Weekly Round-Up: The Aftermath of the Gillette Decision

Bloomberg BNA Tax Law Editor Erin McManus, in this week’s issue of the Weekly State Tax Report, takes a closer look at the impact of Gillette Co. v. Franchise Tax Board, No. A130803 (Cal. Ct. App. July 24, 2012), a major decision coming out of California that surprised many state tax professionals, and the effect of the decision on other states. Click here to read the article in its entirety.

In Gillette, the California Court of Appeal held that the legislature could not override and eliminate the Multistate Tax Compact section that allowed taxpayers to elect to allocate and apportion their multistate income in accordance with the compact or in a manner provided by the state.

The decision comes after several years of movement by California, along with several other compact member states, away from the uniformity originally intended in the formation of the compact.

Michael Herbert, a tax partner in PricewaterhouseCoopers' State and Local Tax practice in San Francisco, and Steve Danowitz, a partner in Ernst & Young's Los Angeles office, both told Bloomberg BNA that the FTB was likely to appeal the decision.

In regard to the possible outcome of an appeal, Herbert noted that the court ruled against the FTB on three grounds and the FTB will have to overcome all of them.

First, the compact is a binding agreement among sovereign signatory states that California cannot unilaterally alter or amend, he said.

Second, the state cannot impair contracts under either the state or federal constitution.

Third, the purported change runs afoul of the California constitution's reenactment rule, which is intended to prevent implied repeal of sections, according to Herbert.

Herbert also observed that “the federal impairment ruling gives taxpayers a viable basis to take this to the U.S. Supreme Court, if needed.”

Danowitz told Bloomberg BNA that “pending appeal, the FTB likely would not issue any refunds for claims based on the equally weighted apportionment formula until the appeals process was exhausted.” Nevertheless, he noted that taxpayers that “can benefit from the use of equal weighting should consider filing refund claims.”

In other developments…

Morrison & Foerster issues its August 2012 issue of New York Tax Insights, which covers, among other things, a pair of recent decisions, each involving estimated sales tax assessments on restaurants.

Total state and local business taxes, a state-by-state estimates for fiscal year 2011, a new report by Ernst & Young LLP in conjunction with the Council On State Taxation.

Compiled by Priya D. Nair
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