Minnesota: Court rejects apportionment using Compact election

Minnesota and apportionment using Compact election

The Minnesota Tax Court held that a taxpayer could not apportion its income to Minnesota using the Multistate Tax Compact’s evenly weighted three factor apportionment formula—in lieu of the more heavily weighted sales factor formula mandated by the Minnesota legislature.

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Summary

Minnesota lawmakers enacted the Multistate Tax Compact in 1983. Articles III and IV of the Compact provide that taxpayers have the option of using the UDITPA allocation and apportionment rules or of using state-specific apportionment provisions.

In 1987, Minnesota lawmakers repealed Articles III and IV, and enacted legislation requiring taxpayers to use a more heavily weighted sales factor (unless the taxpayer petitioned for and was granted permission to use an alternative apportionment formula).

The taxpayer filed original Minnesota tax returns using the more heavily weighted sales factor formula under Minnesota law. Several years later, the taxpayer filed amended returns applying the Compact’s evenly weighted three-factor formula, and requested a refund of approximately $1.2 million.

The Department of Revenue denied the refund, and the taxpayer filed suit in the state’s tax court, alleging that when the legislature enacted the Compact in 1983, from that point forward, it was contractually obligated to offer the Compact election and to refrain from using its sovereign power to repeal the election.

In reaching its decision, the tax court concluded that the legislature was not contractually obligated to furnish the election or to refrain from repealing the election.

 

Read a June 2015 report [PDF 68 KB] prepared by KPMG LLP: Minnesota Tax Court Rejects Compact Election

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