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BDO KNOWLEDGE Tax Webinar Series ‒ California’s Clean Shaven Gillette Decision: What It Means for Companies Doing Business in California

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO KNOWLEDGE Tax Webinar Series California’s Clean Shaven Gillette Decision: What It Means for Companies Doing Business in California Paul McGovern, CPA, Senior Tax Director, BDO USA, LLP August 22, 2013


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mailto:[email protected]


WITH YOU TODAY

Paul McGovern ,CPA Senior Tax Director ‒ State and Local Tax Group [email protected] Direct: 714-913-2592 3200 Bristol St. 4th Floor Costa Mesa, CA 92626 Tel: 714-957-3200 Mobile: 949-244-2836 Fax: 714-913-2540 www.bdo.com

EXPERIENCE SUMMARY Paul has more than 30 years of state tax experience both as a consultant and as tax agency official and is a leader in the West Region State & Local Tax practice.

Paul specializes in consulting companies on state income and franchise tax matters, including tax planning, controversy and state tax compliance issues. His areas of expertise include businesses involved in manufacturing, retail and pharmaceuticals. Paul’s client base has ranged from start-up corporations to Fortune 100 corporations.

Prior to joining BDO, Paul worked 9 years as a director in Big 4 accounting firm in Southern California. Prior to that, Paul worked as a California Franchise Tax Board auditor for 17 years, spending time in the Board’s New York, Houston and Santa Ana offices.

Paul is a frequent speaker on state and local tax issues at such organizations as Tax Executives International and also contributes to internal professional development programs in his areas of expertise.

PROFESSIONAL AFFILIATIONS AICPA California State Society of CPAs EDUCATION Bachelors in Accounting; Fordham University, College of Business Administration


The Gillette Decision

Gillette v. FTB ‒ The UFC of State Tax Cases


THE GILLETTE DECISION Gillette v. FTB Gillette Company & Subsidiaries v. Franchise Tax Board (Cal. Ct. App. July 24, 2012) Facts • Taxpayers filed refund claims by amending returns electing to use the Multistate Tax Compact’s

(“Compact”) allocation and apportionment provisions which allowed for an equally-weighted three-factor apportionment formula.

• FTB denied refund claims claiming that CA’s statutory mandated double-weighted sales factor apportionment formula superseded and/or repealed the Compact’s apportionment formula.

- Statutory language of Cal. Rev & Tax Sec. 25128 … “Notwithstanding Sec. 38006.”


THE GILLETTE DECISION Gillette v. FTB (continued) Gillette Company & Subsidiaries v. Franchise Tax Board (Cal. Ct. App. July 24, 2012) Issue • Whether taxpayers were entitled to elect the Compact’s equally-weighted three-factor

apportionment formula and sourcing rules (Cal. Rev. and Tax. Code Sec. 38006) or instead, were required to use the state’s double-weighted sales factor formula mandated under Cal. Rev. & Tax. Code Sec. 25128.


THE GILLETTE DECISION Gillette v. FTB (continued) Gillette Company & Subsidiaries v. Franchise Tax Board (Cal. Ct. App. July 24, 2012) Holding • The Compact was a valid interstate binding agreement among sovereign signatory states obligating CA

to the Compact’s allocation and apportionment provisions that included equally-weighted three-factor apportionment.

• Under established compact law, a state’s conflicting apportionment statutes cannot override the apportionment election provisions contained in the Compact.


THE GILLETTE DECISION Gillette v. FTB (continued) Gillette Company & Subsidiaries v. Franchise Tax Board (Cal. Ct. App. July 24, 2012) Holding • The FTB’s construction of the language Cal. Rev. and Tax. Code Sec. 25128 (“notwithstanding”)

violates the California Constitution’s “Reenactment Rule.”

- The amendment provides that “notwithstanding Section 38006,” taxpayers must use the double-weighted sales factor apportionment formula.

