MTC Apportionment Election in California: Yes, No, Maybe??
GILLETTE CO. RULING SAYS "YES"
On July 24, 2012, the California Court of Appeals issued its opinion in Gillette Co., (reversing the lower court's order in favor of the Franchise Tax Board (FTB)), holding that taxpayers must be allowed to elect to use the Multistate Tax Compact's equally weighted three-factor apportionment formula even though California amended its statutory provisions to require the use of a double weighted sales factor apportionment formula.
In reaching this conclusion, the court found the Multistate Tax Compact (MTC or Compact) is a valid compact that California as a signatory state is bound by, including the apportionment election provision, until the state withdrawals from the Compact and repeals the apportionment election provision.
California may appeal the ruling; therefore, this battle may not be final.
JUNE 27, 2012 LEGISLATION SAYS "NO"
Prior to the issuance of the Gillette Co. ruling, California enacted legislation on June 27, 2012 that withdraws California from the Multistate Tax Compact entirely and attempts to retroactively disallow the MTC election in California for all tax periods back to 1993. The legislation was done to preempt taxpayers from filing refund claims if the Gillette case was decided against California. However, there are questions about whether the legislation was passed correctly from a procedural standpoint. Hence, it may be overturned, and refund claim opportunities may exist.
The ability to make an MTC apportionment election in California can produce substantial refund opportunities for a company depending on a company's activities in California. The question is whether the company would benefit from making a MTC election to use an equally weighted three-factor apportionment formula instead of using the California mandated double weighted sales factor apportionment formula, (or the new single sales factor apportionment election (as of 1/1/11)).
Based on the legislation passed on June 27, 2012, California would say that an MTC election is not allowed on amended returns or original returns. The June 27, 2012 legislation also states, in general, that all tax elections must be made on original, timely filed tax returns.
The Gillette case goes against the June 27, 2012 legislation and says the MTC election is allowed.
Does the legislation trump the Gillette ruling?
If the June 27, 2012 legislation was passed correctly (under procedural rules), then it would seem that a MTC election could not be made on an amended return (refund claim) or future return.
If the June 27, 2012 legislation wasn't passed correctly, amended returns (refund claims) may be possible under the Gillette ruling.
If the June 27, 2012 legislation wasn't passed correctly, will California appeal the Gillette ruling?
WHAT TO DO NOW?
A company should review its California activities and determine if using an equally three factor apportionment formula would provide a tax benefit over using the mandated double-weighted sales factor three factor apportionment formula. (NOTE: there may be other issues between the MTC and California statutes that should be considered prior to making the MTC election.)
If there is a benefit, the company may want to consider filing "protective" refund claims before any statute of limitations expire. These refund claims would be "protective" since there is so much uncertainty about whether a refund will be allowed.
The question of whether to make the MTC election on a current year return includes considering all of the uncertainty already discussed, along with the fact that if the election is determined to NOT be allowed, the company may be subject to underpayment penalties later.
Each company should have their situation analyzed by a competent multistate tax consultant to help the company make an informed and educated decision.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.