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High Courts in California and Michigan Mull Review in Gillette and IBM, Respectively

Jeremy Abrams
Donald M. Griswold
Walter Nagel
Crowell & Moring LLP - Washington Office

January 16, 2013

Previously published on January 8, 2013

The Gillette issue has become one of the hottest in recent years, as the impact of ultimate decisions by state high courts, or by the U.S. Supreme Court, will extend beyond the apportionment formulas available to taxpayers in California and Michigan to various Compact issues (Multistate Tax Compact as well as other compacts among states) around the nation. As the high courts of California and Michigan contemplate whether to take up the issue in Gillette and IBM, respectively, taxpayers should consider filing refund claims for income taxes paid to states that are full members of the Multistate Tax Compact -- most of which have statutes that depart in some way from Compact provisions.

In The Gillette Company, et. al. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012), the California Court of Appeal concluded that taxpayers may elect to use the Multistate Tax Compact's evenly-weighted three factor apportionment formula, and are not required to use the statutory three factor formula with double-weighted sales, to apportion business income under the Corporation Franchise Tax. Less than two months later, the Michigan Court of Appeals held in International Business Machines Corp. v. Department of Treasury, No. 306618 (Mich. Ct. App. Nov. 20, 2012), that the taxpayer could not elect to use the Compact's three-factor formula to apportion its income for purposes of the Business Income Tax part of the Michigan Business Tax Act. The courts' respective opinions reflected fundamental differences with respect to whether the Multistate Tax Compact is binding on member states and the methods for repealing application of the Compact. We agree with the California Court of Appeal that the Compact is binding and its application in a particular state cannot be repealed simply by enacting a conflicting state statute.

On November 13, 2012, the Franchise Tax Board filed a Petition for Review in the Gillette case. On December 28, 2012, the Supreme Court of California extended the time for granting or denying review to February 11, 2013. Also on December 28, 2012, the plaintiff in IBM filed with the Supreme Court of Michigan an Application for Leave to Appeal from the Court of Appeals' decision. As a result, 2013 is shaping up to be an even more interesting year than 2012 for multistate tax litigation. Will the United States Supreme Court have to get involved?

Looking Ahead

Crowell attorneys Don Griswold and Jeremy Abrams will be discussing the Gillette case and its implications for multistate taxpayers during a Strafford live phone/web seminar, "Corporate Apportionment and Sourcing Rights in Multistate Tax Compact States" scheduled for Wednesday, January 23, 2013 at 1:00pm EST. Among the issues that will be covered are the rights afforded by the Multistate Tax Compact to taxpayers in Compact states, the refund opportunities and filing positions available to taxpayers when the state departs from Compact provisions, and the risks and benefits associated with the different options available to taxpayers.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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