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The California Court of Appeal issued its decision today in Gillette Company v. Franchise Tax Board, No. A130803, confirming that the Multistate Tax Compact is an enforceable multistate compact and that its apportionment election provision is binding on California until the state withdraws from the Compact by enacting a repealing statute. In fact, the California legislature passed Senate Bill 1015 on June 27, 2012, prospectively repealing the Multistate Tax Compact and codifying the “doctrine of elections.” Both sections of Senate Bill 1015 were aimed at limiting the potentially huge revenue fallout that otherwise would have resulted from a taxpayer victory in Gillette.
The impact of the Gillette decision in California remains to be seen. One issue is whether the doctrine of elections applies only to taxpayers that make an election on an original return and then try to revoke it on a subsequently filed amended return. Another issue is whether the doctrine of elections will apply to prohibit taxpayers from making the apportionment election on an amended return altogether. Retroactively prohibiting taxpayers from making the Compact election on amended returns may raise due process concerns.
The reasoning in Gillette regarding the Compact being an enforceable interstate compact may support taxpayers in other Compact states that have modified the Compact apportionment election. If courts in those states were to adopt the reasoning in Gillette, taxpayers potentially could make the election and argue that the state is limited to complete withdrawal from the Compact and cannot unilaterally change or repeal individual provisions.
Stay tuned for Sutherland’s forthcoming Shaker article discussing Gillette in greater detail.