Reevaluate California Apportionment Formulas Following Gillette v. Franchise Tax Board

On December 31, 2015, the California Supreme Court issued its decision in The Gillette Company et. al. v. California Franchise Tax Board. The court held that the taxpayers couldn’t elect an evenly weighted, three-factor apportionment formula pursuant to the Multistate Tax Compact (MTC).

The MTC became effective in 1967 as an agreement among states, drafted by state tax administrators, to promote uniformity in state income taxation.

The California Supreme Court in Gillette examined the issue of whether the agreement was binding and eventually reasoned that the MTC didn’t constitute a binding agreement between the states that adopted it. This latest decision overturned a July 2012 decision of a California Court of Appeals.

Who's Affected?

This ruling impacts business entities whose multistate business operations include operations in California and that either elected the MTC method or are considering the MTC method as a future option.

Impact

Although California withdrew its membership in the MTC through legislation enacted in 2012 (Senate Bill 1015), uncertainty remains regarding the validity of that legislative repeal. The uncertainty arises because the repealing legislation wasn’t enacted with a two-thirds majority vote—required by California Proposition 26 for any legislatively enacted tax increase.

Some taxpayers elected to apply the MTC’s three-factor formula on their 2013 and 2014 tax returns, reasoning that the 2012 California Court of Appeals decision in Gillette found that the MTC was a binding agreement that couldn’t be unilaterally overridden without a valid withdrawal from the MTC. Given this new ruling, doing so may have resulted in one of the following:

  • Underpayment and resulting exposure. Taxpayers that paid less tax as a result of the MTC election have a greater risk of exposure in the event of an examination.
  • Adjustments to net operating loss (NOL) carryovers. Taxpayers that generated greater California apportioned NOLs as a result of the MTC election may be required to adjust their net operating loss carryovers.

We're Here to Help

Contact your Moss Adams professional to discuss the impact this decision may have on your company’s California tax standing. We can help evaluate possible exposures or potential adjustments to NOL carryovers as well as help you file amended California income tax returns. For more insight, contact:

John Clausen, Director
State & Local Tax Services, Silicon Valley
(408) 558-5775
john.clausen@mossadams.com

Bob Reynolds, Partner
State & Local Tax Services, Sacramento
(916) 503-8138
bob.reynolds@mossadams.com

Mark Woodward, Partner
State & Local Tax Services, Los Angeles
(310) 481-1230
mark.woodward@mossadams.com