Gillette Co. v. Franchise Tax Board
62 Cal. 4th 468
| Cal. | 2015Background
- California adopted the UDITPA three-factor (property, payroll, sales equal-weighted) apportionment scheme in 1966 and joined the Multistate Tax Compact in 1974, which contained the same formula and an express taxpayer election to use either the Compact formula or a state's own formula.
- In 1993 the Legislature amended Rev. & Tax. Code § 25128(a) to replace the equal-weighted formula with a four-part divisor formula that double-weights sales (property + payroll + 2×sales ÷ 4), and prefaced the change with "notwithstanding Section 38006" (the Compact).
- Six large multistate corporations paid tax under the new formula, then sought refunds claiming the Compact’s election provision entitled them to use the UDITPA formula and thus they had overpaid by roughly $34 million.
- The Franchise Tax Board denied refunds; the trial court sustained the FTB’s demurrer; the Court of Appeal reversed holding the Legislature could not unilaterally repudiate mandatory Compact terms permitting the taxpayer election.
- The California Supreme Court granted review to decide whether the Legislature could preclude reliance on the Compact’s election provision and whether the Compact created binding reciprocal obligations that limited unilateral state legislative action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether California may unilaterally amend its apportionment law despite the Compact’s election provision | Taxpayers: the Compact created a binding obligation that preserves the taxpayer election; §25128 cannot override the Compact | FTB: Legislature may change state tax law; Compact is not a binding reciprocal agreement that limits legislative power | Held: Legislature may preclude the election; §25128 governs and supersedes the Compact’s election provision in California |
| Whether the Multistate Tax Compact is a binding interstate compact that limits state legislative action | Taxpayers: Compact is a contract/reciprocal statute, so impairing its election provision violates contract clauses | FTB: Compact is advisory/model-law-like; member states retain plenary authority to modify or repeal | Held: Compact lacks the indicia of a binding reciprocal compact (no mutual obligations, no binding regulatory power, unilateral entry/withdrawal) |
| Whether the Commission created by the Compact is a binding regulatory body | Taxpayers: Commission and its regulations reflect a joint regulatory organization | FTB: Commission’s powers are advisory; regulations and audits are nonbinding unless adopted by each state | Held: Commission is advisory only; it lacks binding authority over member states |
| Whether amendment of §25128 violated California’s reenactment rule (Cal. Const., art. IV, § 9) | Taxpayers: §25128 implicitly amended §38006 and required reenactment | FTB: amendment expressly referenced the Compact and gave public notice; reenactment rule not violated | Held: Reenactment rule does not bar the amendment; legislative language and history show intent to supersede the election provision |
Key Cases Cited
- Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (establishes apportionment principle for state income taxation of multistate corporations)
- U.S. Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452 (states may enter advisory compacts; Multistate Tax Compact did not require congressional approval under the Compact Clause)
- Northeast Bancorp v. Board of Governors, FRS, 472 U.S. 159 (tests for when interstate arrangements constitute binding compacts—reciprocity, joint regulatory bodies, conditioning)
- ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307 (discusses limits and purposes of apportionment and state taxation of interstate income)