California Franchise Tax Board Offers Guidance to Taxpayers Who Claimed Multistate Compact Election

The California Franchise Tax Board, on November 1, 2016, issued FTB Notice 2016-03. The purpose of the notice was to inform taxpayers who had claimed the Multistate Tax Compact (“MTC”) election on their California returns of the state’s intended course of action following the denial of the U.S. Supreme Court to hear the case back in October.

The Gillette Company v. Franchise Tax Board (discussed in a prior Marcum Tax Flash) addressed the issue of whether taxpayers could elect to utilize the three-factor apportionment formula contained in the Multistate Tax Compact, rather than the double-weighted sales factor that was described within the California statute (California has since moved to a single sales factor). The California Supreme Court held that the election was not valid, and the case was brought to the U.S. Supreme Court, which then declined to hear it, concluding the litigation.

The state has been holding returns, protests, appeals, and audits claiming the MTC election, waiting for the resolution of the case. Now that the case has been resolved, the state will start addressing taxpayers that claimed the election. In order to halt the accrual of interest of deficiency assessments, the state has recommended that taxpayers pay the amount calculated with the California statute apportionment, either double-weighted sales or single sales, depending on the year at issue. Additionally, penalties may be imposed on a case-by-case basis.

While the California MTC case has been resolved, there are still related cases pending in Colorado, Michigan, Minnesota, Oregon, and Texas. It is possible that if the U.S. Supreme Court decides to hear one of those cases and rules in favor of the taxpayer, the California decision could be changed.