California Court Opens Door for Tax Refunds

In a highly contested decision (The Gillette Co., et al. v. Franchise Tax Board, Cal. Ct. App., Dkt. No. A130803, 07/24/2012), the California Court of Appeal has ruled that multistate taxpayers could elect to use the optional Multistate Tax Compact’s (MTC’s) equally weighted 3-factor formula, versus California’s required double-weighted sales factor.  This decision opens the door for businesses subject to California income taxes  to file refund claims using the 3-factor formula.

The Court ruled the MTC’s optional 3-factor formula, enacted by California in 1974, was not repealed and superseded by the 1993 amendment to Cal. Rev. & Tax. Cd.§ 25128 that required use of the double-weighted sales factor apportionment formula because such an interpretation would be unconstitutional and would violate the prohibition against impairing contracts. The Court concluded that the Compact was a valid multistate compact, and California was bound by it and its 3-factor apportionment election provision, unless and until California withdrew from the Compact by enacting a statute that repeals Cal. Rev. & Tax. Cd.§ 38006.  California has enacted 2012 legislation repealing the Multistate Tax Compact and § 38006, effective 6/27/12.

Although California has repealed this election for 2012, 2011 returns along with other “open” tax years are eligible for this election on an originally filed return or an amended return.  California will more than likely appeal this case to the state Supreme Court, but protective refund claims should be considered while the statute of limitations is open.

Please contact your Meaden & Moore representative, or David Di Salvo at 330-535-5149 or ddisalvo@meadenmoore.com, if you have any questions regarding this Alert or any other state and local tax matters.