Income Tax Refund Opportunity for Multistate Businesses

The California Court of Appeal held on July 24, 2012 that California may not eliminate multistate taxpayers’ use of an equal-weighted apportionment formula for calculating income tax liability. Other jurisdictions may agree. However, on August 9, 2012 the California Court of Appeal stated that it will revisit its July 24 ruling.

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 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 consumer market state, “mandated” the use of a new formula (“payroll ratio + property ratio + 2x sales ratio” / 4), doubling the sales factor to bolster entity presence calculations and boost tax revenue. Other consumer market states enacted similar laws, while states containing more employees and property developed formulas that weighted in-state payroll and in-state property more heavily. 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 equally-weighted formula as an alternative to its individual formula. 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. Gillette Grp. v. Franchise Tax Bd., A130803 (Cal. Ct. App. 2012). Although the Court of Appeal has stated it will issue a revised ruling (and may reverse its position), taxpayers may still take action.

California is one of many states that have advanced individual apportionment formulas over the MTC formula, so taxpayers may take action whether present in California or not. Multistate taxpayers who have apportioned their income taxes in any state may benefit from filing an amended return or a refund claim.

Taxpayers should be aware of states’ different statutes of limitations for filing such claims. In California, 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.

Potentially affected parties are encouraged to contact Royse Law Firm’s Palo Alto office at 650-813-9700 to discuss filing a claim for refund to preserve claims in the event the courts ultimately rule in favor of the taxpayers.

This post is an update to California Income Tax Refund Opportunity for Multistate Businesses, published Aug. 10, 2012.

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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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