United States

Multistate: Update on Multistate Tax Compact Litigation

Jul 11, 2016
From KPMG TaxWatch

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Litigation over whether multistate taxpayers may elect to apportion income utilizing the Multistate Tax Compact’s allocation and apportionment provisions continues to unfold across the country, despite a number of recent taxpayer losses. The Texas Supreme Court is currently considering whether to grant the taxpayer’s petition for review in the Texas Compact case, Graphic Packaging Corp. v. Comptroller. Recall, last July a Texas appellate court held that a taxpayer could not use the Compact's apportionment formula because the Texas franchise tax is not an income tax. Just a few weeks ago, the Minnesota Supreme Court, in its Kimberly Clark decision, ruled that a taxpayer could not apportion its income to Minnesota using the Compact’s allocation and apportionment provisions because the Legislature, when it adopted the Compact, did not have authority to contract away the right to later amend tax statutes. It is unclear whether the taxpayer will appeal the decision to the U.S. Supreme Court. Turning to Oregon, the Oregon Compact election case, Health Net, Inc. v. Dep’t of Revenue, will be heard by the Oregon Supreme Court. Recall, in September 2015, the Oregon Tax Court ruled in favor of the Department of Revenue.  Oral arguments before the Oregon Supreme Court are scheduled for September 19, 2016.

In Michigan, on June 24, 2016, the Michigan Supreme Court declined to review a series of decisions challenging the retroactivity of Michigan’s withdrawal from the Multistate Tax Compact. Recall, after the Michigan Supreme Court ruled in July 2014 that a taxpayer could elect to use the Compact’s allocation and apportionment provisions in computing its Michigan Business Tax liability (on its originally filed 2008 return), the Michigan legislature retroactively repealed the Compact effective January 1, 2008. In the next round of litigation, the Court of Claims and the Court of Appeals held that the retroactive appeal was a legitimate exercise of legislative authority and did not violate the federal and state Due Process Clauses. The Michigan Supreme Court, with two justices dissenting, declined to review these decisions. It has been reported that at least some of the affected taxpayers will petition for certiorari to the U.S. Supreme Court.

Meanwhile, a petition for certiorari is currently pending before the U.S. Supreme Court in the California Compact case. Since the petition was filed by the taxpayer in May, many amicus briefs have been filed by law professors, various companies, tax advocacy groups, and the state of Ohio. California’s response to the petition is due August 1, 2016. Please stay tuned to TWIST for future updates on the Compact litigation.

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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.