State taxation of multistate and multinational corporations is not an issue for the fainthearted.
The formulas for calculating their tax liabilities are complex and interpreting them has involved decades of political and legal wrangling, fueled by the issue’s multibillion-dollar stakes.
The issue bugged Jerry Brown during his first governorship four decades ago and as his second governorship winds down, it’s still percolating.
Just before Brown was elected governor in 1974, the state joined a multistate compact to bring uniformity to corporate taxation, its major feature being the use of three equal factors – payroll, property and sales – to calculate what portion of corporate income should be attributed to each state.
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To illustrate: If a company had 21 percent of its sales, 12 percent of its payroll and 17 percent of its property in California, 16.67 percent of its income would be considered taxable by the state.
However, to audit corporations’ tax returns, state tax officials required access to their internal books, and multinationals headquartered in other countries – Japan and Great Britain, particularly – bridled.
Sony Corp., which had a large operation in San Diego, was particularly resentful, and its executives, as well as those of other corporations, hammered on Brown over the issue.
Initially, Brown backed the state’s position, but after a trip to Japan he flip-flopped, accusing the state’s crusty top tax official, Martin Huff, of feeding him “flaky data.”
Huff, in effect, called Brown a liar and the governor backed a successful – and very sneaky – effort in the Legislature to get rid of him.
In 1993, after years of wrangling, then-Gov. Pete Wilson and the Legislature modified the system to double the weight given to sales in the tax formula, which benefited California-based corporations.
A coalition of out-of-state firms led by the Gillette Co. sued, saying that changing the formula violated the 1974 multistate tax compact. and in 2009 legislators changed the formula again, giving corporations the option of using only sales as a factor, or the three-factor formula.
Three years later – after Brown had returned to the governorship – an appellate court declared that the 1993 change illegally violated the compact, and in response the Legislature formally withdrew from the compact.
Meanwhile, a 2012 ballot measure made sales the only factor in apportioning income, effectively raising state taxes on out-of-state companies and using the proceeds for energy conservation.
Last month, the state Supreme Court overturned the appellate court’s Gillette ruling, declaring that the state was not bound to follow the compact.
It appears to protect the state from refunding hundreds of millions, if not billions, of dollars to Gillette and other corporations.
However, Gillette plans to appeal to the U.S. Supreme Court, so an issue that confronted Brown when he first became governor in 1975 may still be unsettled when his second governorship ends 44 years later.