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California Appellate Court Affirms Ability to Elect MTC Three-Factor Apportionment Formula and State’s Response

Aug 10, 2012

The California Appellate Court, in its recent case The Gillette Company et al, July 24, 2012, ruled that the State of California as a signatory member of the Multistate Tax Compact (“MTC”) and the Franchise Tax Board (FTB) must follow the MTC’s provisions and allow the taxpayers to elect to use either the MTC’s apportionment formula (three-factor equally weighted) or the state’s alternative formula (four-factor double weighted sales). 

However, the State anticipated this result during the court proceedings and the Legislature preemptively passed SB 1015, which was signed into law by the Governor on June 27, 2012.  SB 1015 repealed California’s participation on the MTC and included a clarifying provision related to the “doctrine of elections.”  The doctrine of elections states that an election affecting the tax calculation must be made on the original timely filed return.  The State’s position was that a valid election was made with that filed return and the taxpayer is bound by that election and unable to file an amended return electing the MTC formula. 

We and others expect that the FTB will appeal.  The taxpayers have some options available as well.  Therefore, until all the issues are finalized, taxpayers should consider filing amended returns requesting refunds for all open tax years.  It is important to acknowledge that the FTB will fight long and hard against any refund.  For the California 2011 return, we suggest considering both methods before finalizing the return.

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Gary Bingel

Gary Bingel, Partner-in-Charge of the National State and Local Tax Group, with expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

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