State Tax Snapshot: A Threat to the Multistate Tax Commission Compact?

California recently enacted legislation (S.B. 1015) to withdraw from the Multistate Tax Commission Compact. Meanwhile, the state’s intermediate appellate court will soon issue a decision on whether the Compact’s provision affording a taxpayer the ability to elect a three-factor apportionment formula is binding on member states absent an express withdrawal from the compact.

In Gillette v. California Franchise Tax Bd., No. A130803 (Cal. Ct. App.), the California Franchise Tax Board refused to allow a taxpayer to make an election under the MTC Compact to apportion income using the equally weighed three-factor formula.

The FTB prevailed at the trial court level. But it remains to be seen whether the court of appeals will reach the same conclusion.

A taxpayer victory coupled with California’s withdrawal from the MTC Compact might start a chain reaction in other states that adopt the compact, but deviate from the standard three-factor apportionment formula. As the MTC notes in its amicus brief, “only seven of the twenty compact members require an equally weighted formula.”

The MTC argues that its compact gives states the flexibility to adopt different apportionment regimes. But some tax practitioners are questioning whether the MTC’s apportionment provisions qualify as a “compact” because so many of its members have unilaterally adopted conflicting laws.

By Steven Roll

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