- Cal. Const., art. IV, sec. 9 provides: “A statute may not be amended by reference to its title. A section of a statute may not be amended unless the section is reenacted as amended.”

- Intent is to prevent implied repeal of statutory sections.


THE GILLETTE DECISION Gillette v. FTB (continued) Gillette Company & Subsidiaries v. Franchise Tax Board (Cal. Ct. App. July 24, 2012) Holding • CA can only avoid the application of the Compact’s apportionment election by repealing the statute

adopting the Compact (i.e. withdrawing from the Compact).

• CA could not partially repeal or unilaterally amend the Compact.


POLLING QUESTION Question #1 • T&D to populate


The Multistate Tax Compact

The power of a contract


MULTISTATE TAX COMPACT

• Created after Congress threatened to impose a single uniform apportionment formula that all states would have use in response to Northwestern States Portland Cement v. Minnesota, 358 U.S. 450 (1959) and the subsequent Willis Report.

- Court made clear that there is no Commerce Clause barrier to the imposition of a fairly apportioned corporate income tax on interstate business.

• Taxpayers lobbied for federal legislation restricting the power of states to tax interstate business.

• Congress responded with the enactment of Public Law 86-272.


MULTISTATE TAX COMPACT (CONTINUED) • Congress also responded with the 1964 Willis Report which:

- Expressed doubt that states could achieve any real uniformity acting alone.

- Recommended giving the Treasury Dept. authority to issue uniform rules and regulations governing state income taxes.

• Thereafter, Congress proposed several bills that would have established mandatory method of apportionment and a uniform definition of business income.

• Finally, in 1967, states quashed these efforts through the creation and adoption of the Multistate Tax

Compact.


MULTISTATE TAX COMPACT (CONTINUED) • In 1974, California adopted the Compact under Cal. Rev. & Tax Code Sec. 38006.

• However, The Compact Clause of the U.S. Constitution states:

No State shall, without the Consent of Congress … enter into any Agreement or Compact with another State or with a foreign Powers … (U.S. Const. art. 1, sec. 10, cl. 3).

• The Compact has never received approval from Congress.


MULTISTATE TAX COMPACT (CONTINUED)

• U.S. Steel v. MTC, 434 U.S. 452 (1978) ‒ U.S. Supreme Court stated that the “application of the Compact Clause is limited to agreements that are ‘directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States.”

• The Court held that the Compact “… contains no provisions that would enhance the political power of member states in a way that encroaches upon the supremacy of the United States.”

• The Court therefore rejected the contention that the Compact Clause required every agreement between two or more states to receive consent from Congress.


MULTISTATE TAX COMPACT (CONTINUED) California’s former Rev. & Tax Code Sec. 25128 had reflected the Compact’s three-factor formula until the California legislature amended the section in 1993 to require the use of a double-weighted sales factor “notwithstanding Sec. 38006.”

California Rev. & Tax Code

§ 25128. Apportionment of Business Income

(a) In General. All business income of each apportioning trade or business of the taxpayer shall be apportioned to this state by use of the formula… the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four.



Multistate Tax Compact Article IV. Division of Income

9. All business income shall be apportioned to this State by multiplying the income by a fraction the

numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is three.


MULTISTATE TAX COMPACT (CONTINUED) The Compact does not prohibit member states from adopting an alternative method of apportionment; however, it allows taxpayers to elect to apportion and allocate income using UDITPA apportionment rules in lieu of other state apportionment rules for net income taxes.

Multistate Tax Compact

Article III. Elements of Income Tax Laws Taxpayer Option, State and Local Taxes

1. Any taxpayer subject to an income tax whose income is subject to apportionment and

allocation for tax purposes pursuant to the laws of a party State or pursuant to the laws of subdivisions in two or more party States may elect to apportion and allocate his income in the manner provided by the laws of such States or by the laws of such States and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with Article IV.


MULTISTATE TAX COMPACT (CONTINUED) • Of the 47 states with a corporate income tax, 39 have abandoned the MTC’s original uniform equal-

weighted three-factor apportionment formula.

