California Income Tax Refund Opportunity for Multistate Businesses

Summary:

  • California has overcharged multistate businesses on income tax bills for years, the California Court of Appeal, Fourth District, held on July 24, 2012.
  • Multistate businesses that have paid California income taxes between tax years 2007 and today should contact Royse Law Firm, PC, to determine refund eligibility.

Explanation:
Multistate entities must apportion their taxable income amongst the states in which they are present. States have historically disagreed over how best to measure presence. States with large consumer markets prefer to use the ratio of an entity’s in-state sales to its global sales, whereas states containing more entity employees or property prefer to use in-state payroll or in-state property ratios. To resolve the disagreement, a group of states created the Multistate Tax Compact (“MTC”), a model law that established a uniform apportionment formula equally balancing all three factors (“payroll ratio + property ratio + sales ratio” / 3). Under the MTC, multistate entities may choose to calculate presence under either the MTC formula or under a state’s individual formula. California joined the MTC in 1974.

In 1993 California, a large market state, “mandated” the use of a new formula (“payroll ratio + property ratio + 2x sales ratio” / 4), doubling the sales factor to increase entity presence and boost tax revenue. In 2010 multistate businesses Gillette Co., Proctor & Gamble Mfg. Co., and Kimberly-Clark Worldwide, Inc. sued California’s Franchise Tax Board, claiming the MTC bound California to preserve the MTC’s equal-weight formula as an alternative. The First District Court of Appeal agreed and held California had effectively overcharged the plaintiffs by denying their use of the MTC’s more tax-friendly formula. The plaintiffs are expected to receive a $34 million tax refund. Gillette Grp. v. Franchise Tax Bd., A130803 (Cal. Ct. App. 2012).

This Notice is Time-Sensitive:
Companies may seek to recover overpayments as allowed by California’s statute of limitations. Under CAL. REV. & TAX. CODE §19306, refund claims must be filed within four years from the original due date of the return (or from its filing date, if an extension was granted), or one year from the date of overpayment, whichever occurs later.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City. Read My Full Bio

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