Jun 06, 2016
From KPMG TaxWatch
On December 31, 2015, in the Gillette case, the California Supreme Court held that certain taxpayers could not elect to use the Multistate Tax Compact’s allocation and apportionment provisions to compute their California taxable income. In the court’s view, the Compact was not akin to a binding contract and therefore a signatory state was not required to offer the Compact election. In reaching this conclusion, the court overturned an appeals court decision holding for the taxpayers. After receiving an extension of time to file a petition for cert, the taxpayers filed a petition for certiorari with the U.S. Supreme Court on May 27, 2016. The question presented for review is whether the Multistate Tax Compact has the status of a contract that binds its signatory states. In the taxpayers’ view, the California Supreme Court’s holding to the contrary rests on a distortion of the U.S. Supreme Court’s holding in Northwest Bancorp and a fundamental misunderstanding of the nature of interstate agreements. Specifically, the taxpayers argue that the California Supreme Court erroneously interpreted Northwest Bancorp by elevating that decision’s “list” of the indicia of a binding interstate compact into a “test.” The California court also erred, in the taxpayers’ opinion, in applying the factors to the Compact, which differed significantly from the legislation at issue in Northwest Bancorp. Furthermore, the taxpayer cautioned that the California court's “aberrant” approach to compact interpretation calls into question the meaning and enforceability of many other significant interstate agreements that are currently in force.
Of course, it remains to be seen whether the current eight-justice court will decide to review the decision. In the interim, the California Franchise Tax Board previously issued guidance stating that it would take no action on Compact election refund claims until the litigation had been fully resolved by either a denial of a petition for cert or any final state court action after a decision by the high court. Please stay tuned to TWIST for further updates.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.