THE GILLETTE COMPANY еt al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.
No. S206587
Supreme Court of California
Dec. 31, 2015
*The Proctor & Gamble Manufacturing Co. v. Franchise Tax Bd. (No. CGC-10-495912); Kimberly-Clark Worldwide, Inc. v. Franchise Tax Bd. (No. CGC-10-495916); Sigma-Aldrich, Inc. v. Franchise Tax Bd. (No. CGC-10-496437); RB Holdings (USA) Inc. v. Franchise Tax Bd. (No. CGC-10-496438); Jones Apparel Group, Inc. v. Franchise Tax Bd. (No. CGC-10-499083).
Silverstein & Pomerantz, Amy L. Silverstein, Edwin P. Antolin, Johanna W. Roberts, Charles E. Olson and Lindsay T. Braunig for Plaintiffs and Appellants.
Jeffrey B. Litwak; BraunHagey & Borden and Matthew Borden as Amici Curiae on behalf of Plaintiffs and Appellants.
Wm. Gregory Turner for Council on State Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.
Keith G. Landry; Reed Smith, Brian W. Toman, Mardiros H. Dakessian, Muhammad I. Shaikh and Erin J. Mariano for Institute for Professionals in Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.
Law Offices of Miriam Hiser, Miriam Hiser; Masters, Mullins & Arrington and Richard L. Masters for Interstate Commission for Juveniles and Association of Compact Administrators of the Interstate Compact on the Placement of Children as Amici Curiae on behalf of Plaintiffs and Appellants.
Kamala D. Harris, Attorney General, Susan Duncan Lee, Acting State Solicitor General, Edward C. DuMont, State Solicitor General, Kathleen A. Kenealy,
Gregg Abbot, Attorney General (Texas), Mark L. Walters and Daniel T. Hodge, Assistant Attorneys General, Jonathan F. Mitchell, Solicitor General, Rance Craft, Assistant Solicitor General; Luther Strange, Attorney General (Alabama); Michael C. Geraghty, Attorney General (Alaska); Dustin McDaniel, Attorney Gеneral (Arkansas); John W. Suthers, Attorney General (Colorado); Irvin B. Nathan, Attorney General (District of Columbia); David M. Louie, Attorney General (Hawaii); Lawrence G. Wasden, Attorney General (Idaho); Derek Schmidt, Attorney General (Kansas); Bill Schuette, Attorney General (Michigan); Lori Swanson, Attorney General (Minnesota); Chris Koster, Attorney General (Missouri); Timothy C. Fox, Attorney General (Montana); Catherine Cortez Masto, Attorney General (Nevada); Gary K. King, Attorney General (New Mexico); Wayne Stenehjem, Attorney General (North Dakota); Ellen F. Rosenblum, Attorney General (Oregon); John E. Swallow, Attorney General (Utah); and Robert W. Ferguson, Attorney General (Washington) as Amici Curiae on behalf of the states of Texas, Alabama, Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico, North Dakota, Oregon, Utah, Washington and the District of Columbia.
Joe Huddleston, Shirley K. Sicilian and Sheldon H. Laskin for Multistate Tax Commission as Amicus Curiae on behalf of Defendant and Respondent.
