Weekly Round-Up: California Franchise Tax Board Suffers a Setback

In a loss for the California Franchise Tax Board, the three-judge panel of the state Court of Appeal said the tax agency cannot deny Gillette and five other corporate taxpayers the right to use the formula in the Multistate Tax Compact, which equally weights property, payroll, and sales in California versus those three factors elsewhere.

California enacted the compact in 1973 with the three-factor formula, and the compact's formula supersedes the alternative formula enacted in California in 1993 to require taxpayers to apportion income based on property, payroll, and two-times sales, the court said.

The only way to eliminate the three-factor formula is to repeal the compact, the court said.

“Because the compact is both a statute and a binding agreement among sovereign signatory states, having entered into it, California cannot, by subsequent legislation, unilaterally alter or amend its terms,” the court said (emphasis from the court).

In addition to ruling that the compact supersedes the alternative apportionment formula adopted 20 years later, the court said the FTB's position violates the federal and state constitutional prohibition against states passing laws that impair the obligations of contracts, and the way the state adopted the alternative formula “runs afoul of the reenactment clause of the California Constitution.”

The case before the court involves $34 million in claims for refund filed by the six corporations since 2006, but FTB and the California Department of Finance have said the state could lose at least $500 million if the ultimate outcome of the case is in favor of the taxpayers. To hedge against such a loss, lawmakers repealed the compact in June.

In light of the fact that the compact is more than a statute, “the multiple flaws in the FTB's position become apparent,” the court said.

For complete coverage of this development, check out Bloomberg BNA correspondent Laura Mahoney’s article in this week’s issue of the Weekly State Tax Report.

Alerts on this development have also been issued by Morrison & Foerster, PwC, and Sutherland SALT.

In other developments…

States press Congress to make Internet merchants collect sales taxes for them at recent House Judiciary Committee hearing, the Washington Post reports.

Register here for a Bloomberg BNA Webinar on August 29 during which state tax policy experts on both sides of the nexus debate analyze the results of Bloomberg BNA's 2012 Survey of State Tax Departments.

Bloomberg BNA will offer a Tax Policy & Practice Summit Nov. 13- 14 focusing on the most important issues currently facing senior corporate tax professionals. State sessions include cloud computing and other state sales tax issues and a post-election roundup from a state tax perspective.
                                                                                                                                                                                   Compiled by Priya D. Nair
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