- Over the past 30 years, most states have placed increasing weight on the sales factor within their respective apportionment formulas.

- States’ rationale:

o Decreases the tax burden on in-state corporations

o Provides incentive for in-state corporations to expand production

o Eliminates disincentive for out-of-state corporations to increase property and payroll within the state

o Not well-suited for today’s service and information economy.



2006 Single Sales Factor Trends

Single Sales Factor

50%<Sales Factor<100%

Three Factor Formula with Double-Weighted Sales

Evenly Weighted Three-Factor Formula

Elective/Industry Specific Single Sales Factor

No State Income Tax

2013


MULTISTATE TAX COMPACT California Historic law • Three-factor apportionment formula with double-weighted sales factor. • Cost-of-performance (preponderance) sourcing for sales of other than tangible personal property. Single-Sales Factor • Elective single-sales factor effective for tax years 2011 & 2012 (CRTC § 25128.5)

- Elections not binding ‒ can make a different election each year

- Must be made on original, timely filed return

- Mandatory market-based sourcing for those electing the single-factor sales apportionment.

- Cost of performance applies if no election is made.

• Mandatory single-sales factor effective beginning Jan. 1, 2013 (Prop. 39)

• Single sales factor does not apply to taxpayers engaged in “qualified business activities” which means that the taxpayer derives more than 50% of its gross receipts from agriculture, extractive, savings and loans, or banks and financial activities.

• Complete exclusion from sales factor for treasury receipts.


MULTISTATE TAX COMPACT The MTC Election ‒ Summary • Full members of the Multistate Tax Compact sign the compact with terms that require the state to

adopt UDITPA.

• UDITPA provides that a taxpayer is permitted to annually elect to apportion income using the apportionment rules of UDITPA in lieu of other apportionment rules adopted by the states.

- The election only applies to net income taxes

- The election does not apply to financial corporations or utilities • Many states that are full members of the MTC have modified the apportionment rules in UDITPA as

adopted by the state or have state rules that override the rules of UDITPA even for taxpayers electing UDITPA

• Key provisions of UDITPA that may be different than typical state rules:

- Equally weighted three-factor apportionment formula; no super weighted sales factor

- Cost-of-performance for sales of non-TPP; no market sourcing

- Traditional business v. nonbusiness income definition


MULTISTATE TAX COMPACT California’s (Attempted) Repeal from the Compact CA legislature passed S.B. 1015 on June 27, 2012 to repeal the Compact’s election. • Stated that Compact’s apportionment election was not permitted since 1993 when the double-

weighted sales factor was first adopted.

• Stated that the “doctrine of elections” requires that an election affecting the computation of tax must be made on an original timely filed return for the tax period for which the election is to apply and is binding once the election is made.

- Declaratory of existing law - Doctrine of elections ‒ untested judicial doctrine based in federal income tax law


MULTISTATE TAX COMPACT California’s (Attempted) Repeal from the Compact Is S.B. 1015 enforceable?

• Did not pass with requisite 2/3 vote in each house as required by Prop. 26 for revenue-raising bills.

- “Any change in state statute which results in any taxpayer paying a higher tax must be

imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature…”

• If 2/3 majority vote was required, then equally weighted three-factor Compact method may still

be available to taxpayers.


Gillette’s Impact on Companies Doing Business in California Call, Fold, Stay or Quit?


GILLETTE DEVELOPMENTS

• August 9, 2012 ‒ CA Court of Appeal vacated opinion and ordered rehearing as a result of petition filed by FTB.

• October 2, 2012 ‒ California Court of Appeal reissued its decision (Gillette v. FTB, 207 Cal. App. 4th 1369 (Op. on Rehearing, Oct. 2, 2012): Substantially the same but made changes to reflect enactment of S.B. 1015’s attempted repeal of CA’s membership in the Compact.

