On June 22, 2016, the Minnesota Supreme Court (Court) issued its opinion in Kimberly-Clark Corporation & Subsidiaries,¹ upholding the tax court's ruling that the Legislature's repeal of the Multistate Tax Compact's (Compact) apportionment election provision and apportionment formula (Articles III and IV of the Compact, respectively) is constitutional. As such, Kimberly-Clark is not entitled to a refund of corporate income tax based on the use of the Compact's equally weighted three-factor apportionment formula, rather than the state's standard formula, which resulted in a more heavily weighted sales factor formula in this case.

Kimberly-Clark Corporation, a multistate corporation, filed amended returns for its 2007, 2008 and 2009 tax years claiming that the Minnesota Legislature's 1987 repeal of Articles III and IV of the Compact, which it had enacted in 1983, was ineffective because the state had contractually obligated itself to furnish the apportionment election until it fully withdrew from the Compact in 2013. The Minnesota Commissioner of Revenue disagreed, arguing that the Compact is only advisory because it does not meet the criteria for a binding contract as set forth in Northeast Bancorp.²

In ruling in favor of the state, the Court rejected Kimberly-Clark's argument, finding it lacked legal support. Specifically, the Court noted that "[t]he state is not bound by the passage of a law unless named therein, or unless the words of the act are so plain, clear, and unmistakable as to leave no doubt as to the intention of the legislature." Even if the Court were to assume that the state undertook a contractual obligation, it nevertheless found the obligation invalid, stating that, regardless of the Compact's language, the State is constitutionally barred from surrendering, suspending or contracting away its power to amend or repeal a tax.

The Court further held that, under the unmistakability doctrine, which "is a rule of contract construction that provides the sovereign powers of a state cannot be contracted away except in 'unmistakable' terms,"³ the State made "no unmistakable or express promise surrendering [its] legislative authority in section 290.171 as enacted in 1983." The Court determined that, while the statute allowed a member state to withdraw from the Compact by enacting a statute repealing the Compact, nothing in the statute required the state to be bound by the Compact's term until it withdraws. The Court found the statute, at best, is silent on this issue, noting, however, that "neither silence nor ambiguous terms in a contract will be construed as effecting a waiver of sovereign authority."

Lastly, the Court said that it could not conclude that the directive in Article XI to implement the Article III election represented an unmistakable, clear promise to allow taxpayers to use the Compact's evenly weighted apportionment formula until the State withdrew from the Compact.

Implications

We are unaware as to whether the taxpayer intends to appeal this decision to the US Supreme Court. Currently, the US Supreme Court is being asked to consider the California Supreme Court's ruling in Gillette, in which the California court held that corporate taxpayers cannot elect to use the Compact's apportionment formula because the Legislature's enactment of a new apportionment formula controls, and that the state is not bound by the Compact election.⁴

Regardless, taxpayers seeking to preserve their rights under the Compact election in Minnesota, as well as other states in which the repeal of the election is being challenged, should consider their procedural options until all appeals have been exhausted (i.e., until the U.S. Supreme Court acts by denying certiorari or grants certiorari and issues an opinion).

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ENDNOTES

¹ Kimberly-Clark Corporation & Subsidiaries vs. Commissioner of Revenue, A15-1322 (Minn. S. Ct. June 22, 2016).

² Northeast Bancorp, Inc. v. Board of Governors of Federal Reserve Systems, 472 U.S. 159 (1985).

³ The Court cited the U.S. Supreme Court decision in U.S. v. Winstar, 518 U.S. 839, 874 (1994); and the Minnesota Supreme Court in State v. Phillip Morris 713 N.W. 2d, 350, 359 (Minn. 2006) in describing this doctrine.

⁴ For more on the ruling in Gillette, see Tax Alert 2016-24.