Minnesota Tax Court Denies Use Of Multistate Tax Compact's Equally-Weighted Three-Factor Apportionment Formula Election

On June 19, the Minnesota Tax Court granted the Minnesota Commissioner of Revenue's motion for summary judgment and denied a taxpayer's election to use the equallyweighted three-factor apportionment formula provided in the Multistate Tax Compact.1 Minnesota adopted the Compact in 1983, but in 1987, Minnesota specifically repealed Articles III and IV, which provide for the equally-weighted three-factor apportionment formula election and the standard apportionment provisions contained in the Compact.

Background

Kimberly-Clark and its subsidiaries are part of a unitary group that manufactures consumer products that are used around the world. Kimberly-Clark timely filed its Minnesota corporate franchise tax returns for the 2007-2009 tax years. Between 1989 and 2009, Kimberly-Clark apportioned its income to Minnesota using the required three-factor apportionment formula with sales weighed more heavily, pursuant to Minnesota statute.2 In 2013, Kimberly-Clark amended its returns for the 2007-2009 tax years and elected to utilize the equally-weighted three-factor property, payroll, and sales apportionment formula as provided under Articles III and IV of the Compact as it existed in Minnesota law prior to 1987, and requested a refund in the total amount of $1,205,749 in tax, plus interest.

Minnesota adopted the Compact in 1983, codifying the terms of the Compact in Minn. Stat. Sec. 290.171. Under Articles III and IV of the Compact, taxpayers are provided with the option to elect the use of an equally-weighted three-factor payroll, property, and sales factor apportionment formula, as well as the standard apportionment provisions contained in the Compact. In 1987, Minnesota amended its version of the Compact, repealing Articles III and IV.3 At that time, the apportionment formula applicable for purposes of the Minnesota corporation income tax required weighting the sales factor at 70 percent, with the property and payroll factors each weighted at 15 percent. Between the 2007 and 2014 tax years, Minnesota phased in the use of single sales factor apportionment.4 In 2013, Minnesota repealed the Compact in its entirety.

The Commissioner denied Kimberly-Clark's refund claims, and Kimberly-Clark timely appealed to the Minnesota Tax Court. No issues of material fact were in dispute, only issues in application of the law. As such, the Commissioner and Kimberly-Clark both filed for summary judgment.

Kimberly-Clark took the position that Minnesota may not unilaterally repeal Articles III and IV of the Compact as this action violated the Federal Compact Clause, the Contract Clause contained in the U.S. and Minnesota Constitutions, and was an invalid unilateral modification of the Compact. It was Kimberly-Clark's position that under the Compact as adopted by Minnesota, if Minnesota did not want to comply with the provisions of the Compact, it was required to enact a statute to repeal the Compact in full.5 Although Articles III and IV of...