OPINION
CORRIGAN, J.-Here we consider how California calculates income taxes on multistate businesses. In 1974, California joined the Multistate Tax Compact (Multistate Tax Com., Model Multistate Tax Compact (Aug. 4, 1967)) (Compact), which contained an apportionment formula and permitted a taxpayer election between the Compact‘s formula and any other formula provided by state law. (
A. Apportionment of Business Income in California Before the Compact
When a business earns income in multiple jurisdictions, apportionment is necessary to avoid tax duplication or other inequity. The Uniform Law Commission, also known as the National Conference of Commissioners on Uniform State Laws, is “a nоn-profit association of lawyers who draft model legislation regarding areas of law in which they believe it would be best to have uniformity of law among the states.” (Metso Minerals Industries v. FLSmidth-Excel LLC (E.D.Wis. 2010) 733 F.Supp.2d 969, 973, fn. 5.) In 1957, this commission drafted the Uniform Division of Income for Tax Purposes Act (7A pt. 1 West‘s U. Laws Ann. (2002) U. Div. of Income for Tax Purposes Act, § 1 et seq., p. 141) (the UDITPA or the Act). The Act was intended to provide a uniform guide for state laws and practices regarding multistate business taxation and to prevent taxation in multiple jurisdictions based “on more than [a business‘s] net income.” (7A pt. 1 West‘s U. Laws Ann., supra, Prefatory Note, p. 142; see ASARCO Inc. v. Idaho State Tax Comm‘n (1982) 458 U.S. 307, 310, fn. 3 [73 L.Ed.2d 787, 102 S.Ct. 3103].) Our Legislature codified the provisions of the UDITPA in 1966. (See
B. Promulgation of the Compact and Its Adoption in California
The UDITPA was not widely adopted. States hаd scant motive to enact a uniform apportionment scheme benefitting multistate corporations. (See Ryan,
That study, known as the “Willis Report,” “recommended a uniform two-factor apportionment formula based on the amount of property and payroll in each state, as well as a blanket nexus standard that limited income tax jurisdiction to states in which a business had either real property or payroll.” (Ryan, supra, 67 Wash. & Lee L.Rev. at pp. 311-312, fns. omitted; see Judiciary Spеcial Subcom. on State Taxation of Interstate Commerce, H.R.Rep. No. 89-952, 1st Sess., pp. 1135–1136 (1965).) Starting in 1965, several congressional bills proposed a comprehensive tax scheme for interstate business income. (U.S. Steel, supra, 434 U.S. at p. 456, fn. 4.) Most states objected to the loss of sovereignty inherent in the Willis Report recommendations. Some states also feared the proposals would cause lost revenue. (See McLure, The Difficulty of Getting Serious About State Corporate Tax Reform (2010) 67 Wash. & Lee L.Rev. 327, 337.)
The Willis Report and subsequent congressional action spurred an “unprecedented special meeting of the National Association of Tax Administrators” in January 1966, at which “the idea of a multistate tax compact was envisioned.” (Multistate Tax Com., First Annual Rеp., period ending Dec. 31, 1968, p. 1.) A draft of the Compact was presented to the states in January 1967. It provided an alternative to potential federal legislation restricting state taxation power. Nine states adopted it within six months. (Id. at p. 2.)
The Compact includes two central features. The first is the creation of the Multistate Tax Commission (Commission). The Commission is empowered to
The second central feature is the adoption of the UDITPA‘s equal-weighted apportionment formula. (Compact, art. IV.) The formula is designed to address the lack of uniformity among the various states’ apportionment schemes. (Com., Third Annual Rep. (Fiscal Year July 1, 1969—June 30, 1970) p. 2.) The Compact contains an election provision. A taxpayer subject to apportionment of income “in two or more pаrty States may elect to apportion and allocate his income in the manner provided by the laws of such States ....” (Compact, art. III, § 1.) Alternatively, the taxpayer may elect to rely on the Compact‘s apportionment formula. (Ibid.)
In 1974, the Legislature passed former section 38006, which included the entire text of the Compact, and made California a member state. (Stats. 1974, ch. 93, § 3, p. 193.) This action resulted in no immediate apportionment change because, as noted, existing California law had previously adopted the UDITPA formula.4
C. Change in the Apportionment Formula: Amendment of Section 25128
This situation changed in 1993 when the Legislature adopted a different apportionment formula. It amended section 25128(a) to prоvide: “Notwithstanding Section 38006 [i.e., the provisions of the Compact], all business income shall be apportioned to this state by multiplying the business income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four ....”5
D. The Current Litigation
Between 1993 and 2005, six multistate corporations (Taxpayers) paid income tax calculated under the new formula. They then sought a refund, arguing that the Compact gave them the right to choose between the new legislative formula or the UDITPA approach. They claimed that under the UDITPA formula, they had overpaid their income taxes by approximately $34 million. After the Franchise Tax Board (FTB) denied their claims, they filed a refund action. The trial court sustained the FTB‘s demurrer, concluding the Legislature could, consistent with the Compact, eliminate the election provision. The Court of Appeal reversed, reasoning in part that the Legislature could not unilaterally repudiate mandatory terms of the Compact, which permitted election.6 We granted the FTB‘s petition for review.
II. DISCUSSION
The FTB contends section 25128(a)‘s new apportionment formula should control, arguing that when member states entered the Compact their intent “was to allow them to change their state laws to establish alternate mandatory apportionment formulas.” Taxpayers do not dispute that the Legislature has authority to enact an alternate formula. They argue instead that the Compact explicitly permits election and the Legislature is bound to allow it. This case turns on whether the Legislature is so bound. We conclude it is not and California‘s statutory formula governs.
A. The Compact Constitutes State Law
Taxpayers recognize that the Compact does not have the force of federal law. It was never ratified by Congress as rеquired under the compact clause. (See
The Legislature ordinarily has authority to repeal or modify any enactment. “[T]he legislative power the state Constitution vests is plenary,” and “[a] corollary of the legislative power to make new laws is the power to abrogate existing ones. What the Legislature has enacted, it may repeal.” (California Redevelopment Assn. v. Matosantos (2011) 53 Cal.4th 231, 254, 255 [135 Cal.Rptr.3d 683, 267 P.3d 580]; see
Taxpayers acknowledge the lack of congressional approval but argue “interstate compacts (approved or not) take precedence over other state laws” because “they are both contracts and binding reciprocal statutes among sovereign states.” Taxpayers thus contend section 25128 violatеs the contract clauses of the federal and state Constitutions because it impairs an obligation created by an interstate compact. (See
The Commission, which was created by the Compact, has filed an amicus curiae brief here. In the Commission‘s own view, the Compact is not binding. “Rather, it is an advisory compact that contains two apportionment provisions, the UDITPA formula and the election provision... which are more in the naturе of model uniform laws.” To support this interpretation, the Commission urges a test derived from Northeast Bancorp v. Board of Governors, FRS (1985) 472 U.S. 159 [86 L.Ed.2d 112, 105 S.Ct. 2545] (Northeast Bancorp). That case involved an attempt by several out-of-state banks to acquire banks in New England. Federal law prohibited the acquisition of local banks by out-of-state banks unless expressly authorized by state law. (See
1. Reciprocal Obligations
We begin with the “[m]ost important[]” factor: whether the Compact crеated reciprocal obligations among member states. (Northeast Bancorp, supra, 472 U.S. at p. 175.) The Commission argues the Compact creates no reciprocal obligations, especially with respect to maintaining the election provision. Like Northeast Bancorp, U.S. Steel emphasized the importance of
Taxpayers admit that “party states do not perform or deliver obligations to one [another]” and “have no incentive to enforce the Compact,” which “is not the type of contract where the parties exchange obligations and are in a meaningful position to gauge each other‘s compliance.” Nevertheless, they argue the member states’ commitment to the UDITPA formula is what prevented congressional intervention, and maintenance of that formula is mutual, reciprocal, and “critical to the effectiveness of the Compact.”
As described ante, there is little doubt that, decades ago, the possibility of congressional action helped spur adoption of the Compact. But Taxpayers do not explain how a state‘s elimination of the UDITPA formula renders the Compact less “effective.” More importantly, whether it does or not is a completely different question from whether the Compact constitutes a reciprocal obligation among members. The Compact‘s provision of election between the UDITPA or any other state formula does not create an obligation of member states to each other. Even if maintenance of the election provision in one member state might benefit taxpayers in another state, that benefit to the tаxpayer applies whether the taxpayer is from a member or nonmember state. This application is more akin to the adoption of a model law rather than the creation of any mutual obligations among Compact members. We note the Commission, in its amicus curiae brief, does not urge that California‘s decision to discontinue use of the UDITPA formula in any way undermines the effectiveness of the Compact.
Indeed, as noted, the UDITPA was promulgated as a model law, and our Legislature adopted it years before joining the Compact. Clearly, the Legislature is free to amend its own legislation even if it is based on a model law. (See Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 772 [47 Cal.Rptr.3d 216, 139 P.3d 1169] [noting the Legislature was “free” to amend the UDITPA].) Nothing in the language оf the Compact, nor California‘s enactment of it, suggested any change in the Legislature‘s authority to modify the apportionment formula. The Legislative Counsel commented that the Compact did not “alter any state tax.” (Ops. Cal. Legis. Counsel, No. 11600
2. Conditional or Unilateral Action
Other indicia of a binding compact include whether its effectiveness depends on the conduct of other members and whether any provision prohibits unilateral member action. With respect to the former, the Compact has not required efficacious member action since 1967. By its terms, the Compact became effective once it had been “enacted into law by any seven States.” (Compact, art. X, § 1.) Nine states other than California enacted the Compact within six months of its initial draft. (Com., First Annual Rep., supra, at p. 2.) Thereafter, the Compact was effective “as to any other State upon its enactment thereof.” (Compact, art. X, § 1.) Thus, the Compact had long been effective when California joined it in 1974. No action by existing members was required to admit California.
