Concluding that the California Legislature (1) is not bound by the Multistate Tax Compact (the “Compact”), (2) had unilateral authority to eliminate the apportionment formula election provision, and (3) clearly intended to do so.
In a unanimous opinion, the California Supreme Court today issued its decision inThe Gillette Company v. Franchise Tax Board, Case No. S206587 (Cal. Dec. 31, 2015), reversing the court of appeal opinion. In so doing, the court held that the Compact is not a binding contract among its member states, and thus the California Legislature may properly preclude a taxpayer from relying on the (equally-weighted three-factor apportionment formula) election provision in the Compact. The court also held that even without a reenactment of Section 38006 (the Compact election provision) to eliminate the election language, because the amendment to Section 25128 (establishing the double-weighted sales factor formula) expressly referenced the Compact, legislators and the public were reasonably notified of the changes in the law. Accordingly, there was no violation of the reenactment rule.
The court framed the issue thus: “This case turns on whether the Legislature is [ ] bound [to allow the apportionment formula election provision]. We conclude it is not and California’s statutory formula governs.” To determine if the Compact was binding, the court applied the four-factor analysis established in Northeast Bancorp, Inc. v. Board of Governors, FRS, 472 U.S. 159 (1985): (1) whether the Compact created reciprocal obligations; (2) whether the Compact’s effectiveness depends on the conduct of other members; (3) whether any provision prohibits unilateral member action; and (4) whether a joint organization or body has been established to regulate the members. The court found that each factor weighed against a finding that the Compact was a binding contract. First, the court held that the Compact’s apportionment election provision does not create an obligation of member states to each other, but rather the Legislature’s adoption of the Compact was more akin to the adoption of a model law. Second, the court noted that the Compact has not required efficacious member action since 1967. Third, the court noted that the history of the Compact is replete with examples of unilateral state action, and that the Compact expressly grants authority to join or leave the compact at will. Fourth, the court found that the Multistate Tax Commission (the “Commission”) has no binding regulatory authority upon its member states. Whatever power the Commission has to promulgate regulations or conduct audits exists solely at the pleasure of each member state. Further, any power the Commission has independent of the authority granted by each member is purely advisory.