Taxable Talk

California’s Franchise Tax Board won the appeal of Gillette v. Franchise Tax Board. This opinion covers taxation of multi-state entities in California prior to 2012.

Gillette (and several other companies) argued that the FTB’s weighing of the “sales” factor higher than other factors was discriminatory based on a multi-state compact. (California specifically withdrew from the compact for years after 2011.) The California Supreme Court decided that the FTB’s interpretation of the California legislature is accurate.

Gillette and the other appellants can file a writ of certiorari to the US Supreme Court; however, this does not appear to be the kind of case that the US Supreme Court would take.

As expected, the California Supreme Court has accepted Gillette vs. Franchise Tax Board. While no date has been announced for the arguments, I’d expect the case to be heard this Spring or Summer, with a decision sometime before year-end.

The Gillette case is very important to multi-state entities that file in California.

Prior Taxable Talk Gillette Coverage.

As expected, California’s Franchise Tax Board has appealed the Gillette decision to the California Supreme Court. (The FTB’s Tax Practitioner Liaison sent an email notifying tax professionals of the appeal.) The California Supreme Court does not have to take the case but is likely to. Most likely, the case would be heard in the Spring of next year with a decision sometime over the summer.

For business entities operating in multiple states, apportioning corporate tax can be difficult. Every state has different rules. This is especially true when dealing with California.

While California has a “single-factor” (sales) apportionment that can be used, there’s also a “three-factor” apportionment that uses sales, property and payroll. Back in 1993 the legislature said that when using the three-factor apportionment, the weight of the sales factor is doubled.

There’s a problem with that, though: California signed a multi-state compact that said the factors would be weighed equally. Several businesses sued the state. While the lawsuit was thrown out at the district court level, the 1st District Court of Appeal ruled unanimously that the businesses, led by Gillette, were correct. California must abide by the agreement because to not do so would be to break a contract.

I expect the Franchise Tax Board to appeal the case to the California Supreme Court.