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California Balking at Tax Uniformity Rules It Agreed To

2 min readBy: Joseph Bishop-Henchman

The Multistate TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Commission (MTC) is a collection of 19 states that seek uniformity and cooperation in tax laws, particularly the state corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . The MTC came about in 1967 when Congress threatened to impose uniformity on how states divvied up corporate profits for the corporate income tax (“apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. ”); under this threat, the states hammered out a uniform rule on their own.

But not for long: today, as the MTC itself admits, “39 of the 47 states with a corporate income tax” have abandoned this original uniform formula. States, pressured by in-state businesses, have modified their tax rules to measure taxes owed by sales in a state rather than property or employees, as had been done in the past.

One company dusted off its copy of the MTC compact and found that it gives taxpayers in MTC member states the option to use the old uniform apportionment formula rather than whatever formula might be in state law. California is an MTC member state, and the Gillette Company says it wants to use that old uniform formula even though it’s not authorized by state law.

Tax Analysts today has an excellent piece reviewing the case and the arguments in it. California strenuously argues that the MTC compact was never approved by Congress, so therefore it cannot supersede state law. (To be on the safe side, California is quickly working to withdraw from the MTC, a serious move since the state is its largest funder.) MTC predictably sided with California, contorting itself to downplay the importance of uniformity and the relevance of language in its own founding document. Other multistate compacts have sided with Gillette, worried about letting a state get away with unilaterally changing the terms of a compact.

The California appellate decision is expected anytime this summer, and appeals to the California Supreme Court and even the U.S. Supreme Court may follow. However it shakes out, it shows that whatever lip service state tax officials give to bringing about uniformity and simplification, they shirk from it whenever it means actual changes to how a state does things. With state tax officials clamoring for more authority to tax interstate business income and sales, Congressionally-mandated simplification efforts (and not just vague state-enforced promises of uniformity) need to be a part of the mix.