/  About Us / Details
October 10, 2012

As the Dust Settles: The Aftermath of the Gillette Case and S.B. 1015 (article)

On October 2, 2012, after rehearing the case of Gillette Co. et al v. Franchise Tax Board (Cal. Ct. App., Dkt. No. A130803, 10/2/2012), the California Court of Appeal held that multistate taxpayers may elect to use the Multistate Tax Compact's ("MTC" or the "Compact") evenly-weighted three-factor formula ("MTC formula") to apportion income for California corporation franchise (income) tax purposes for the tax years at issue. The latest opinion is another chapter in the interesting saga taking place in California as to whether corporate taxpayers can elect to use the MTC formula in lieu of the required double-weighted sales factor formula. As a result of this decision, California taxpayers should carefully evaluate whether the MTC formula produces a beneficial tax result and whether protective claims should be filed.


In 1967, the MTC was enacted as a means of facilitating the equitable apportionment of tax bases and promoting uniformity or compatibility in significant components of the tax systems. In 1974, California adopted the MTC. Consequently, California required corporations to apportion business income based on the MTC formula. However, in 1993, California passed Cal. Rev. & Tax Code § 25128(a), which provided that notwithstanding the MTC, all business income will be apportioned based on a double-weighted sales factor formula. In January of 2010, a group of taxpayers, including Gillette, filed complaints seeking refunds based on their right to elect and compute California apportionable income using the MTC formula. The trial court heard the complaints but held for the Franchise Tax Board ("FTB") finding that section 25128 mandated the exclusive use of the double-weighted sales factor formula.

Senate Bill 1015

On June 27, 2012, Governor Jerry Brown signed S.B. 1015, which effectively repealed California's participation in the MTC and limited the ability to use the MTC formula to previously filed returns based on the doctrine of election. The objective of the bill was to eliminate taxpayers' ability to make the MTC formula election on either a prospective or retroactive basis, effectively eliminating the impact of a taxpayer victory if the court ruled in Gillette's favor. In essence, S.B. 1015 only allows those taxpayers who made such an election on a return filed prior to the enactment of S.B. 1015, to use the MTC formula. However, it is noteworthy that S.B. 1015 did not pass either the California Assembly or Senate with the requisite two-thirds majority vote as required by Proposition 26 for bills that increase taxes. As a result, it would appear that S.B. 1015 is still vulnerable to challenges from taxpayers under Proposition 26. Additionally, the Court of Appeal never addressed the passage or validity of this legislation in its rehearing opinion as this was not a matter before the court.

Appellate Hearing

In July of this year, the California Court of Appeal reversed the trial court's ruling in Gillette by holding that taxpayers could elect to use the MTC formula, instead of the double-weighted sales factor formula, to apportion income. The court reasoned that section 25128 did not repeal or supersede California's adoption of the MTC and that California was bound by the MTC until it withdrew from the Compact. However, on August 9, 2012, the California Court of Appeal, on its own motion, vacated its decision and scheduled a rehearing.

Appellate Rehearing

Upon rehearing the case in October, the California Court of Appeal affirmed its previous ruling. Specifically, the court found that the MTC was a valid compact and it superseded subsequent conflicting state laws. Further, the federal and California constitutions prevented California from passing laws that impaired the obligations of contracts.

Effect of Gillette on Filings due October 15, 2012

Pursuant to the California Rules of Court, the Gillette decision does not become law until 30 days after the decision is issued. Hence, the FTB Staff believes that any taxpayer filing its original return due October 15, 2012 who elects to use the MTC formula in apportioning its income will be subject to a large corporate understatement penalty if the Gillette decision is later reversed (since these returns will need to be filed before the 30 day period expires for the Gillette decision to become law – November 1st). Of course, this is a moot point if the Gillette decision ultimately withstands further challenge.


The only clarity that we have from the recent developments in California is that taxpayers who have previously filed original or amended returns using the MTC evenly-weighted three-factor formula are entitled to do so, based on the latest Gillette decision. Due to the enactment of S.B. 1015, the doctrine of election would prevent taxpayers from amending returns (unless the validity of this law is successfully challenged via Proposition 26). Thus, only returns filed prior to the enactment of S.B. 1015 would be eligible for the MTC formula. Whether or not the FTB will appeal this matter to the California Supreme Court, or if that court will even hear the appeal, is yet to be determined. Interestingly, despite the fact that the FTB will continue its aggressive fight against taxpayer's ability to claim refunds utilizing the MTC formula, it has already established and provided guidance on how to file such a claim. Accordingly, while the dust has not settled on whether taxpayers may elect to use the MTC formula (after the passage of S.B. 1015), California taxpayers who can benefit from its use should file protective claims prior to the expiration of the statute of limitations and/or consider use of the MTC formula on original returns due October 15, 2012.


If you have any questions regarding tax law changes in California, please contact your local CBIZ MHM tax advisor.

Copyright © 2012, CBIZ, Inc. Contents of this publication may not be reproduced without the express written consent of CCH and CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that—unless specifically indicated otherwise—any tax advice in this communication (and any attachments) is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter.;This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.;

CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc. (NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies.

COVID-19 Resources

Access all COVID-19 related articles to help your business respond to the pandemic.

Insights in Your Inbox