Minnesota could be on the hook for $700 million in refunds should it lose a case pending in state tax court.
The case, involving how multistate corporations calculate tax liability in Minnesota, is scheduled to be heard later this month.
The $700 million figure — which would be more than half the state’s annual corporate franchise tax collections and about 2 percent of its biennial general fund budget — was given in court papers in November by state Solicitor General Alan Gilbert, who is representing the state Revenue Department in an appeal brought by Dallas-based Kimberly-Clark Corp.
Even if Gilbert’s estimate is on the high side, the state’s potential liability is “a big deal,” said Richard Pomp, a professor at the University of Connecticut School of Law and a former consultant to the Multistate Tax Commission. “Whatever the actual dollars are, it’s a lot of money.”
Kimberly-Clark itself is asking for only $1.2 million plus interest, claiming in its 2013 appeal that it should have been able to use a different formula for calculating tax liability in 2007-09 that would have saved it money.
But Kimberly-Clark is a test case for seven other appeals from multistate corporate taxpayers that raise the same issue. The total sought in those eight cases is more than $27 million.
And Gilbert, in the November filing, told the court that the stakes could be higher.
Taxpayers had filed roughly $155 million in refund claims as of October, Gilbert said, and the state estimates claims for tax years up to and including 2012 “could be as much as $700 million.”
ALTERNATE FORMULA
Neither the Revenue Department nor attorneys for Kimberly-Clark, a maker of paper-based consumer products, agreed to talk about the case.
And it’s not getting much attention — even high-ranking lawmakers on tax-related committees in the House and Senate said they were unfamiliar with it.
The facts aren’t much in dispute. The conflict is over the validity of the state of Minnesota’s elimination in 1987 of an option for multistate businesses to use an alternate tax formula.
According to the state, Kimberly-Clark has no right to have its taxes calculated under a multistate formula that Minnesota abandoned in 1987.
The company claims that formula remained a viable choice for the years it’s seeking refunds.
As a member of the Multistate Tax Compact until 2013, Minnesota was required to allow businesses to choose the alternate formula, Kimberly-Clark says. States that enter into a multistate compact can’t just drop pieces of it they don’t like, the company argues. They’re either all in or all out.
The state counters that there’s nothing about being part of a multistate compact that means it gives up its sovereign taxing authority or forfeits its ability to modify law.
The compact was drafted in the 1960s after companies that had operations in multiple states started complaining they weren’t being treated uniformly.
“The states said to themselves, ‘We’ve got to really clean up our own act or the feds are going to do it for us, and whenever they get involved we don’t like it,’ ” Pomp said.
Under the compact, multistate businesses were allowed to choose whether to calculate their tax under the compact formula — which gave equal weight to sales, property and payroll — or to use whatever formula a state had in place.
At first, most states used the same formula the compact had, “so the election had no real significance in the early years,” Pomp said.
That changed over time, as states — including Minnesota — began to change their formulas to rely more on sales than on property or payroll. That benefited in-state businesses, which paid less tax as their workforce and plants began to count for less in the formula.
Minnesota phased in the change gradually and, as of 2014, now relies 100 percent on sales.
Minnesota became a member of the compact in 1983, but in 1987, it struck from its tax law the portion of the agreement that allowed businesses to elect the compact formula.
That meant in the state’s view, companies from then on would be required to use the state formula, which put greater weight on sales, increasing the tax on out-of-state companies.
In 2013, Minnesota dropped out of the compact altogether, in part over concern about a court of appeals decision in California ruling that Gillette was entitled to use the compact formula rather than California’s.
The compact currently has 15 member states plus the District of Columbia, according to the Multistate Tax Commission’s website. Commission officials did not return a call for comment on the case.
HEARING PLANNED
Minnesota is one of five states where similar cases are pending, Pomp said.
The Minnesota Tax Court has scheduled a hearing March 19 on motions from both sides for summary judgment.
In a sign of the case’s importance, all three judges will hear the case instead of one, said Dale Busacker, director for state and local taxes at Grant Thornton in Minneapolis and an adjunct professor in the Master of Business Taxation program at the University of Minnesota.
After oral arguments are finished and all briefs are in, the tax court has 90 days to issue a decision, Busacker said, but that likely won’t be the end of it.
“I assume that however the court rules in Kimberly-Clark, it will be appealed to our Minnesota Supreme Court and potentially also to the U.S. Supreme Court,” he said.
One state supreme court, in Michigan, has ruled on the multistate tax compact issue, holding last summer that IBM was entitled to use the compact’s formula for 2008 taxes. The state Legislature then repealed the compact retroactively to avoid paying what was estimated by the state to be $1.1 billion in refunds.
But it’s the California case, potentially headed to that state’s supreme court in the spring, that people will be watching, Busacker said.
“The big case is the Gillette case in California,” he said, “because if the California Supreme Court says that this is a binding compact among the states, and a state’s only option is to repeal it — they can’t try and supersede it — then that could have impact in Minnesota.”
Doug Belden can be reached at 651-228-5136. Follow him at twitter.com/dbeldenpipress.
AT A GLANCE
WHAT’S THIS ABOUT? Dallas-based Kimberly-Clark wants $1.2 million in tax refunds from the state of Minnesota, claiming it had the right to use a certain formula to calculate tax liability that the state says it did not.
SO WHAT? At least seven other similar appeals are pending, awaiting the outcome in Kimberly-Clark. The state says total refund claims could reach $700 million. At least four other states are facing similar claims.
WHAT’S NEXT? Oral arguments are March 19 at the Minnesota Tax Court. Any decision is expected to be appealed to the state Supreme Court.
