Gillette Wins. You Win. Taxpayers Should Hurry To File California Refund Claims Before The Fall Deadline

Executive summary and action item

On July 24, 2012, a California Court of Appeal held that taxpayers have the option of electing to single-weight (as opposed to double-weight) their sales factor to compute their California apportionment fraction.1 We encourage any taxpayer with positive taxable income whose California property and payroll factors are less than their sales factor to file a refund claim. Refund claims for the 2007 year will be due soon for calendar-year taxpayers that filed on extension: California's four-year statute of limitations expires on the fourth anniversary of when the original return was filed on extension.

Your refund claim simply needs to raise the issue to the effect that your company is entitled to compute its apportionment fraction following the method provided by the Multistate Tax Compact. Specifically, the refund claim should state that your company is entitled to compute its 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. The claim needs to be submitted to:

Refund Unit Franchise Tax Board P.O. Box 942857 Sacramento, CA 94257-0540

Discussion

In Gillette, the court held that corporate taxpayers are entitled to elect to apportion income under the method set forth in the Multistate Tax Compact. The compact permits interstate taxpayers to apportion income to California based on an equally weighted, three-factor apportionment formula, with the sales factor determined based on costs-of-performance.

This is a decision with broad implications potentially affecting many aspects of the California taxing regime. Prior to the Gillette decision, the California Legislature attempted to get ahead of the case by repealing compact provisions2 from the California Revenue and Taxation Code3, and by limiting taxpayers' ability to file retroactive refund claims based on the Gillette decision. This attempt to preemptively circumvent the court's decision (which we believe is invalid) adds another layer of complexity to California's treatment of the compact.

1. Background and Holding

   California incorporates the compact into the Revenue and Taxation Code. The compact includes an election to apportion and allocate income using the method set forth in the compact as an alternative to any method otherwise provided by state law.4 The compact's method is a three-factor formula composed of property, payroll, and sales factors—all equally weighted.5 Thus, a taxpayer in a compact state may choose either the apportionment formula under the compact or under some other formula provided by state law.

   Until 1993, the California Revenue and Taxation Code provided for the same equally weighted three-factor formula as the compact formula. Then in 1993, the California Legislature amended section 25128 and thereby double-weighted the sales factor. The FTB has taken the position that the new statutory language double-weighting the sales factor also eliminated the taxpayer's option to elect the single-weighted formula under the compact.6

   According to the court, the FTB's interpretation of this language as the Legislature's attempt to bypass the compact had one fatal flaw: it ignored...