California Sees $750 Million in Refunds at Risk in Court:

California says the fate of 80,000 annual corporate tax returns and $750 million in potential refunds are in the hands of the state’s supreme court.

California’s Franchise Tax Board, in written arguments to persuade the high court to take up an appeals court case involving Gillette Co., is fighting over rules around how companies apportion tax revenue across state borders.

A multistate agreement for taxing business may be coming undone after an appeals court ruling last month, which said that California must let companies apportion their multistate income based on a formula called the Multistate Tax Compact. The compact is an agreement among participating states designed to promote uniformity in tax procedures among the states.

California repealed its participation. If that defection stands, other states may leave as well, which could end the effort to create uniformity for businesses that operate across state lines.

The state tax agency is asking the high court to overturn the appeals court ruling, Bloomberg BNA reported.

Although the amount of tax and interest at stake for the plaintiffs in the case is $34.6 million, the price tag for the state could reach at least $750 million if the lower court ruling stands and the state must give refunds to other taxpayers with similar claims, the tax agency said.

The cost may go even higher because other provisions of the state tax code that are also part of the compact have been amended in similar ways, the agency said.

Additional Litigation

“California will potentially face additional litigation from taxpayers seeking to raise claims for tax refunds based on Compact provisions that conflict with subsequent legislative changes,” the Franchise Tax Board said in its petition.

The agency pointed out that the case is important to tens of thousands of multistate enterprises that do business inside and outside of California and file 80,000 apportioning tax returns each year, as well as to businesses that operate in the other states that remain as members of the compact.

Cases raising similar issues are pending in Michigan, Oregon and Texas, and the decision in the Gillette case “will no doubt encourage the filing of similar suits in other member states,” the California agency said.

The compact members are: Alabama, Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, New Mexico, North Dakota, Oregon, South Dakota, Texas, Utah and Washington, as well as Washington, D.C.

Notwithstanding Clause

In addition to highlighting the scope of the potential issue, California also argued that the appellate court failed to perform an “impairment of contracts” analysis and therefore concluded inaccurately that the corporate taxpayers who filed the lawsuit had standing as parties to the compact. The agency argued the taxpayers weren’t parties to the compact.

In addition, the tax board argued that the appellate court erred when it ruled that California’s enactment of an alternative income apportionment formula “notwithstanding” the existence of the compact in state law violated the state Constitution’s prohibition on repealing a statute by reference

“If the decision below stands, hundreds of California statutes which contain the ‘notwithstanding’ phrase are vulnerable to constitutional challenge,” the agency said.

The state also submitted minutes of a 1972 meeting of the Multistate Tax Commission, which the agency said shows that states belonging to the compact understood that a state wasn’t required to withdraw from the compact if it changed or modified the contract.

California repealed the Multistate Tax Compact in June as a hedge against a loss in the Gillette case by enacting S.B. 1015.

To contact the reporter on this story: Laura Mahoney in Arlington at lmahoney4@bloomberg.net

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

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