News and Insights

Texas Supreme Court Denies Three-Factor Apportionment in Graphic Packaging

Tax Development Dec 26, 2017

In its Graphic Packaging Corporation v. Hegar decision1 rendered December 22, 2017, the Texas Supreme Court fell in line with the rejection of the Multistate Tax Commission (MTC) optional three-factor apportionment provisions, citing the California Supreme Court Gillette decision,2 the Minnesota Supreme Court Kimberly Clark decision,3 and the Oregon Tax Court decision in Health Net.4

The Graphic Packaging case was different in that the Court first had to determine the threshold question of whether the Texas franchise tax is an income tax, as the MTC only applies to income taxes. The lower court determined that the franchise tax was not an income tax and found for the Comptroller. The Supreme Court agreed. It found that there is a difference between a taxpayer’s margin and net income, and noted that a taxpayer might have a positive margin yet operate at a net loss. In addition, the Court cited the Legislature’s provision that the franchise tax is not an income tax.

The Supreme Court also addressed two additional issues that were not considered by the Court of Appeals. The first is whether Tax Code § 171.106 precludes a taxpayer from using the Compact’s alternative formula. The Court found that Tax Code § 171.106 conflicts with the alternative apportionment section of the Compact. When there is an irreconcilable conflict between laws, a specific provision overrides a general provision, and the last law enacted prevails over an earlier law. In this case, the requirement to use a single factor apportionment formula for the franchise tax is both more specific than the MTC alternative formula, and it was enacted later than the MTC provision. Therefore, the provisions Tax Code § 171.106 prevail and require the use of a single-factor apportionment formula. 

The other issue considered by the Court is whether membership in the MTC prevented the Legislature from requiring a taxpayer to use only the apportionment formula found in the franchise tax rules. Here again, the Court found for the Comptroller in finding the MTC is merely an advisory compact and not binding on the state. In fact, the Texas Constitution prohibits the Legislature from giving up its sovereign rights. The Court found the decisions in California, Minnesota, and Oregon cited above to support this position. 

The only remaining MTC three-factor decision pending at a state supreme court level is the Health Net case in Oregon. With that case having been argued over a year ago, one would expect a decision to be rendered by the Oregon Supreme Court in the near future.  

1Graphic Packaging Corporation v. Hegar, Case No. 15-0669, Supreme Court of Texas.

2Gillette Co. v. Franchise Tax Bd., 363 P 3d. 94 (Cal. 2015), cert. denied, 137 S. Ct. 294 (2016).

3Kimberly-Clark Corp. v. Comm’r of Revenue, 880 N.W. 2d. 844 (Minn. 2016) cert. denied 137 S. Ct. 598 (2016).

4Health Net, Inc. v. Dep’t of Revenue, No. TC-5127, 2015 WL 5249431 (Or. T.C. September 9, 2015) appeal pending, No. S06365 (Or.) (argued September 19, 2016).


Mary Bernard