In a decision issued late last year in Graphic Packaging Corporation v. Hegar, the Texas Supreme Court affirmed a lower court ruling that the Texas franchise tax is not “an income tax within the (Multistate Tax) Compact’s meaning.”
Following similar decisions by state supreme courts in Michigan, Minnesota and California that the Multistate Tax Compact, or MTC, is more akin to a uniform law than an interstate compact, the Texas Supreme Court ruled against Graphic Packaging’s contention that the MTC is an interstate compact that binds the Texas Legislature. The court concluded that the MTC is a nonbinding uniform law and that the tax formula in the Texas statute is law.
“I’m not surprised the Texas court followed all of the other state supreme courts, disappointed but not surprised,” said Jeff Litwak, the general counsel for the Columbia River Gorge Commission.
The Multistate Tax Compact was created in the 1960s in an effort to promote uniformity among the states in the assessment and collection of interstate corporate taxes. However, over the years, adherence to uniform provisions of the compact has broken down as some member states have begun to adopt conflicting statutes.
The MTC could be viewed as a case study for all compact commissions as it highlights both the importance of continually educating state policymakers, the compact’s original intent, the importance of uniformity and the binding nature of compacts.
“Florida was first to repeal the uniform formula from its MTC enactment, and the tax commission allowed that to happen because Florida had other statutes that allowed the same formula,” Litwak said. “But then all the other states said if Florida gets to repeal the compact’s apportionment formula, we are going to also. The tax commission should have enforced the compact and required the states to ensure they were allowing the compact’s formula. Instead, the tax commission allowed the states to kill the uniform standard, one of the basic elements of the compact.”
Litwak also noted his concern with the recent spate of MTC decisions. “Overall, if these multistate tax compact cases are really limited to just the multistate tax compact, that’s fine. Because compact law is based on pulling together decisions involving multiple compacts, there is high risk that these decisions will upset the binding nature of compacts and thus the whole compacting system, and it is going to take a heck of a lot more work to undo the damage from these cases than it took to actually do the damage.”
Rick Masters, special counsel for the National Center for Interstate Compacts at The Council of State Governments, does see some bright spots in the recent Texas decision.
“I’m comfortable that we can rely upon this decision as recognition by the court that there is a distinction between a model law and a compact.”
Masters also noted that unlike the California Supreme Court’s decision in The Gillette Company, et al. v. Franchise Tax Board, the Texas court in this case clearly recognizes that an interstate compact, regardless of congressional consent, does have constitutional protection under the contract clause
“It is an important point that you have a state supreme court holding that the contract clause of the U. S. Constitution protects interstate compacts from impairment by unilateral action by a state through the enactment of a conflicting statute,” Masters said. “To have a state supreme court decision which emphasizes this compact law principle is significant. The U. S. Supreme Court has recognized this crucial aspect of compacts, but Gillette was not as clear about it.”
In a statement from the Texas Office of the Comptroller of Public Accounts, Comptroller Glenn Hegar said the “decision prevents a significant potential revenue loss to the state, and confirms the comptroller’s position that the Texas Legislature acted within its constitutional power. … The Court further held this tax code provision does not violate the Compact Clause of the United States Constitution because the Multistate Tax Compact is not a binding regulatory compact.”
Despite the Texas ruling, this matter isn’t over yet. The Oregon State Supreme Court heard oral arguments in another MTC case, Health Net, Inc. v. Department of Revenue in 2016. A decision is expected sometime this year.
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