Gillette Co. v. Franchise Tax Bd.

• Decision Date: 31 December 2015
• Docket Number: No. S206587.,S206587.
• Court: California Supreme Court
• Parties: The GILLETTE COMPANY et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent. [And five other cases.]

62 Cal.4th 468

363 P.3d 94

196 Cal.Rptr.3d 486

The GILLETTE COMPANY et al., Plaintiffs and Appellants,

v. FRANCHISE TAX BOARD, Defendant and Respondent.[And five other cases.^* ]

No. S206587.

Supreme Court of California

Dec. 31, 2015.

Silverstein & Pomerantz, Amy L. Silverstein, Edwin P. Antolin, Johanna W. Roberts, Charles E. Olson and Lindsay T. Braunig, San Francisco, for Plaintiffs and Appellants.

Jeffrey B. Litwak ; BraunHagey & Borden, San Francisco, and Matthew Borden as Amici Curiae on behalf of Plaintiffs and Appellants.

Wm. Gregory Turner for Council on State Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.

Keith G. Landry ; Reed Smith, Brian W. Toman, Mardiros H. Dakessian, Muhammad I. Shaikh and Erin J. Mariano, San Francisco, for Institute for Professionals in Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.

Law Offices of Miriam Hiser, Miriam Hiser ; Masters, Mullins & Arrington and Richard L. Masters for Interstate Commission for Juveniles and Association of Compact Administrators of the Interstate Compact on the Placement of Children as Amici Curiae on behalf of Plaintiffs and Appellants.

Kamala D. Harris, Attorney General, Susan Duncan Lee, Acting State Solicitor General, Edward C. DuMont, State Solicitor General, Kathleen A. Kenealy, Chief Assistant Attorney General, Paul D. Gifford, Assistant Attorney General, W. Dean Freeman, Joyce E. Hee and Lucy F. Wang, Deputy Attorneys General, for Defendant and Respondent.

Gregg Abbot, Attorney General (Texas), Mark L. Walters and Daniel T. Hodge, Assistant Attorneys General, Jonathan F. Mitchell, Solicitor General, Rance Craft, Assistant Solicitor General; Luther Strange, Attorney General (Alabama); Michael C. Geraghty, Attorney General (Alaska); Dustin McDaniel, Attorney General (Arkansas); John W. Suthers, Attorney General (Colorado); Irvin B. Nathan, Attorney General (District of Columbia); David M. Louie, Attorney General (Hawaii); Lawrence G. Wasden, Attorney General (Idaho); Derek Schmidt, Attorney General (Kansas); Bill Schuette, Attorney General (Michigan); Lori Swanson, Attorney General (Minnesota); Chris Koster, Attorney General (Missouri), Timothy C. Fox, Attorney General (Montana); Catherine Cortez Masto, Attorney General (Nevada); Gary K. King, Attorney General (New Mexico); Wayne Stenehjem, Attorney General (North Dakota); Ellen F. Rosenblum, Attorney General (Oregon); John E. Swallow, Attorney General (Utah); and Robert W. Ferguson, Attorney General (Washington) as Amici Curiae on behalf of the states of Texas, Alabama, Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico, North Dakota, Oregon, Utah, Washington and the District of Columbia.

Joe Huddleston, Shirley K. Sicilian and Sheldon H. Laskin for Multistate Tax Commission as Amicus Curiae on behalf of Defendant and Respondent.

CORRIGAN, J.

Here we consider how California calculates income taxes on multistate businesses. In 1974, California joined the Multistate Tax Compact (Multistate Tax Com., Model Multistate Tax Compact (Aug. 4, 1967)) (Compact), which contained an apportionment formula and permitted a taxpayer election between the Compact's formula and any other formula provided by state law. (Former Rev. & Tax.Code § 38001 et seq., enacted by Stats.1974, ch. 93, § 3, p. 193 and repealed by Stats.2012, ch. 37, § 3.) The Legislature later amended the Revenue and Taxation Code to specify a different apportionment formula that " shall" apply "[n]otwithstanding" the Compact's provisions. (rev. & tax.code,¹§ 25128, subd. (a) (section 25128(a) ).) taxpayers here contend they remain entitled to elect between the new statutory formula and that contained in the Compact. We conclude the Legislature may properly preclude a taxpayer from relying on the Compact's election provision.