Any state may join the Compact simply by enacting its provisions into law. As U.S. Steel observed, “each State is free to withdraw at any time.” (U.S. Steel, supra, 434 U.S. at p. 473; see Compact, art. X, § 2.) Thus, any state may join or leave the Compact without notice. This ability of member states to unilaterally come and go as they please militates against a finding that the Compact is a binding interstate agreement under Northeast Bancorp. (See Seattle Master Builders v. Pacific Northwest Electric Power (9th Cir. 1986) 786 F.2d 1359, 1372 (Seattle Master Builders).)
Contrary to the Taxpayers’ arguments, the presence of a withdrawal provision says nothing about a member state‘s ability to unilaterally modify the Compact. Indeed, no express language of the Compact or any California enabling statute proscribes unilateral amendment of our own state law. As the FTB observes, the history of the Compact is replete with examples of unilateral state action. Florida was one of the first states to enact the Compact in 1967. Yet it later passed statutes eliminating Compact articles III and IV from Florida law. The Commission subsequently resolved that, in spite of that action, Florida was recognized “as a regular member in good standing of the Multistate Tax Compact and the Multistate Tax Commission.” (Com., Minutes of Meeting, Dec. 1, 1972, p. 2.) Numerous member statеs have subsequently enacted different apportionment formulae. Currently, only seven of the Compact‘s 16 members employ the equal-weighted UDITPA formula.8
3. Regulatory Organization
The Taxpayers argue that the establishment of the Commission is “a classic characteristic of an interstate compact.” The argument ignores an important point. Although the Compact established the Commission, that body has no authority ordinarily associated with a regulatory organization. Article VI of the Compact authorizes the Commission to “[s]tudy State and local tax systems and particularly types of State and local taxes,” “[d]evelop and recommend proposals for an increase in uniformity or compatibility of State and local tax laws with a view toward encouraging the simplification and improvement of State and local tax law and administration,” and “[c]ompile and publish such information as would, in its judgment, assist the party States in implementation of the compact and taxpayers in complying with State and local tax laws.” (Compact, art. VI, § 3, subds. (a)-(c), italics added.) As the Commission observes, these powers “are strictly limited to an advisory and informational role.”
The Commission may also promulgate administrative regulations “in the event that two or more States have uniform provisions relating to specified types of taxes.” (U.S. Steel, supra, 434 U.S. at p. 457; see Compact, art. VII.) However, as U.S. Steel observed: “These regulations are advisory only. Each member State has the power to reject, disregard, amend, or modify any rules or regulations promulgated by the Commission. They have no force in any member State until adopted by that State in accordance with its own law.” (U.S. Steel, at p. 457.) While these regulations may play a persuasive role in shaping policy, the Commission‘s inability to bind member states to adopt them further confirms it is not a regulatory organization within the meaning of Northeast Bancorp.
Similarly, the Commission may conduct taxpayer audits but only if the member state has passed separate authorizing legislation and expressly requests thе audit. (Compact, art. VIII.) In such a case, the Commission acts as “the State‘s auditing agent” and any power of compulsory process derives from the authority vested by the laws of the requesting member state. (U.S. Steel, supra, 434 U.S. at p. 457; see Compact, art. VIII, § 4.) Further, although the Commission may “require the attendance of persons and the production of documents in connection with its audits,” it “has no power to punish failures to comply” and “must resort to the courts for compulsory process, as
Finally, the Compact authorizes the Commission to provide for binding arbitration of disputes between member states. (Compact, art. IX, § 1.) However, the Commission has never adopted such a regulation and no arbitrаtion provisions are currently effective. (See U.S. Steel, supra, 434 U.S. at p. 457, fn. 6.) Indeed, California hesitated to join the Compact due, in part, to concerns that such an arbitration provision would not only displace California institutions as the forum for tax disputes, but that “easy access to arbitration” would lead to “erosion of the state‘s tax base.” (Assem. Com. on Revenue & Taxation, analysis of Assem. Bill No. 1304 (1973–1974 Reg. Sess.) as amended June 14, 1973, p. 3.) The Legislature approved California‘s membership upon explicit condition that the Commission not make the arbitration provision effective. An uncodified portion of our enacting statute provided that California would automatically withdraw from the Compact if the Commission changed its voting rules or if the arbitratiоn provision was made effective. (Stats. 1974, ch. 93, § 5, p. 208.)9
As discussed, U.S. Steel held the Compact did not encroach on federal authority in any way that would require congressional approval under the compact clause. The U.S. Steel court observed there is no “delegation of sovereign power to the Commission; each State retains complete freedom to adopt or reject the rules and regulations of the Commission.” (U.S. Steel, supra, 434 U.S. at p. 473.) The Commission simply has no binding regulatory authority upon member states. Whatever power the Commission has to promulgate regulations or conduct audits exists solely at the pleasure of each member state. Further, the only express powers of the Commission independent of authority granted by each member is purely advisory. It may study tax laws, make proposals, and publish data. (Compact, art. VI, § 3.) Because the
Nothing in the language of former section 38006, the circumstances of its enactment, the subsequent conduct of other members states, or the position taken by the Commission, indicate our Legislature intended to be bound by the taxpayer election provision.
