Breaking News: California Supreme Court Hears Long-Awaited Gillette Oral Argument

Today, counsel for the taxpayer and the Franchise Tax Board ("FTB") argued before the California Supreme Court in The Gillette Company & Subs. v. California Franchise Tax Board.1 This case has been watched closely by taxpayers and tax practitioners on a national level since briefing was completed nearly two years ago. The substantive issue before the court is whether, for tax years 1993 through 2012,2 multistate taxpayers were required to use the four-factor, double-weighted sales apportionment formula as provided in Revenue and Taxation Code Section 25128(a), or whether they had the option to elect to compute their California apportionment using the three-factor formula, composed of equally weighted property, payroll, and sales factors, pursuant to California's adoption of the Multistate Tax Compact election contained in the former Revenue and Taxation Code Section 38006.

California adopted and codified the Multistate Tax Compact into the Revenue and Taxation Code3 in 1974. Prior to 1993, Section 25128 required taxpayers to use an equally weighted, three-factor formula to apportion their income - the same formula as allowed under the MTC election. In 1993, the Legislature changed the formula to double-weight the sales factor and amended Section 25128 by adding the words, "Notwithstanding Section 38006," business income shall be apportioned using the double-weighted sales, four-factor formula. The Gillette case turns on whether, by adding that language to Section 25128, the Legislature repealed and superseded the MTC election, or whether the election was still available to taxpayers. When presented with this issue, the Court of Appeal found in favor of the taxpayer.

The FTB argues that the MTC election was no longer available in California because the state could modify the election and apportionment provisions without having to withdraw from the Compact; and, that the 1993 amendment violated neither the contracts clause of the state and federal constitutions nor the reenactment rule of the California constitution.

The taxpayer, on the other hand, argues that the Multistate Tax Compact is a binding interstate compact and that California is bound by its terms unless and until it withdraws from the Compact - and that the 1993 amendment to Section 25128 did not constitute such a withdrawal. It also argued that the contract clause bars Section 25128 from eliminating the MTC election, and that the reenactment rule invalidates Section 25128. Reed...