For business entities operating in multiple states, apportioning corporate tax can be difficult. Every state has different rules. This is especially true when dealing with California.

While California has a “single-factor” (sales) apportionment that can be used, there’s also a “three-factor” apportionment that uses sales, property and payroll. Back in 1993 the legislature said that when using the three-factor apportionment, the weight of the sales factor is doubled.

There’s a problem with that, though: California signed a multi-state compact that said the factors would be weighed equally. Several businesses sued the state. While the lawsuit was thrown out at the district court level, the 1st District Court of Appeal ruled unanimously that the businesses, led by Gillette, were correct. California must abide by the agreement because to not do so would be to break a contract.

I expect the Franchise Tax Board to appeal the case to the California Supreme Court.