- Decision noted that while S.B. 1015’s effect and validity was not at issue before the court,

the Compact was valid and California was bound by it and its apportionment election provision during tax years at issue despite S.B. 1015.

- Clarified that Sec. 25128 was an unconstitutional violation of the federal and state constitutions which prohibit states from passing laws that impair the obligations of contracts (U.S. Const., art. I, sec. 10, cl. 1; Cal. Const., art. I, sec. 9).


GILLETTE DEVELOPMENTS (CONTINUED) • January16, 2013 ‒ California Supreme Court granted FTB’s petition for review (Gillette v. FTB, Case

No. S206587 (pet. for rev. granted, Jan. 16, 2013).

• FTB arguments: 1. Court’s interpretation of rights and obligations of states and parties under the Compact

conflicts with established law. When CA adopted Compact, it was with the understanding that it was not required to withdraw from the Compact to effect any changes or modifications in the Compact and if holding is allowed to stand, many other changes CA made to UDITPA statutes are at risk of being invalidated.

2. Court’s Contract Clause determination conflicts with existing law since taxpayers were not parties to the Compact. State legislature’s amendment to Sec. 25128 was within the purview of CA’s sovereignty over its tax laws that cannot be suspended or surrendered by contract.

3. Court’s application of reenactment rule to Sec. 25128 conflicts with established law (i.e. “notwithstanding sec. 38006” language and holding that “neither public nor legislators had adequate notice”). Evaluation of legislative history confirms legislative intent to prohibit use of equally-weighted three-factor formula and many taxpayers voiced opposition during legislative process.


GILLETTE DEVELOPMENTS (CONTINUED) • July 16, 2013 ‒ Gillette filed an answer brief with California Supreme Court

- Arguments - Section 25128 is an invalid attempt to alter an interstate compact - The constitution’s contract clause bars Section 25128 from eliminating the election - Statutory interpretation provides a separate basis to void Section 25128


FTB RESPONSE TO GILLETTE

FTB stated it will assert the Doctrine of Elections if it does not prevail in the Gillette litigation. • Why didn’t FTB raise doctrine before S.B. 1015 was enacted?

• Questionable application to Compact election

• May violate Prop. 26 if doctrine was not existing law


FTB RESPONSE TO GILLETTE (CONTINUED) FTB Notice 2012-01 (Oct. 5, 2012) • Provides two options to file protective refund claims amending returns to use the Compact’s

apportionment election:

1. Amended Tax Return, or 2. Letter Claim

FTB Tax News “Flash” (Oct. 5, 2012) • The FTB stated that taxpayers who elect the Compact apportionment for original timely filed 2011

tax returns will run the risk of incurring a large corporate understatement penalty under Sec. 19138 if Gillette is subsequently vacated, reversed or overturned.


POTENTIAL FISCAL IMPACT FROM GILLETTE

FTB estimates the Gillette decision may result in

$750 Million in tax refunds to California taxpayers.


TAXPAYER CONSIDERATIONS

File original returns prospectively making Compact election • Validity and operative date of CA’s repeal from Compact may be in question

- Did California terminate its membership in the Multistate Tax Compact with the enactment S.B. 1015 on June 27, 2012?

• Consider large corporate understatement penalty.

File protective refund claims pending resolution of Gillette • Taxpayers with positive taxable income whose California property and payroll factors are less than their sales

factor should consider filing protective refund claims.

• Potential for audit trigger?

Apply other Compact provisions? - Sales factor sourcing - Industry-specific rules - Nonbusiness allocation of income - Gross receipts definition


CALIFORNIA FILING OPTIONS FOR TAX YEAR 2012 Double-Weighted Taxpayers= ((Sales x2) + Property + Payroll)/4

• Double-Weighted Sales Method (former default): Three-factor, double-weighted sales factor, with

cost-of-performance (“COP”) sourcing for sales other than sales of tangible personal property. SSF Election = Sales • Sales factor only, with market-based sourcing for sales of services and intangibles. MTC Compact Formula = (Sales + Property + Payroll)/3 • Three factor Single-Weighted Sales Method with COP sourcing for sales other than sales of tangible

personal property.


