State Tax Snapshot: With FTB Set to Appeal Gillette, Practitioners Eye Opportunities

In its petition to the California Supreme Court for review of the ruling in the Gillette case regarding apportionment of multistate income, the Franchise Tax Board will focus on findings in the appellate court's decision related to the impairment of contracts and rules for reenactment of state laws, Laura Mahoney reported for Bloomberg BNA’s Daily Tax Report.

Specifically, the FTB will focus on the appeals court finding that California violated the re-enactment rule when it adopted an alternative income apportionment formula in 1993 that varied from the compact “notwithstanding” the existence of the compact in state law.

Litigation surrounding the case is far from settled, but it raises a multitude of questions surrounding the income tax treatment of multistate businesses. One question is: how aggressively should Gillette be read? In Gillette, the taxpayers were retailers seeking three-factor apportionment, but there may be other reasons for taxpayers to seek to take advantage of UDITPA apportionment and allocation, besides wanting to take advantage of UDITPA’s three-factor apportionment formula.

Other potential opportunities arising from Gillette include:


  •   business/nonbusiness income positions,

  • industry specific apportionment,

  • sourcing of intangibles, and

  • sourcing of services (i.e., choosing costs of performance over market-based sourcing).  

These challenges are likely to be made in every state that is a member of the MTC Compact. “I expect we are going to see the largest dollar volume of refund claims across the nation that we have ever seen,” said Donald Griswold a partner with in the Washington, D.C. office of Crowell & Moring at a recent Bloomberg BNA State Tax Roundtable. “Because… it’s not going to be limited to just those taxpayers that may want to single weight their sales factor in an MTC member state. It’s anything in the MTC Compact that the state has departed from.”

This and other aspects of the Gillette ruling will be the subject of a Dec. 12 Bloomberg BNA Webinar. Kendall Houghton and Matthew Hedstrom of Alston & Bird and Jeffrey Reed with Mayer Brown will share their insights on Gillette and the Future of Income Tax Apportionment.

By Steven Roll

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