug. 16 reply brief in support of their petition for certiorari.

Gillette Co.; its parent, Procter & Gamble Manufacturing Co.; Kimberly-Clark Worldwide Inc.; and Sigma-Aldrich Inc. also argued that lower court rulings on the questions raised in the case in California and other states are inconsistent about the binding nature of the compact, making it necessary for the U.S. Supreme Court to step in.

“It thus appears that the only constant in these state-court decisions is a determination to rule for the state and against out-of-state taxpayers,” the companies said in the latest round of briefing in the case that sparked a national debate about the compact's meaning.

With briefing now complete, the petition will be distributed for the court's Sept. 26 conference.

$3 Billion at Stake

The companies are asking the court to overturn a state supreme court ruling that California could enforce its statutory apportionment formula in lieu of the compact's formula, despite the state's adoption of the compact. The companies' dispute with the California Franchise Tax Board has centered on competing interpretations of the Multistate Tax Compact as either an advisory compact or a binding agreement.

Whether the compact is an advisory or binding agreement is an issue still before two other supreme courts after the Minnesota high court recently ruled in favor of the state and the Michigan high court declined to review the issue (124 DTR H-1, 6/28/16).

At least $3 billion in corporate tax payments across the country are at stake, according to the Gillette petitioners.

In their Aug. 16 reply brief, the companies refuted the FTB's argument that overturning the California ruling would improperly allow “private taxpayers” to enforce the compact. The FTB didn't raise the issue earlier, likely because other court precedent clearly gives third parties the right to sue to enforce agreements intended to benefit them, the companies said.

The companies also argued that the FTB, in its brief to the court, didn't defend the California court's rationale to interpret the compact based on another U.S. Supreme Court ruling, Northeast Bancorp v. Board of Governors, 472 U.S. 159 (1985) , because it is indefensible. The California court relied on Northeast Bancorp, saying it offered “a unique set of considerations that govern the interpretation of interstate compacts,” in error, the companies said.

“The California Supreme Court misunderstood this Court's precedent, a mistake that this Court has a special responsibility to correct,” the companies said in their brief.

Corporations, tax groups like the Council On State Taxation and the Tax Foundation, and a tax consultant who says he could be the last living person who witnessed the creation of the Multistate Tax Compact have urged the U.S. Supreme Court to review the California case (128 DTR K-2, 7/5/16).

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

For More Information

Text of the reply brief is available at http://src.bna.com/hQF.

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