In light of the potential unintended consequences of the Multistate Tax Compact and the California Court of Appeal's decision in Gillette, some states have begun to withdraw from the Compact. The Gillette decision held that a group of taxpayers was entitled to make the compact three-factor election in lieu of California's standard double-weighted sales factor. In contrast, the Michigan Court of Appeals held in International Business Machines Corp. v. Department of Treasury that a taxpayer was not allowed to elect to use the compact's three-factor apportionment formula for purposes of the Michigan Business Tax. Both cases have been appealed to each state's respective supreme court.
The contrasting decisions in California and Michigan, and the uncertainty surrounding the fiscal impact to states' budgets have caused some states to begin withdrawing from the compact. Prior to the most recent decision in Gillette, California enacted legislation to try to retroactively repeal the compact in an attempt to limit the tax refunds the state might be required to pay for open tax years. South Dakota also effectively withdrew from the compact by repealing its membership in the Multistate Tax Commission as of July 1, 2013. Most recently, Utah enacted legislation withdrawing from the Compact as of June 30, 2013, and simultaneously readopting some of the compact's provisions until June 30, 2014. Notably, Utah's readopted compact does not include current Articles III, IV and IX, which respectively deal with a taxpayer's ability to elect the compact's equally weighted three-factor apportionment in lieu of apportionment provided by state statute, the uniform allocation and apportionment provisions, and the compact's arbitration provisions.
Taxpayers should expect more compact members to withdraw from the compact to avoid the possibility of paying significant refunds to taxpayers if taxpayers succeed with their claims. Taxpayers who would benefit from the elections afforded in the compact should consider filing a protective refund claim in compact states where the election would be beneficial.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
