Minnesota ~ Corporate Income Tax: Use of Multistate Tax Compact’s Apportionment Formula Denied

The Minnesota Supreme Court held that taxpayers were not permitted to use the Multistate Tax Compact’s (Compact’s) three-factor apportionment formula to calculate their corporate franchise tax, because the state legislature’s enactment of the Compact in 1983 did not created a contractual obligation that prohibited the Minnesota Legislature from later repealing parts of the Compact without completely withdrawing from it. The Compact contained an election provision that permitted multistate corporate taxpayers to use either the Compact’s allocation and apportionment rules or any other allocation and apportionment rules enacted by the state. In addition, the Compact’s allocation and apportionment rules called for use of an equally-weighted three-factor apportionment formula. However, in 1987, the state repealed the parts of the Compact that contained the apportionment formula and the election provision.

In 2013, the taxpayers amended their Minnesota corporate franchise tax returns for the 2007 to 2009 tax years by recalculating their state tax liability using the Compact’s evenly-weighted three-factor apportionment formula. According to the taxpayers, by enacting the apportionment formula in 1983, Minnesota created a binding obligation that could not be terminated without a full and complete withdrawal from the Compact, which the state did not do until 2013. Thus, argued the taxpayers, the Minnesota Legislature violated the Contract Clauses of the United States and Minnesota Constitutions by repealing parts of the Compact. On the other hand, the state claimed that the Compact is advisory only, because it does not meet the criteria for a binding contract set out in Northeast Bancorp, Inc. v. Board of Governors of Federal Reserve System, 472 U.S. 159 (1985).

The court rejected the taxpayers’ argument that, by enacting the Compact in 1983, the Minnesota Legislature could not later amend that statute and that it could only repeal the Compact in its entirety. According to the court, this argument has no support in the law. In addition, the court noted that the state is constitutionally barred from surrendering, suspending, or contracting away its authority to amend or repeal tax provisions.

After concluding that the mere act of enacting legislation did not bar the Minnesota Legislature from later amending the Compact, the court examined the Compact’s language in light of the “unmistakability doctrine,” which is a rule of contract construction that prevents a state from contracting away its sovereign powers except in “unmistakable” terms. The taxpayers argued that, by enacting the Compact’s election provision, the state “unmistakably. . . promised to be bound by the Compact’s terms until it withdraws from the Compact or the member States collectively agree to amend the Compact.” However, the court found no unmistakable or express promise surrendering the state’s legislative authority. The statute did provide that the Compact is “enacted into law” and that a member state may withdraw from the Compact by enacting a statute repealing it, but nothing in the statute dictated the “all or nothing” position advanced by the taxpayers. At best, said the court, the statute is silent, but neither silence nor ambiguous terms in a contract constitute a waiver of sovereign authority. Furthermore, the court rejected the argument that the Compact directive to “implement” the election provision represented an unmistakable, clear promise to allow taxpayers to use the optional apportionment formula until the state withdrew from the Compact.

Kimberly-Clark Corp. & Subsidiaries v. Commissioner of Revenue, Minnesota Supreme Court, No. A15-1322, June 22, 2016

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