I. BACKGROUND

A. Apportionment of Business Income in California Before the Compact

When a business earns income in multiple jurisdictions, apportionment is necessary to avoid tax duplication or other inequity. The Uniform Law Commission, also known as the National Conference of Commissioners on Uniform State Laws, is "a non-profit association of lawyers who draft model legislation regarding areas of law in which they believe it would be best to have uniformity of law among the states." (Metso Minerals Industries v. FLSmidth–Excel LLC (E.D.Wis.2010) 733 F.Supp.2d 969, 973, fn. 5.) In 1957, this commission drafted the Uniform Division of Income for Tax Purposes Act (7A pt. 1 West's U. Laws Ann. (2002) U. Div. of Income for Tax Purposes Act, § 1 et seq., p. 141) (the UDITPA or the Act). The Act was intended to provide a uniform guide for state laws and practices regarding multistate business taxation and to prevent taxation in multiple jurisdictions based "on more than [a business's] net income." (7A pt. 1 West's U. Laws Ann., supra, prefatory note, p. 142; see ASARCO Inc. v. Idaho State Tax Comm'n (1982) 458 U.S. 307, 310, fn. 3, 102 S.Ct. 3103, 73 L.Ed.2d 787.) Our Legislature codified the provisions of the UDITPA in 1966. (See § 25120 et seq.) The statutory scheme included an apportionment formula based on three factors: (1) The value of real property the business held in California (the property factor); (2) compensation paid to California employees (the payroll factor); and (3) gross California sales (the sales factor). Each factor was divided by the worldwide property holdings, payroll, and sales of the business. (§§ 25129, 25132, 25134.) Those three factors were added, then divided by three, yielding a California apportionment figure. (Former § 25128, as added by Stats.1966, ch. 2, § 7, p. 179.) Under this approach, each constituent factor was given equal weight in calculating the ultimate apportionment figure. That figure was then multiplied by the business's worldwide income to determine its California income tax liability.² (§ 25101.)

B. Promulgation of the Compact and its Adoption in California

The UDITPA was not widely adopted. States had scant motive to enact a uniform apportionment scheme benefitting multistate corporations. (See Ryan, Beyond BATSA: Getting Serious About State Corporate Tax Reform

(2010) 67 Wash. & Lee L.Rev. 275, 314, fn. 216 (Ryan) ; Swain, Reforming the State Corporate Income Tax: A Market State Approach to the Sourcing of Service Receipts (2008) 83 Tul. L.Rev. 285, 295 ; see also 61C West's Ann. Rev. & Tax.Code (2004 ed.) p. 456 [UDITPA adoption table].) The incentive arose with the specter of federal intervention. The United States Supreme Court held in Northwestern States Portland Cement Co. v. Minnesota (1959) 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421, that a state income tax could be levied on an out-of-state corporation based upon its in-state activities. "[T]he entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs." (Id. at p. 460, 79 S.Ct. 357.) This decision "prompted Congress to enact a statute ... which sets forth certain minimum standards for the exercise of that power."³ (U.S. Steel Corp. v. Multistate Tax Comm'n (1978) 434 U.S. 452, 455, 98 S.Ct. 799, 54 L.Ed.2d 682, fn. omitted (U.S.Steel ).) Congress also authorized a study to recommend legislation regulating state taxation of interstate business income. (Ibid. )

That study, known as the "Willis Report," "recommended a uniform two-factor apportionment formula based on the amount of property and payroll in each state, as well as a blanket nexus standard that limited income tax jurisdiction to states in which a business had either real property or payroll." (Ryan, supra, 67 Wash. & Lee L.Rev. at pp. 311–312, fns. omitted; see Judiciary Special Subcom. on State Taxation of Interstate Commerce, H.R.Rep. No. 89–952, 1st Sess., pp. 1135–1136 (1965).) Starting in 1965, several congressional bills proposed a comprehensive tax scheme for interstate business income. (U.S. Steel, supra, 434 U.S. at p. 456, fn. 4, 98 S.Ct. 799.) Most states objected to the loss of sovereignty inherent in the Willis Report recommendations. Some states also feared the proposals would cause lost revenue. (See McLure, Jr., The Difficulty of Getting Serious About State Corporate Tax Reform (2010) 67 Wash. & Lee L.Rev. 327, 337.)

The Willis Report and subsequent congressional action spurred an "unprecedented special meeting of the National Association of Tax Administrators" in January 1966, at which "the idea of a multistate tax compact was envisioned." (Multistate Tax Com., First Annual Rep., Period Ending Dec. 31, 1968, p. 1.) A draft of the Compact was presented to the states in January 1967. It provided an alternative to potential federal legislation restricting state taxation power. Nine states adopted it within six months. (Id. at p. 2.)

The Compact includes two central features. The first is the creation of the Multistate Tax Commission (Commission). The Commission is empowered to:

(1) study state and local tax systems; (2) recommend proposals to increase uniformity or compatibility of state and local tax laws, thus improving tax law and administration; (3) compile and publish information to assist the implementation of the Compact; and (4) do anything "necessary and incidental to the administration of its functions pursuant to this compact." (Compact, art. VI, § 3.) While the Commission may adopt uniform regulations interpreting the tax laws of its member states, these regulations are not binding. (Compact, art. VII; U.S. Steel, supra, 434 U.S. at p. 457, 98 S.Ct. 799.) The Compact also empowers a member state to ask the Commission to conduct audits, but only if the state has enacted enabling legislation. (Compact, art. VIII.)

The second central feature is the adoption of the UDITPA's equal-weighted apportionment formula. (Compact, art. IV.) The formula is designed to address the lack of uniformity among the...