California Apportionment Decision May Require Taxpayer Action
Posted Friday, August 3, 2012 by Ronald L. Bueing
On July 24, 2012, a decision was rendered by the California Court of Appeal in a case involving a group of companies, including Gillette. The case provides that taxpayers may use the apportionment formula provided for in the Multistate Tax Compact (MTC) in which California was a member. This would primarily benefit companies whose sales factor exceeds their property and payroll factors in California because California had switched to a double weighted sales factor in 1993. Under the holding in Gillette, taxpayers would be allowed to use the equally weighted three factor formula provided for in the MTC.
While this case could be a windfall for certain taxpayers necessitating the filing of a refund claim for earlier years, there are reasons to be cautious. First, Gillette and the other plaintiffs lost their original refund action at the trial court level. Although the California Franchise Tax Board has not yet indicated whether they will appeal the decision, an appeal is likely and the holding in Gillette could be reversed by the California Supreme Court. Second, in anticipation of a potential loss the California legislature repealed the Multistate Tax Compact and also provided that in order to use the equally weighted factor in election must be made on an original timely filed return.
Nonetheless, taxpayers that may have a significant refund available should seriously consider filing a refund claim with California. The decision of the Court of Appeal appears well reasoned and it is doubtful that California can retroactively deny the benefits of Gillette to taxpayers. One thing is certain - there will be additional litigation. By the time that litigation is over, there will probably be no open years left in which to file a refund, even given prospective effect of the recent California legislation. Thus, taxpayers with a significant California income tax refund opportunity need to consider filing a refund action now. Further, taxpayers that filed an extension in connection with the filing of their 2007 return may be able to still claim a refund for that year, depending on the date that the original return was filed. This may require immediate action.
The case also indicates a possibility for taxpayers with other specialized issues regarding apportionment of California income to elect the MTC formula. While the case did not involve the use of a special industry apportionment formula and did not address other issues, such as the use of the Finnegan or Joyce rule, arguably, any deviation from the MTC formula that was required by California in earlier years, may provide a basis for a refund. If you have any questions, call me and we can discuss whether a refund action may be appropriate for your company.
For more information, please contact Ronald Bueing at (206) 340-2008.