CALIFORNIA FILING OPTIONS FOR TAX YEAR 2012 (CONTINUED) SSF Method: Sales factor only, with market-based sourcing for sales of services and intangibles. MTC Compact Formula: Three-factor Single-Weighted Sales Method with COP sourcing for sales other than sales of tangible personal property. • Did California terminate its membership in the Multistate Tax Compact with the enactment S.B. 1015

on June 27, 2012?

• What about Prop. 26?

• Consider large corporate understatement penalty if denied.


CALIFORNIA FILING OPTIONS FOR TAX YEAR 2012 (CONTINUED) FTB’s argument: 1. The Doctrine of Elections requires the Compact’s election to be made on an original return and there

is no available election for 2012 forward due to California’s withdrawal from the Compact in S.B. 1015 subject to potential challenges under Prop. 26; and

2. The special industry regulations at Sec. 25137 do not deviate from the Compact and are hence not at issue if an election is allowed.


CALIFORNIA FILING OPTIONS FOR TAX YEAR 2012 (CONTINUED) • Refund claims are due no later than four years from the date the original return was filed.

• Refund claims should include amended returns and indicate that you are entitled to compute the

apportionment fraction using the equally weighted sales factor as provided for under the Compact, without regard to any provisions of California law that purport to deviate from the compact.

• Have amended returns reviewed prior to submission to FTB. There may be other items in the return that could be affected.

The claim needs to be submitted to:

Refund Unit Franchise Tax Board

P.O. Box 942857 Sacramento, CA 94257-0540


Gillette’s Impact on Other States

Good News Travels Fast


GILLETTE’S IMPACT ON OTHER STATES

• CA’s Gillette decision has no precedential value in other state jurisdictions.

• May be persuasive influence for taxpayers when deciding whether to challenge a Compact member state’s mandatory apportionment formula that is different from the Compact’s equally-weighted three-factor formula.

• Questionable application to non-income based taxes such as Texas’ Margins Tax and the modified gross

receipts tax portion of the Michigan Business Tax.


GILLETTE’S IMPACT ON OTHER STATES (CONTINUED)

COMPACT STATE Year Adopted Conflicting Provision STATUS

ALABAMA 1997; Al. Code Sec. 40-27-1 Double-weighted sales factor (eff. 2011; H.B. 434, Laws 2011)

Statute also amended Compact when adopting double-weighted sales factor.

ALASKA 1970; AK Stat. Sec. 43.19.010 Sec. 43.02.072 enacted in 1981 special appt. for oil & gas companies

ARKANSAS 1967; AR Code Ann. Sec. 26-5-101 S.B. 532, 1995, amended to require double-weighted sales factor.

Statute also amended Compact when adopting double-weighted sales factor.

COLORADO 1963; Co. Rev. Stat. Sec. 24-60-1301

H.B. 1380, 2008, repealed Art. III, Sec. 1 from Compact replacing it with single sales factor Co. Rev. Stat. Sec. 39-22-303.5.

Statute repealed apportionment provision of Compact when adopting SSF.

DISTRICT OF COLUMBIA

1981; D.C. Code Ann. 47-441 Double-weighted sales factor (eff. 2011; Act 19-21; D.C. Code Ann. Sec. 47-1810.02(d-1)).

Withdraws from MTC eff. Oct. 1, 2013 (B20-337) ‒ re-enacts it without Article III and IV.

HAWAII 1968; Haw. Rev. Stat Sec. 255-1 No conflict ‒ uses equally weighted three factor formula (Haw. Rev. Stat. Sec. 235.29)



COMPACT STATE Year Adopted Conflicting Provision STATUS

IDAHO 1967; ID Code Ann. Sec. 63-3701

Double-weighted sales factor (eff. 1994; H.B. 897, Laws 1994; ID Code Ann. Sec. 63-3027(i) para 1 stating “notwithstanding the election in art. III sec. 1 of the compact, must use double sales factor).

