The Final Nail in the Multistate Tax Compact Coffin

DALLAS, April 16, 2018 /PRNewswire/ -- On April 12, 2018, the Oregon Supreme Court issued its opinion in Health Net Inc. v. Dep't of Revenue.¹ Unsurprisingly, the court found in favor of the state and upheld the denial of a refund based upon the taxpayer electing to use an equally weighted three-factor apportionment formula. 

The court based its finding on the conclusion that the Multistate Tax Compact (MTC) did not create a binding contract with other states when enacting the alternate apportionment formula. The majority opinion relied on the U.S. Supreme Court holding in the U.S. Steel Corp. case.² While that decision did not involve apportionment issues, the court held that the MTC was not a binding contract. The California decision in Gillette³ and the Minnesota decision in Kimberly-Clark⁴ were also relied on in the analysis by the Oregon Supreme Court. The court found both of those cases persuasive in reasoning that the MTC did not give rise to a contractual obligation. In its analysis of the Oregon standard to consider the MTC a binding contract, the court found that the Legislature in enacting the MTC must have clearly and unmistakably expressed its intent to create a contract. 

Three of the Oregon Supreme Court justices entered a concurring opinion in which they agreed with the result, but on differing grounds. The concurring opinion found that while the MTC might have been a binding contract, the taxpayer was not entitled to relief under the contract, as it was not a party to the contract. These justices relied on the Texas Supreme Court decision in Graphic Packaging.⁵ The Texas court determined that the taxpayer was not unmistakably made a contractual party to the MTC's apportionment provision. 

Unless the taxpayer appeals to the U.S. Supreme Court, this decision effectively puts the final nail in the coffin for the position that a taxpayer may elect to apportion its income under Article IV using an equally weighted three-factor formula. It is unlikely that the taxpayer will appeal, in that the U.S. Supreme Court has denied a review of both the California Gillette and the Minnesota Kimberly-Clark cases.

¹ Health Net, Inc. v. Dep't of Revenue, Oregon Supreme Court, 4/12/18, Doc. 2018-16123.
² U.S. Steel Corp. v. Multistate Tax Comm'n, 434 US 452 (1978).
³ Gillette Co. v. FTB, 62 Cal 4^th 468 (2015).
⁴ Kimberly-Clark Corp. v. Comm'r of Revenue, 880 NW2d 844 (Minn. 2016).
⁵ Graphic Packaging Corp. v. Hegar, 538 SW3d 89 (Tex. 2017).

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