Supreme Court Denies Cert in Gillette
On Tuesday, October 11, 2016, the U.S. Supreme Court denied the petition for a writ of certiorari to the California Supreme Court filed by The Gillette Company and three other corporations, seeking review of the California high court’s decision in Gillette v. Franchise Tax Board. 363 P.3d 94 (Cal. 2015). The issue presented by the petition was whether the MTC has the status of a contract which binds the signatory states. The MTC provides for companies to use an equally-weighted three-factor formula to apportion taxable income for purposes of determining their state corporate income tax liability. See MTC, Art. IV(9). Years after adopting the MTC, including its apportionment formula, California enacted a different apportionment formula that double-weighted the sales factor, and required its use by multi-state corporations in reporting California franchise tax. Cal. Rev. & Tax Code § 25128(a). Gillette and the other challengers argued that they should be permitted to use the three-factor apportionment formula based on the State’s membership in the MTC. In rejecting their argument, the California Supreme Court, based on the factors outlined by the U.S. Supreme Court in Northeast Bancorp v. Board of Governors, 472 U.S. 159 (1985), held that the MTC was not a binding interstate compact.
Challenges to state statutes that diverge from the MTC’s three-factor apportionment formula have been filed in multiple states that have accepted membership in the MTC, so far largely without success. For instance, in June the Minnesota Supreme Court upheld a statute that double-weights the sales factor, in response to a challenge by Kimberly-Clark Corporation. The company has indicated its intention to file a petition for cert seeking review of the decision, and the Court has granted an extension to file its petition through October 20, 2016. Also in June, a divided Michigan Supreme Court blocked the appeal of a Michigan appeals court ruling that held Michigan’s withdrawal from the MTC was constitutional. On September 9, 2015, the Oregon Tax Court denied Health-Net, Inc.’s appeal of the Oregon Department of Revenue’s decision to deny its refund, finding that Health-Net could not use the equal-factor apportionment formula because Oregon validly unilaterally withdrew from the MTC and removed the equal-factor apportionment option. Sherwin-Williams has filed a complaint in Denver County, Colorado District Court, appealing from a final determination of the Colorado Department of Revenue, which concluded that the Taxpayer was unable to elect to use the MTC’s three-factor apportionment formula in reporting Colorado income tax. Finally, a taxpayer has appealed, to the Texas Supreme Court, a Texas Appeals Court decision that the Texas franchise tax was not an income tax, and thus that the MTC’s three-factor apportionment formula was not a valid approach for determining the taxpayer’s franchise tax liability. The taxpayer filed its brief with the Texas Supreme Court on the September 30, 2016, and Respondent’s brief is due on October 31, 2016.
Thus, although the Supreme Court has denied Gillette’s cert. petition, there are likely to be further developments in the coming months regarding the status of the MTC as a binding contractual commitment of member states. We will keep you posted.