California Supreme Court Holds Multistate Tax Compact is Not Binding

In a unanimous ruling, the California Supreme Court held that the Multistate Tax Compact (“Compact”), in particular the ability to elect an equally weighted three-factor apportionment formula under Article IV, can be unilaterally amended by the Legislature. Taxpayers had been optimistic about this decision, as the California Court of Appeals found for the taxpayer in its 2012 decision. However, in the intervening years, courts in Oregon, Texas, and Minnesota all found that the Compact was not binding. In addition, although the Michigan Supreme Court found for the taxpayer in IBM v. Dept. of Treasury, MI S.C., 496 Mich. 642, July 14, 2014, the Michigan Legislature retroactively overturned the decision in 2015. Based on the oral arguments, it is not surprising that the California Supreme Court sided with the Franchise Tax Board. The opinion relied on the Multistate Tax Commission’s amicus brief, which stated that the Compact was never intended to bind state legislatures. The Multistate Tax Commission stated that the Compact was only an advisory compact that could be overturned by the Legislature. Counsel for IBM stated that they intend to appeal the decision to the U.S. Supreme Court. However, now that California has come to the same conclusion as the other states considering the Compact, it is unlikely that the U.S. Supreme Court will grant certiorari. It would now appear that this election is not available to taxpayers in states that have affirmatively changed their apportionment statutes mandating something other than an equally weighted three-factor apportionment formula.

TECHNICAL INFORMATION CONTACT:

Mark L. Nachbar
Principal
Ryan
213.627.1719
mark.nachbar@ryan.com