Multistate Tax Alert - California Gillette Decision Update - FTB Issues Guidance
On October 4, 2012, we issued a Multistate External Alert summarizing the California Court of Appeal’s October 2, 2012 decision in The Gillette Company, et al., v. California Franchise Tax Board (“Gillette”).1 In that decision the Court of Appeal upheld the right of the taxpayers to elect to apportion and allocate income to California using the Multistate Tax Compact (“Compact”).2 The Compact, contained in Cal. Rev. & Tax. Code § 38006, includes an equally-weighted three-factor apportionment formula (property, payroll, and sales) (the “Compact Election”), rather than the threefactor formula with a double-weighted sales factor generally applicable under the standard apportionment provisions.3 The California Franchise Tax Board (“FTB”) has recently issued guidance regarding: (1) how taxpayers may file a protective claim for refund for prior tax years pertaining to the Compact Election, and (2) whether taxpayers that use the Compact Election on a timely filed original return for the 2011 taxable year run the risk of incurring the Large Corporate Underpayment Penalty pursuant to Cal. Rev. & Tax. Code § 19138. In this Tax Alert we summarize this FTB guidance.
Refund claim procedures
On October 5, 2012, the FTB issued Notice 2012-01 (the “Notice”), explaining “how a taxpayer that wants to raise the Compact Election Issue should file protective claims for refund.”4 Although stating that it is the FTB’s position that “a taxpayer may not elect the Compact apportionment method retroactively,” the FTB acknowledges in the Notice that it has received taxpayer inquiries in this regard and thus decided to issue procedural guidance. The Notice provides that the FTB will treat a protective claim “as a request that the … Board take no action on the claim currently, but rather that the claim is filed to avoid the bar of refunds by the statute of limitations.”5 Finally, the Notice specifies that the “Board will only take action on the claim once Gillette has been fully resolved.”
Large corporate underpayment penalty
On October 5, 2012, the FTB issued a Tax News Flash (the “News Flash”) stating that FTB Staff believes that taxpayers choosing the Compact Election on a timely filed original return for the 2011 taxable year:
will run the risk of incurring [the Large Corporate Underpayment Penalty (“LCUP”) if Gillette] … is subsequently vacated, reversed, or overturned. The reason is that the decision of the Court of Appeal is not final until November 1, 2012, -- 30 days after the decision was issued (Cal. Rules of Court rule 8.264(b)(1)). Because the decision is not final, it should not be treated as the state of the law until November 1, 2012.6
The News Flash explains further that LCUP penalty relief, under Cal. Rev. & Tax. Code § 19138(f) due to a change in law occurring after a return is filed, would not apply to timely filed returns for the 2011 tax year because:
the state of the law on October 15, 2012 does not include the [Gillette] decision …, as it has not yet become final. Therefore, there is no "change in law" that will occur should the decision be vacated or overturned after October 15, 2012. The law would be the same as it was at the time the taxpayer filed the return.
If you have questions regarding the Gillette decision, the FTB’s Notice 2012-01 or Tax News Flash, or other California tax matters, please contact any of the following Deloitte Tax professionals or your Lead Multistate Professional.
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Deloitte Tax LLP, Costa Mesa
+1 714 436 7657
Deloitte Tax, LLP, San Francisco
+1 415 783 6090
Deloitte Tax LLP, San Francisco
+1 415 783 4579
Deloitte Tax LLP, San Francisco
+1 415 783 4309
Deloitte Tax LLP, Los Angeles
+1 213 688 5339
Deloitte Tax LLP, Sacramento
+1 916 288 3350
1 The Gillette Company, et. al. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012). This decision is available at: http://www.courts.ca.gov/opinions/documents/A130803A.PDF.
2 For more information regarding this Court of Appeal decision, see our External Alert dated October 4, 2012, available at:
3 Taxpayers in certain industries (e.g., agriculture and extractive) are required, however, to file using a three factor (single-weighted sales) formula. Cal. Rev. & Tax. Code § 25128(b).
4 The Notice is available at: https://www.ftb.ca.gov/law/notices/2012/2012_01.pdf.
5 Note a taxpayer has the right to deem a refund claim denied if the FTB does not mail a notice of action within six months after the claim is filed, and, based on that deemed denial, the taxpayer may then appeal the matter to the California State Board of Equalization. Cal. Rev. & Tax. Code § 19331.
6 The News Flash does not mention Senate Bill 1015, which withdrew California from the Compact in an attempt to repeal the Compact Election (SB 1015 repealed Part 18, commencing with Section 38001, of Division 2 of the Cal. Rev. &Tax. Code).