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January 22, 2015
Minnesota Estimates Compact Cases Could Cost State $700 Million in Tax Refunds
by Amy Hamilton

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Minnesota estimates that the state would face the prospect of refunding nearly $700 million in taxes before interest -- or more than half of the state's corporate franchise tax collections in a single year -- if out-of-state taxpayers prevail in asserting the right to apportion their business income using the Multistate Tax Compact's formula.

Solicitor General Alan Gilbert cited the aggregate figure in a memorandum of law filed in the Minnesota Tax Court in support of the Department of Revenue in the lead compact election case in the state, Kimberly-Clark Corp. v. Commissioner of Revenue .

The Minnesota estimate is not far off the projected $1.1 billion in tax refunds plus interest that Michigan's attorney general and solicitor general said the state would owe to out-of-state corporate taxpayers as a result of the Michigan Supreme Court's July decision in favor of IBM in another compact case, International Business Machines Corp. v. Dep't of Treasury. In response, Michigan in September 2014 retroactively repealed the compact from the state's code to avoid paying the refunds.

According to Gilbert, the Minnesota DOR only recently started receiving refund claims from out-of-state corporations asserting the ability to apportion their income based on the compact's evenly weighted three-factor formula. Kimberly-Clark Corp. itself didn't file amended returns and refund claims until 2013, for example. As of October 16, 2014, business taxpayers had filed an estimated $155 million in refund claims with the department, Gilbert said, adding that the state projects refund claims for tax years up to and including 2012 could be as much as $700 million.

The revenue department is denying the refund claims, arguing that out-of-state taxpayers do not have the ability to elect to use the apportionment formula in the Multistate Tax Compact. Minnesota enacted the compact in 1983, but then in 1987 -- more than a quarter century ago -- repealed the compact's Article III election provision and Article IV apportionment formula because of concerns about the state's ability to mandate the use of any one apportionment formula.

The Minnesota compact cases depart from similar litigation in Michigan, California, Oregon, and Texas regarding how long ago the state unilaterally amended those key compact provisions in its code. While Minnesota officials believe the Legislature properly repealed the articles in 1987, the state withdrew from the compact entirely in 2013 to avoid even the possibility of taxpayers asserting refund claims in future years based on compact articles III and IV.

Kimberly-Clark, meanwhile, is arguing that Minnesota's attempt to repeal articles III and IV violates the federal compact clause as well as federal and state contract clauses. The company also argues that repealing some provisions of the compact from a state's code amounts to an invalid unilateral modification of an interstate compact.

In addition to Kimberly-Clark, seven other businesses have filed appeals in the Minnesota Tax Court. According to the court, the companies are seeking a combined $27 million in refunds in those eight cases alone. The court has stayed proceedings in the other compact cases pending a final judicial resolution of Kimberly-Clark.

In a January 16 order, the tax court repeatedly referred to the significance of the compact cases in Minnesota and across affected states. For example, while the revenue commissioner is routinely represented at the tax court level by an assistant attorney general rather than the solicitor general, "the Compact Cases are sufficiently important that the Solicitor General has filed a notice of appearance in this case," the court said.

In another development that the tax court acknowledged is relatively rare, all three judges will hear and decide Kimberly-Clark.

States created the Multistate Tax Compact in the late 1960s in response to the then-imminent threat of federal preemption of state taxing authority. One of the issues attracting the attention of federal lawmakers at that time had been the conflicting apportionment formulas used by individual states and applied to out-of-state corporate taxpayers. In court, taxpayers are arguing that one of the central purposes of the compact was to provide some baseline uniformity by allowing an out-of-state taxpayer to apportion its business income to a member state using either the state's own apportionment formula or the one provided in the compact. This election provision allows out-of-state taxpayers to avail themselves of uniformity among the taxing schemes of different member states, even when those states adopted alternative apportionment formulas, the taxpayers argue.

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