KANSAS 1967; KS Stat. Ann. Sec. 79-4301

KS Stat. Ann. Sec. 79-3279(b) allows taxpayers to elect to use equally weighted or two-factor sales and property formula.

MICHIGAN 1970; MI Comp. Laws Sec. 205.581

Increasingly weighted sales factor starting in 1991 until SSF in 2012 for CIT under Sec. 206.663(3). H.B. 4479, Laws 2011 denied the compact art III, sec. 1 election to CIT taxpayers and for MBT taxpayers after 1/1/2011 due to litigation which began starting with the 90% weighting of sales factor (end of SBT) with most litigation in the 2008 MBT years, for which MI Treasury Dept. denies the MBT is subject to the Compact since it is a hybrid GR/Inc tax.

IBM v. Dept. of Treas. (Michigan Supreme Court granted review July 3, 2013). Anheuser-Busch Inc. v. Dept. of Treas. (Parties have appealed to Mich. App. Ct. July 11, 2013).

MINNESOTA 1983; Minn. Stat. §290.171. 1999 H.B. 2420 increased the sales factor weighting and 2005 H.B. 138 required phase-in of SSF 2007 -2014 (Minn. Stat. §290.171(2)(b)). Prior to 1987, allowed option to elect to use either compact method or 70% sales weighted formula (election repealed in 1987)

Withdrew from MTC eff. July 1, 2013 (H.F. 677, enacted 05/23/13).



COMPACT STATE

Year Adopted Conflicting Provision STATUS

MISSOURI 1967; Mo. Laws §32.200 None ‒ allows election of Compact method or SSF under Mo. Laws §§143.451, 143.461. See Mo. Dept. of Rev.,Schedule MO-MS Instructions.

MONTANA 2001; Mont. Code Ann. §15-1-601.

None ‒ provides for an equally-weighted three-factor formula under Mont. Code Ann. §15-31-305

NEW MEXICO 1967; N.M. Stat. Ann. §7-5-1

N.M. Stat. Ann. §7-4-10(A) provides for an equally-weighted three-factor formula, and N.M. Stat. Ann. §7-4-10(B) allows manufacturers to elect to use a double-weighted sales factor, effective for tax years beginning on or after Jan. 1, 2020.

NORTH DAKOTA 1967; N.D. Cent. Code §57-59-01

None ‒ statute reflects equally-weighted three-factor formula in Compact ‒ N.D. Cent. Code §57-38.1-21

OREGON 1967; Or. Rev. Stat. §305.655.

Double-weighted sales factor required eff. 1991 (1989 H.B. 2643) and increasing weighted sales factor until SSF required eff. July 1, 2005 (S.B. 31, 2005).

Withdrew from MTC eff. July 1, 2013 (S.B. 307, enacted 06/13/13)- re-enacts it without Article III and IV.



COMPACT STATE

Year Adopted Conflicting Provision STATUS

SOUTH DAKOTA 1976; S.D. Codified Laws §10-54-1

None ‒ No income tax Withdrew from MTC March 8, 2013 (S.B. 239)

TEXAS 1981; Tex. Tax Code §141.001.

Require SSF under Tex. Tax Code §171.106(a) Tex. Comp. of Pub. Accts., Comptroller Dec.,Hrg No. 104,752 (Aug. 18, 2011) (notwithstanding absence of repealed statutory prohibition, applicable Texas authorities preclude a taxable entity from electing to use the MTC three-factor formula).

UTAH 1969; Utah Code Ann. §59-1-801

May elect equally weighted or double weighted sales factor (Utah Code Ann. §59-7-311(2)); however, in 2013, SSF required for “sales factor weighted taxpayers” (i.e. with greater than 50% sales from activities other than mining, manufacturing, warehousing, finance, information services or insurance).

