To: The General Manager, Grayling Company
From: State and Local Tax Department Representative
Date: 26/07/2016
Subject: Status of Refund Claims For Earlier Years with Regards to a Key Multistate Issue.
Facts
The Grayling Company is bounded by the rules of the Multistate Tax Compact, which is a valid interstate compact, and thus California is bound by the provisions that include the election to make application of the equally weighted three factor formula for apportionment. Our former application of the three apportionment formula proved relevance as it apportioned the business income in terms of the sales, the payroll and the property on an equally weighted basis. Using this type of formula for apportionment was a fair representation to the state of California on the basis of the activities within the Grayling; California Rev. & Tax Code Section 25128(a) . By consideration, the 3-formula was put forth in the compact and it was equally adopted by the legislature in the state of California through the enactment of the previous State tax code section 38006. The tax code gave room for consideration of the entire texts of the UDIPTA, which in turn made the state of California a member state of the compact.
The State of California was a signatory state to the Compact, where it has provisions which obligate member states of the compact to offer the tax payers an option of using an the three factor formula for apportionment or any alternative formula applicable to the state. This is the reason why California adopted the double weighted sales formula for apportionment in the year 1993. Consequently, the California franchise board of taxation made an assertion that this provision made in the taxation law in 1993 superseded the election of the formula, and which in turn made the formula mandatory. The court of appeal held that the state of California is bound by both the compact and the election provision, and that the only possibility of making subsequent changes to the provision would be to withdraw from the compact. Since Grayling is subject to the election provision as a multistate taxation company, we were obligated to pay the tax using the new law that considers the double weighted apportionment factor. However, we had the right to choose between the new double weighted sales formula and the UDIPTA approach that was adopted by the compact. This is the major reason why our company is seeking to settle the audit issue with the court and the tax litigation as opposed to the refund claims.
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ISSUE
The issue of contention here is that the December 31, 2015 Supreme Court had it that the California law precluded the taxpayers from entirely relying on the Multistate Tax factor for the compact based on an equally weighted apportionment election. The court had a reason that the compact did not reach the binding reciprocal agreement and thus the legislature in California was not mandated to let the election provision for the compact. Since the compact does not prove to be the reciprocal agreement, the provision therein should not have been applicable to the situation in Grayling Company; Ca. Rev. & Tax Code Section 25128(a) . We therefore seek a system of redress of this issue in the court of law and the tax litigation agencies as opposed to the $10 million claim. This is from the fact that the $10 million refund claim will be only a timely solution for the current case of apportionment by the double factor formula, although it does not respond to the recurrent problems within our system of operation.
Authorities
In this case, the plaintiff of the attorney has to argue that the party of the compact coveted in conveyance of the entire interest in the subject of taxation to the party of Grayling. The court and the tax litigation are the major authorities for consideration.
Conclusion
We should make a preference of moving to court and discuss the matter of the compact with the tax litigation as opposed to giving preference to the refund claims of $10 million. If we decide to forego a court jurisdiction and litigation at the tax agency, we might be victims of economic losses as a result of consistent changes in the formula for apportionment. This is why we need to seek a permanent solution, which will allows California as a state to make the choice between being bound by the provision and the compact without necessarily withdrawing from the compact. If need be, we may seek the court to address the changes to the formula of apportionment by doing away with the compact or letting member states to have the right of choice between being bounded by the compact or doing away with it altogether.
Analysis
Just like the state of Michigan, Oregon and Texas, taxation companies are entitled to use the three factor apportionment formula of the compact. This is evident in the calculation of the Michigan Business Tax Liability, where IBM was at the jurisdiction of making application of the three factor formula. The case of Grayling is comparable to the Michigan court ruling of April 28 2015, which ruled that IBM was not at the jurisdiction of making an election since the state had retroactively repealed the compact in the year 2008; IBM v. Department of Treasury , 822F. 2D (2014). This is the reason why we at Grayling should not seek for a refund claim at the audit, but to set oral arguments with the court as a way of putting sanity to the election provision now and in the future.
References
Wellisch, D. (2014). Taxation under formula apportionment—tax competition, tax incidence, and the choice of apportionment factors. FinanzArchiv: Public Finance Analysis , 60 (1), 24-41.
Rudolph, E. G. (2009). State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups. Tax L. Rev. , 25 , 171.
Schafer, C. J. (2011). Federal legislation regarding taxation of Internet sales transactions. Berkeley Technology Law Journal , 415-433.