C. The Reenactment Rule Does Not Bar the Legislature‘s Amendment of Section 25128
Taxpayers alternatively argue that the Legislature‘s amendment of section 25128 is invalid because it violates the reenactment rule. That rule derives from article IV, section 9 of our Constitution, stating: “A statute shall embrace but one subject, which shall be expressed in its title. If a statute embraces a subject not expressed in its title, only the part not expressed is void. A statute may not be amended by reference to its title. A section of a statute may not be amended unless the section is re-enacted as amended.” (Italics added.) One purpose of this provision “is to ‘make sure legislators are not operating in the blind when they amend legislation, and to make sure the public can become apprised of changes in the law.’ ” (St. John‘s Well Child & Family Center v. Schwarzenegger (2010) 50 Cal.4th 960, 983, fn. 20 [116 Cal.Rptr.3d 195, 239 P.3d 651]; see Hellman v. Shoulters (1896) 114 Cal. 136, 152 [45 P. 1057] (Hellman).)
Generally, the reenactment rule does not apply to statutes that act to “amend” others only by implication. (Hellman, supra, 114 Cal. at p. 152.) We reasoned long ago in Hellman: “To say that every statute which thus affects the operation of another is therefore an amendment of it would introduce into the law an element of uncertainty which no one can estimate. It is impossible for the wisest legislator to know in advance how every statute proposed would affect the operation of existing laws.” (Ibid.) The Legislature‘s 1993 amendment of section 25128 replaced the equal-weighted UDITPA apportionment formula with a different formula double-counting the sales factor. This amendment expressly referenced the Compact, stating that it applied “[n]otwithstanding Section 38006. . . .” (
D. The Legislature Intended to Supersede the Compact‘s Election Provision
Having concluded the Legislature had the unilateral authority to eliminate the Compact‘s election provision, we must determine whether it intended to do so. Taxpayers suggest it did not, arguing that the Legislature intended section 25128‘s double-sales factor formula to apply only “if the Cоmpact Formula is not elected.”
Both the language of section 25128 and its legislative history defeat such a claim. First, section 25128(a) explicitly provides that “all business income shall be apportioned to this state by” using the formula it sets out, “[n]otwithstanding Section 38006 [i.e., the Compact] ....” (Italics added.) There is no ambiguity in this language. The Assembly Committee on Revenue and Taxation‘s analysis of the bill explained the need for the amendment: “California and most other states have used an equal weighted three-factor apportionment formula for many years. This formula has been retained largely out of a belief that uniformity among states is the best way to ensure that corporations are not subject to double taxation or that some income ‘falls through the crack‘. While any apportionment formula may be somewhat arbitrary, supporters of the current system argue that it is still in California‘s best interest to remain uniform with other states. [] However, while uniformity in apportionment methods existed between states in the 1960‘s and may still be a desirable principle, this uniformity has been eroded significantly in recent years by the actions of other states. Currently twenty-five other states at least provide an option to certain taxpayers to place an additional weight on the sales factor in their apportionment formulas [citation]. [] Proponents believe that California‘s continued reliance upon the three-factor apportionment system results in discriminatory taxation against California-based companies, particularly given the additional weight given to sales factors by other states.” (Assem. Com. on Revenue & Taxation, analysis of Sen. Bill No. 1176 (1993–1994 Reg. Sess.) as introduced Mar. 5, 1993, pp. 1-2; see also Sen. Com. on Revenue & Taxation, analysis of Sen. Bill No. 1176 (1993–1994 Reg. Sess.) as introduced Mar. 5, 1993, p. 2.) In light
III. DISPOSITION
The Court of Appeal‘s judgment is reversed.
Cantil-Sakauye, C. J., Werdegar, J., Liu, J., Cuéllar, J., Kruger, J., and Murray, J.,* concurred.
*Associate Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.