Gillette opened the door to possible refund claims for companies operating in multiple US states.
Each US state taxes income earned in the state. Because the states have different approaches to determining how much income a large company operating nationally earned in each, there is the potential for double taxation. A House subcommittee recommended in 1965 that Congress impose a uniform apportionment regime on the states. State tax administrators from nine states drafted a multistate tax compact in 1967 in an effort to avoid federal action. The multistate compact adopts a three-factor formula in which a company apportions income to the state based on the share of the company’s total property, payroll and sales in the state. The three factors are given equal weight.
California adopted the multistate compact in 1974. However, in 1993, its changed its law to require double weighting be given to the sales factor.
Gillette and five other companies sued the state for $34 million in refunds in 2010 arguing that they are entitled by law to use the formula in the multistate tax compact. A California appeals court agreed in a decision on July 24.
The court announced on August 9 that it would reconsider the decision. Estimates of the potential cost of the decision to California vary, but start at $100 million a year. The decision is expected to be appealed to the California Supreme Court and possibly ultimately to the US Supreme Court.
The state enacted a bill in July, shortly before the appeals court released its decision, withdrawing from the multistate compact and barring refund claims unless a company elected use of the apportionment formula in the multistate compact when it filed its tax return.
Refund claims are now expected in other states.
Fourteen of 20 states that belong to the multistate compact have moved away from the three-factor formula.
A majority of state tax advisers listening to a recent webinar on the subject said they are likely to advise their companies to pursue refund claims; 87% of participants said they would advise pursuing such claims in California and 78% said they would advise making claims in other states.