Supreme Court Summoned in Second Appeal Over Tax Compact

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By Jennifer McLoughlin

Oct. 24 — The U.S. Supreme Court has another chance to take up a case that calls into question the nature and future of the Multistate Tax Compact—and potentially implicates $3 billion in tax liability across the states.

Kimberly-Clark Corp. filed a certiorari petition with the high court Oct. 20, challenging the Minnesota Supreme Court’s conclusion that the state Legislature “made no unmistakable commitment” when enacting select provisions of the compact that was later impaired by the subsequent repeal of those provisions ( Kimberly-Clark Corp. v. Minn. Comm’r of Revenue , U.S., cert. petition filed 10/20/16 ).

At issue is Minnesota’s 1983 adoption of the compact’s equally weighted, three-factor apportionment formula, which the Legislature repealed four years later. Kimberly-Clark and its subsidiaries sought to amend corporate franchise tax returns for years 2007 through 2009 using the compact formula. The company brought suit when Minnesota’s revenue commissioner denied the company’s apportionment election and rejected related refund claims.

In a June 22 decision, the state supreme court affirmed the lower tax court’s ruling that handed a win to the state, finding no “clear and unmistakable promise by the State to refrain from amending or repealing” the statutory adoption of the apportionment formula or election. Accordingly, the court found the compact created no contractual obligation that prohibited the subsequent legislative repeal of the apportionment formula without entirely withdrawing from the compact.

Practitioners have speculated on the long odds of the Supreme Court granting certiorari in one of several compact cases pending across the nation. While the court denied review Oct. 11 in Gillette Co. v. Cal. Franchise Tax Bd., 2016 BL 337826, U.S., No. 15-1442., 10/11/16, that decision may not deter other taxpayers from seeking review.

“I think all of these will rise and fall on their own merits,” Joe Huddleston, an executive director for Ernst & Young LLP’s Indirect Tax group in the National Tax office, told Bloomberg BNA Oct. 24. “So, I’m not thinking that any denial would keep the other cases from moving forward.”

Conflict Over Unmistakability Doctrine

According to Kimberly-Clark, the Minnesota Supreme Court’s central holding was that “the unmistakability doctrine governs the interpretation of multistate compacts and that, under this doctrine, States are free to disregard contractual commitments touching on the exercise of sovereign authority unless the compact contains a separate promise to abide by the compact terms—that is, an express ‘second promise’ to keep the State’s promise.”

From that ruling, the company proposes one question for review: “Whether, under the ‘unmistakability doctrine,’ States are bound by contractual promises embodied in multistate compacts only if the contracting States make a separate and express ‘second promise’ to abide by their initial contractual promise.”

The petition highlights several reasons why review by the high court is warranted:

  •  A conflict exists among state and federal courts on the meaning and application of the unmistakability doctrine, largely stemming from confusion over the Supreme Court’s fractured decision in United States v. Winstar Corp., 518 U.S. 839 (1996).
  •  Requiring a “second promise” renders the compact’s guarantees illusory, as nearly all interstate compacts “have as their central purpose a surrender of aspects of state sovereignty.”
  •  An aggregate of approximately $3 billion in tax liability is at stake nationwide.
  •  The lower court’s ruling has far-reaching repercussions, calling into question the binding nature of all compacts and obscuring the scope of states’ compact obligations.

Stronger Case for Kimberly-Clark

Charles A. Rothfeld, special counsel with Mayer Brown, is counsel of record for Kimberly-Clark. Rothfeld also appeared as counsel for Gillette Co. in Gillette Co. v. Cal. Franchise Tax Bd.—the lead compact case that sought the Supreme Court’s examination of the compact’s binding or advisory nature.

While the court denied Gillette’s certiorari petition, Kimberly-Clark argues that its case for review is stronger.

“Although the California court focused narrowly on the rules governing compact interpretation, the decision below turns on the meaning of the unmistakability doctrine, a principle that applies in a wide range of contexts, is the source of widely acknowledged confusion, and that this Court was unable to explain clearly in Winstar,” according to the petition.

Several practitioners have told Bloomberg BNA that the Gillette denial may color the high court’s consideration of other compact challenges, but won’t necessarily close the door on review of unique issues and theories. However, the state-specific overlay in the cases presents a hurdle for taxpayers seeking the Supreme Court’s intervention—including Kimberly-Clark.

Huddleston explained that the various compact cases—whether in California, Michigan, Minnesota or Oregon—highlight state-specific questions exclusive of the compact question.

“As they argue these state-specific questions, the same question will arise for the Supreme Court to consider,” he said. “And that is, is this truly a federal question?”

Chances of Certiorari?

Kimberly-Clark’s petition notes that the amici arguments in support of Gillette’s certiorari petition, “which apply with equal force in this case, establish the doctrinal and practical importance of review here.” The court was referred to those amicus briefs—rather than asking the parties to re-file substantially identical briefs.

The Gillette case didn’t involve the unmistakability doctrine, which may favor Kimberly-Clark’s chances for review. However, those chances are still slim.

“The relationships between the two cases are very close,” Huddleston said. He added that Kimberly-Clark’s arguments are a little broader, so that if the Supreme Court is “looking for just something else to take this case, then Kimberly-Clark gives them that.”

Ultimately, however, the prospect of the court granting certiorari is “probably unlikely.”

To contact the reporter on this story: Jennifer McLoughlin in Washington at

To contact the editor responsible for this story: Ryan Tuck at

For More Information

Text of the petition is at

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