United States

Minnesota: State Supreme Court Rejects Compact Election

Jun 27, 2016
From KPMG TaxWatch

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On June 22, 2016, the Minnesota Supreme Court held that a taxpayer could not apportion its income to Minnesota using the Multistate Tax Compact’s evenly-weighted three factor formula in lieu of the more heavily-weighted sales factor mandated by the Minnesota legislature.  As background, Minnesota lawmakers enacted the Compact in 1983. Articles III and IV of the Compact provide that taxpayers have the option of using the UDITPA apportionment rules or state-specific apportionment provisions. In 1987, Minnesota lawmakers repealed Articles III and IV, and enacted legislation requiring taxpayers to use a more heavily weighted sales factor (unless, of course, the taxpayer was granted permission to use an alternative apportionment formula). Post-1987, Minnesota remained a member of the Compact in good standing (until 2013, after the tax years at issue, when the state completely withdrew from the Compact).

The taxpayer, Kimberly Clark, filed original Minnesota tax returns utilizing the more heavily weighted sales factor, but later filed amended returns applying the Compact’s evenly-weighted three-factor formula. After its refund claims were denied, the matter went to the tax court. In a rather-lengthy ruling, the court concluded that the taxpayer had failed to prove beyond a reasonable doubt that the Legislature’s repeal of Articles III and IV, without repealing the entire Compact, was an unconstitutional violation of the state and federal contracts clauses.  In reaching this conclusion, the court focused on the unmistakability doctrine, which requires that limits to the state’s ability to tax must be in language and terms “too clear to admit of doubt.”  The court, concluded that no provision of the Compact constituted a clear and unmistakable promise that the state would not alter or repeal the election. 

On appeal, the Minnesota Supreme Court noted that the fundamental question before it was whether Minnesota was bound to offer the election unless and until it withdrew entirely from the Compact.  In the court’s view, this argument had “no support in the law.” The Minnesota Constitution specifically provides that the “power of taxation shall never be surrendered, suspended or contracted away.”  Thus, even if the state created an obligation when it enacted the Compact, this obligation was invalid as the state had no power to contract away its right to later amend tax statutes. The court turned next to the unmistakability doctrine, agreeing with the tax court there was no unmistakable or express promise in the Compact to surrender the state’s legislative authority.  The court determined that, “at best,” the Compact was silent on the issue. However, the court observed that it is well established that neither silence nor ambiguous terms in a contract will be construed as effecting a waiver of sovereign authority. Please contact Mike O’Brien at 612-305-5441 with questions.

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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.