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Multistate Taxpayers: Court Decisions Could Impact Your Tax Position


7/19/13

Synopsis:
 
Taxpayers who do business in multiple states may be affected by a number of court decisions that could limit options for sourcing income between the states.
 
Background:
 
Many states, including California, Michigan, and Texas, are members of the Multistate Tax Commission (MTC), an intergovernmental state tax agency whose purpose, in part, is to promote uniformity in the taxation of multistate businesses. In addition to joining the MTC, many states adopted the Multistate Tax Compact (“Compact”) which is a model statute addressing the sourcing of income by multistate taxpayers among the states in which multistate taxpayers are doing business. 
 
The Compact uses an equally weighted three-factor formula, consisting of property, payroll, and sales to apportion income. Many states adopting the Compact have also adopted their own apportionment rules that differ from the Compact’s terms. In a number of states, litigation has occurred to determine which rule taxpayers should use in apportioning their income to states that have adopted the Compact, but have also adopted apportionment rules that differ from those in the Compact. Recently, the question arose as to which rule taxpayers should use in apportioning their income to states that adopted the Compact, but which have also adopted apportionment provisions that differ from those set forth in the Compact.
 
In 2010, California’s apportionment rules were challenged in The Gillette Co. et al. v. Franchise Tax Board. California enacted an apportionment formula that double-weighted the sales factor, essentially increasing the tax on most out-of-state taxpayers. In October 2012, after two years of litigation and appeals, the California Court of Appeals ruled that Gillette is able to use the Compact apportionment provisions in apportioning income to California. The Franchise Tax Board asked the California Supreme Court to review the decision.
 
Michigan and Texas:
 
After Gillette, taxpayers in other states also sought to use the Compact provisions where the state adopted the Compact, but also adopted apportionment provisions that differed from the Compact. In Texas, the Comptroller of Public Accounts has ruled in multiple opinions that taxpayers must use the apportionment provisions set forth in the applicable Texas Franchise Tax provisions, despite Texas’ adoption of the Compact. Decision, Hearing Nos. 108,223, 108,204, 108,285, Texas Comptroller of Public Accounts, May 2, 2013.
 
In Michigan, there is a split in the state courts. In IBM Inc. v. Treasury, No. 306618 (Mich. Ct. App. Nov. 20, 2012), the Michigan Court of Appeals ruled that taxpayers are not allowed to use the Compact’s provisions in sourcing income to Michigan. However, in Anheuser-Busch Inc. v. Treasury, Case No. 11-85-MT (Order and Opinion, Mich. Ct. of Claims June 6, 2013), the Michigan Court of Claims allowed the taxpayer to use the Compact provisions, holding that the Compact is a binding, multistate compact that cannot be repealed or changed by a separate statute (essentially adopting the California rationale). 


What Does CohnReznick Think?
Multistate taxpayers should identify those states in which they are doing business that have adopted the Compact, and apportionment provisions that differ from the Compact, to determine whether protective refund claims should be filed. Also, taxpayers should monitor the appeal of each of the Michigan cases to keep abreast of any changes to the current state of the law.


Contact:
 
For more information, please contact Patrick Duffany, Partner and State and Local Tax Practice Leader, at 860-368-3607.
 
To learn more about CohnReznick’s State and Local Tax services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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