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The California Court of Appeal, First Appellate District, has issued an opinion that could have a significant ripple effect in other states that have adopted the Multistate Tax Compact. In The Gillette Company v. Franchise Tax Board, the court held that the taxpayer had the option of using either the compact’s three-factor formula to apportion and allocate income for state income tax purposes, or California’s own double-weighted sales factor apportionment formula. The California Franchise Tax Board (FTB) argued that legislation enacted in 1993 repealed and supersede the compact’s formula, thereby making the state’s double-weighted sales factor formula mandatory. However, the court concluded that the Multistate Tax Compact is a valid multistate compact, and that California is bound by it and its apportionment election provision unless and until the state withdraws from the compact. This decision should act as a warning for any other states that have adopted the compact, but that may also want to force taxpayers to use an apportionment formula other than the standard three-factor formula.

 

Note: In anticipation of this ruling, California actually did withdraw from the Multistate Tax Compact with legislation that repealed the state’s compact provisions, clarifying that the standard three-factor apportionment formula is not an option for California corporation franchise and income tax purposes, except for businesses that derive more than 50% of their gross business receipts from certain qualifying business activities (see Ch. 37, Laws 2012). However, this legislation is prospective only (effective June 27, 2012).

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