On December 31, 2015, the California Supreme Court closed the book on California’s Multistate Tax Compact election saga, unanimously holding that the Compact is not a binding contract among its members and the State was not bound by its provisions before the State’s repeal of the Compact in 2012.
Citing the Multistate Tax Commission’s amicus curiae brief as much as the Franchise Tax Board’s brief and largely ignoring the Court of Appeal’s lengthy decision, the Supreme Court concluded that the Compact does not satisfy any of the indicia of binding interstate compacts contemplated by the United States Supreme Court in Northeast Bancorp v. Board of Governors, FRS (1985) 472 U.S. 159.
- First, the Court found the election provision allowing corporate taxpayers to apportion income using the Compact’s equally weighted, three-factor apportionment formula “does not create an obligation of member states to each other.” (Emph. orig.)
- Second, looking to the nearly-50-year history of the Compact in practice, the Court found the Compact “has not required efficacious member action since 1967” when seven states were required to enact the Compact into law for it to become effective and that nothing in the Compact itself prohibited unilateral member action, evidenced by numerous examples of member states subsequently enacting different apportionment formulae.
- Third, examining the various advisory roles of the Commission and its authority to act as a member state’s auditing agent pursuant to state-specific legislation, the Court found the Commission “lacks any binding authority over the member states” such that “it is not a joint regulatory organization as contemplated by Northeast Bancorp.” Accordingly, the Court held the Compact is not a binding reciprocal agreement.
The Court also determined that the text of California Revenue and Taxation Code section 25128, whereby the State enacted a mandatory double-weighted sales factor in 1993, and the corresponding legislative history revealed the Legislature intended to repeal the election upon enactment of the statute and defeated Gillette’s argument with regard to California’s “reenactment rule” derived from the California Constitution’s prohibition against amendment by reference. Notably, this decision should eliminate uncertainty related to California’s 2012 repeal of the Compact via Senate Bill 1015, which passed by a simple majority, and the California Constitution’s requirement that tax increases pass by a two-thirds super majority under Proposition 26. Gillette Company v. Franchise Tax Bd., No. S206587, Dec. 31, 2015.