United States: 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 The Gillette case turns on whether, by adding that language to Section 25128, the Legislature repealed and superseded the MTC election, or whether the election was still available to taxpayers.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 Smith filed an amicus brief on behalf of the Institute for Professionals in Taxation in support of the taxpayers.

This case will likely have national impact. Although the MTC election issue is at various points in litigation in states like Michigan,4 Minnesota,5 and Oregon,6 states across the country look to California for guidance.

Justices Corrigan and Liu posed most of the questions to counsel; Chief Justice Cantil-Sakauye and Justice Cuéllar asked some questions as well. The judges questioned the binding nature of the Compact—as opposed to it being a mere suggestion. They also questioned whether indicia of a binding compact under the Northeast Bancorp7 case were present here. The court will issue its opinion within 90 days, unless it orders supplemental briefing.

For more information on the Gillette case and its impact on filing returns, contact the authors of this Alert or another member of the Reed Smith State Tax Group.


1. California Supreme Court Case No. S206587.

2. Beginning with the 2013 tax year, California moved to single sales factor apportionment pursuant to Section 25128.7. For tax years 2011 and 2012, in addition to the standard four-factor formula or MTC election at issue in this case, taxpayers could elect to apportion income pursuant to the single sales factor election contained in former Section 25128.5.

3. Former Rev. & Tax Code §§ 38001 et seq.

4. The Michigan Supreme Court found in favor of the taxpayer in International Business Machines Corporation v. Michigan Department of Treasury, 4852 N.W. 2d 865 (2014).

5. Kimberly-Clark Corp. & Subs. v. Comm'r of Rev., File No. 8670-R (2015).

6. Health Net Inc. v. Department of Revenue, Case No. TC 5217 (2015).

7. Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve, 472 U.S. 159 (1985).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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