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High Courts in California and Michigan Mull Review in Gillette and IBM, Respectively


UPDATE: On January 16, 2013, the Supreme Court of California granted the Franchise Tax Board's Petition for Review in Gillette. Stay tuned!


The Gillette issue has become one of the hottest in recent years, as the impact of ultimate decisions by state high courts, or by the U.S. Supreme Court, will extend beyond the apportionment formulas available to taxpayers in California and Michigan to various Compact issues (Multistate Tax Compact as well as other compacts among states) around the nation. As the high courts of California and Michigan contemplate whether to take up the issue in Gillette and IBM, respectively, taxpayers should consider filing refund claims for income taxes paid to states that are full members of the Multistate Tax Compact -- most of which have statutes that depart in some way from Compact provisions.

In The Gillette Company, et. al. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012), the California Court of Appeal concluded that taxpayers may elect to use the Multistate Tax Compact's evenly-weighted three factor apportionment formula, and are not required to use the statutory three factor formula with double-weighted sales, to apportion business income under the Corporation Franchise Tax. [See Gillette: "The Best a [Taxpayer] Can Get!" Updated 10/9/2012]. Less than two months later, the Michigan Court of Appeals held in International Business Machines Corp. v. Department of Treasury, No. 306618 (Mich. Ct. App. Nov. 20, 2012), that the taxpayer could not elect to use the Compact's three-factor formula to apportion its income for purposes of the Business Income Tax part of the Michigan Business Tax Act. [See Let's Build A Smarter Apportionment Formula 11/28/2012]. The courts' respective opinions reflected fundamental differences with respect to whether the Multistate Tax Compact is binding on member states and the methods for repealing application of the Compact. We agree with the California Court of Appeal that the Compact is binding and its application in a particular state cannot be repealed simply by enacting a conflicting state statute.

On November 13, 2012, the Franchise Tax Board filed a Petition for Review in the Gillette case. On December 28, 2012, the Supreme Court of California extended the time for granting or denying review to February 11, 2013. Also on December 28, 2012, the plaintiff in IBM filed with the Supreme Court of Michigan an Application for Leave to Appeal from the Court of Appeals' decision. As a result, 2013 is shaping up to be an even more interesting year than 2012 for multistate tax litigation. Will the United States Supreme Court have to get involved? 

Looking Ahead

Crowell attorneys Don Griswold and Jeremy Abrams will be discussing the Gillette case and its implications for multistate taxpayers during a Strafford live phone/web seminar, "Corporate Apportionment and Sourcing Rights in Multistate Tax Compact States" scheduled for Wednesday, January 23, 2013 at 1:00pm EST. Among the issues that will be covered are the rights afforded by the Multistate Tax Compact to taxpayers in Compact states, the refund opportunities and filing positions available to taxpayers when the state departs from Compact provisions, and the risks and benefits associated with the different options available to taxpayers.

For more information about registering for the upcoming webinar, or for help determining whether to file refund claims in a particular jurisdiction and what non-conformity issues may be appropriate for your company to include in its refund claims, contact one of the authors of this Alert.


IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing, or recommending any partnership or other entity, investment plan, or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. To the extent that a state taxing authority has adopted rules similar to the relevant provisions of Circular 230, use of any state tax advice contained herein is similarly limited.

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Donald M. Griswold
Partner – Washington, D.C.
Phone: +1 202.624.2730

Jeremy Abrams
Counsel – Washington, D.C.
Phone: +1 202.624.2926