United States

California: Discriminatory Filing Regime Withstands Strict Scrutiny

Nov 07, 2016
From KPMG TaxWatch

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A California superior court recently issued a decision in a case addressing whether the state’s differential treatment of interstate and intrastate businesses violated the Commerce Clause. Recall, in the 2015 Harley Davidson case, an appeals court held that allowing intrastate unitary businesses to choose to file combined or separately but requiring interstate unitary businesses to file combined was discriminatory. The case was remanded to the trial court to determine whether the differential treatment advanced a legitimate local purpose that could not be adequately served by reasonable nondiscriminatory alternatives. On remand, the FTB argued that the appeals court merely concluded that the taxpayer sufficiently demonstrated discrimination for the purposes of overcoming demurrer, but did not so hold on the merits. On October 31, 2016, the trial court agreed with the FTB and held that the appeals court’s ruling on discrimination was sufficient only for purposes of sustaining the demurrer. This put the issue of discrimination back before the trial court and the court held that summary judgment was proper with respect to two issues (1) whether discrimination existed, and (2) whether the discrimination could survive strict scrutiny (i.e., was there a legitimate state purpose for the discriminatory treatment that could not be resolved through a nondiscriminatory alternative). Although it determined there was a “triable” question on the discrimination claim, the court ruled in the FTB’s favor on the strict scrutiny issue. Notably, the court held that the state has a valid interest in preventing the manipulation and hiding of taxable income and there did not appear to be a reasonable nondiscriminatory alternative to the differential treatment. Please contact Gina Rodriquez at 916-551-3132 with questions on Harley Davidson v. FTB.


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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.