California Franchise Tax Board Issues Guidance on Processing of Cases Raising the Multistate Tax Commission Compact Election Issue
On November 1, 2016, the California Franchise Tax Board (“FTB”) issued FTB Notice 2016-03, which provides the FTB’s intended courses of action on Multistate Tax Commission (“MTC”) Compact election cases following the U.S. Supreme Court’s denial of the taxpayers’ petition for a writ of certiorari in The Gillette Company v. California Franchise Tax Board
, No. 15-1442. The FTB will resume processing MTC Compact refund claims, protests and appeals, and audits in the normal course of business. In addition, the FTB advises taxpayers that they should make tax deposits or pay proposed deficiency assessments in order to stop the accrual of interest, and penalties will be imposed on a case-by-case basis.
On December 31, 2015, the Supreme Court of California decided Gillette Co. et al. v. Franchise Tax Board
, Docket No. S2016587 (Cal. Dec. 31, 2015) in which the court held that the state is not bound to allow the use of the MTC Compact election to use an evenly-weighted, three-factor apportionment formula, rather than the double-weighted sales factor formula mandated under Cal. Rev. & Tax. Code § 25128 for taxable years prior to 2013. See the BDO SALT Alert
that discusses this case. The taxpayers in Gillette
filed a petition for a writ of certiorari from the U.S. Supreme Court, but on October 11, 2016, the U.S. Supreme Court denied the taxpayers’ petition.
FTB Actions on MTC Compact Election Cases
The FTB will take the following actions in cases where taxpayers attempted to make an election based on the MTC Compact:
Claims for Refund
– The FTB will process claims for refund based on the MTC Compact election issue in the normal course of business. The Notice states that taxpayers may expect to receive formal notices of denial in response to their claims over the next several months.
Administrative Protests and Appeals
– The FTB will place administrative protests that include the MTC Compact election issue into active status and resume working on such cases in the normal course of business. The FTB will also work with the State Board of Equalization to return administrative appeals involving the MTC Compact election issue to active status.
– The FTB will process audits involving the MTC Compact election issue in the normal course of business. The Notice states that taxpayers should consult with the auditors assigned to such cases in order to determine the timeline in each case.
Interest and Penalties
- The Notice states that taxpayers may make tax deposits pursuant to Cal. Rev. & Tax. Code § 19041.5, or may pay proposed deficiency assessments in order to stop the accrual of interest on deficiency assessments. In addition, penalties will be imposed as appropriate on a case-by-case basis.
- Although the decision in the Gillette case stands, it is only one of a number of MTC Compact cases that are currently pending, including two on petitions for writs of certiorari before the U.S. Supreme Court. On October 20, 2016, Kimberly-Clark filed a petition for a writ of certiorari challenging the decision in favor of the state from the Minnesota Supreme Court. Kimberly-Clark Corp. v. Minnesota Commissioner of Revenue, No. 16-565. The taxpayers involved in Gillette Commercial Operations, Inc. v. Dept. of Treasury, No. 325258 (Mich. Ct. App. Sept. 29, 2015) have until November 21, 2016, to file a petition for a writ of certiorari with the U.S. Supreme Court regarding Michigan’s retroactive repeal of the MTC Compact. Sonoco Products Co. v. Michigan Department of Treasury, No. 16A250. In addition, cases from Oregon and Texas related to the MTC Compact are still moving through the courts in those states. The MTC Compact election question is still unsettled in many states, and taxpayers should monitor these cases as they proceed.
- Taxpayers affected by FTB Notice 2016-03 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
For more information, please contact one of the following regional practice leaders: