June 30, 2016

The Supreme Court Needs to Protect Interstate Compacts From Destruction: Gillette Co. v. California Franchise Tax Board

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On June 30, 2016, the Tax Foundation filed a brief with the U.S. Supreme Court asking them to hear the appeal in Gillette Co. v. California Franchise Tax Board, a case where the California Supreme Court ruled that taxpayer protections in an interstate compact can be overridden by a state law.

The case involves a business taxpayer seeking to invoke a more favorable tax calculation method as authorized by an interstate compact, the Multistate Tax Compact, to which California was a party at the time. While the case is seemingly about business tax refund claims in one state, it is really about whether a state that disagrees with the requirements of an interstate compact (1) must follow the procedures of the compact and withdraw from it or seek amendments to it, or (2) can simply enact a contrary law and thereby unilaterally alter the terms of the compact.

Our brief further noted:

  • The Multistate Tax Compact was created and enacted by the signatory states in response to the threat of federal encroachment on states’ taxation powers. Through its reciprocal agreement that all states uniformly offer the “UDIPTA apportionment formula” as an option, the stated goal of creating a baseline level of uniformity for multistate tax apportionment was achieved.
  • Now, with little threat of federal encroachment, California and other states claim that the Compact was never binding on them, and are denying taxpayers the ability to use a “safety valve” provision in the Compact.
  • The Compact’s governing entity, the Multistate Tax Commission, today supports this interpretation for institutional reasons, but a large body of statements and reports by the Commission at the time, as well as a full understanding of the purposes of the Multistate Tax Compact, demonstrate that all parties understood the Compact to be binding.

Allowing California to unilaterally amend a compact it has adopted, rather than seeking to amend it or withdrawing from it, will undermine the entire concept of interstate compacts as binding agreements among states and strip the states of an incredibly important tool used to foster interstate cooperation. The U.S. Supreme Court has in the past recognized the importance of such agreements and the unique role they play in fostering cooperation among states, and should act to protect them from destruction.

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