Withdrew from MTC eff. July 1, 2013 (S.B. 247, enacted 04/01/13) ‒ temporarily re-enacts it without Article III and IV until June 30, 2014 (then entirely repealed).

WASHINGTON 1967; Wash. Rev. Code §82.56.010

Does not have a corporate net income tax. The B&O tax is on gross receipts for the privilege of engaging in business in the state and are apportioned pursuant to Wash. Rev. Code §82.04.462.


GILLETTE’S IMPACT ON OTHER STATES (CONTINUED) Michigan • IBM v. Michigan Department of Treasury, Michigan Court of Appeals, No. 306618 (Mich. Ct. App., Nov.

20, 2012), leave to appeal granted, No. 146440 (Mich. July 3, 2013).

- MTC is not a contract and MBT repealed Compact by implication; Michigan Supreme Court granted taxpayer’s petition for leave to appeal.

• Anheuser-Busch Inc. v. Department of Treasury, No. 11-85-MT (Mich. Ct. Cl. June 6, 2013); Appeals

consolidated nos. 316743 & 316977 (Mich. Ct. App. July 11, 2013).

- Compact is a binding compact that cannot be repealed by a conflicting statute and the taxpayer may elect to apportion its income tax according to the Compact.

- However the Michigan modified gross receipts tax is not an “income tax” under the Compact and therefore cannot be apportioned according to the Compact.

- Both parties appealing the decision to the Court of Appeals.


GILLETTE’S IMPACT ON OTHER STATES (CONTINUED) Oregon

• Health Net, Inc. and Sub’s v. DOR, Oregon Tax Court, No. 120649D (filed July 2, 2012) ‒ Taxpayer asserted the right to elect the MTC’s three-factor formula. Oregon had not yet repealed the MTC.

• On September 24, 2012, a DOR Corporation Tax Policy Coordinator issued a release:

- Noting that there was ongoing litigation in Oregon based on arguments similar to those raised in Gillette.

- Stating that it is the DOR’s position that the MTC 3-Factor Election “is not available on an Oregon return” under Or. Rev. Stat. Sec. 314.606.

- Providing a recommended procedure for filing protective refund claims


GILLETTE’S IMPACT ON OTHER STATES (CONTINUED) Texas • Texas Comptroller ruled that a taxpayer cannot elect to use the Compact’s three-factor

apportionment formula when calculating Texas franchise tax liability. Texas law requires that a taxable entity's margin must be apportioned using the single-factor apportionment formula and that no weight should be afforded to the Gillette decision because the decision was de-published pending the California Supreme Court’s grant of review, and therefore has no precedential value. (Texas Comptroller’s Accession No. 201305712H (May 2, 2013).

• Texas Office of Administrative Hearings: Compact’s election does not apply to the Texas Margins Tax and taxpayers must apportion based on the statutory single receipts factor (Tex. Compt. Dec. No. 106,503, Aug. 10, 2012; Tex. Compt. Dec. No. 106,508, Jul. 13, 2012).

• Graphic Packaging Corp. v. Combs, Dist. Court of Travis County, Texas, 353rd Jud. Dist., No. D-1-

GN-12-003038 (filed Sep. 27, 2012) ‒ challenges the Comptroller’s position on the availability of the MTC Election (issue may surround whether margin tax is an income tax as found in In re Nestle USA Inc. and In re Allcat Claims Service L.P.).


GILLETTE’S IMPACT ON OTHER STATES (CONTINUED) South Dakota • March 8, 2013, S.B. 239 repealed MTC provisions from South Dakota law.

Utah • April 1, 2013, Governor signed S.B. 247 withdrawing from the MTC eff. June 30, 2013, and

simultaneously readopting some of the Compact’s provisions until June 30, 2014 (excluding the apportionment provisions).

• Prospectively preventing taxpayers from utilizing the MTC election and ensuring that the state-specific apportionment provisions are used.


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