United States: Minnesota Tax Court Denies Use Of Multistate Tax Compact's Equally-Weighted Three-Factor Apportionment Formula Election

On June 19, the Minnesota Tax Court granted the Minnesota Commissioner of Revenue's motion for summary judgment and denied a taxpayer's election to use the equallyweighted three-factor apportionment formula provided in the Multistate Tax Compact.1 Minnesota adopted the Compact in 1983, but in 1987, Minnesota specifically repealed Articles III and IV, which provide for the equally-weighted three-factor apportionment formula election and the standard apportionment provisions contained in the Compact.


Kimberly-Clark and its subsidiaries are part of a unitary group that manufactures consumer products that are used around the world. Kimberly-Clark timely filed its Minnesota corporate franchise tax returns for the 2007-2009 tax years. Between 1989 and 2009, Kimberly-Clark apportioned its income to Minnesota using the required three-factor apportionment formula with sales weighed more heavily, pursuant to Minnesota statute.2 In 2013, Kimberly-Clark amended its returns for the 2007-2009 tax years and elected to utilize the equally-weighted three-factor property, payroll, and sales apportionment formula as provided under Articles III and IV of the Compact as it existed in Minnesota law prior to 1987, and requested a refund in the total amount of $1,205,749 in tax, plus interest.

Minnesota adopted the Compact in 1983, codifying the terms of the Compact in Minn. Stat. Sec. 290.171. Under Articles III and IV of the Compact, taxpayers are provided with the option to elect the use of an equally-weighted three-factor payroll, property, and sales factor apportionment formula, as well as the standard apportionment provisions contained in the Compact. In 1987, Minnesota amended its version of the Compact, repealing Articles III and IV.3 At that time, the apportionment formula applicable for purposes of the Minnesota corporation income tax required weighting the sales factor at 70 percent, with the property and payroll factors each weighted at 15 percent. Between the 2007 and 2014 tax years, Minnesota phased in the use of single sales factor apportionment.4 In 2013, Minnesota repealed the Compact in its entirety.

The Commissioner denied Kimberly-Clark's refund claims, and Kimberly-Clark timely appealed to the Minnesota Tax Court. No issues of material fact were in dispute, only issues in application of the law. As such, the Commissioner and Kimberly-Clark both filed for summary judgment.

Kimberly-Clark took the position that Minnesota may not unilaterally repeal Articles III and IV of the Compact as this action violated the Federal Compact Clause, the Contract Clause contained in the U.S. and Minnesota Constitutions, and was an invalid unilateral modification of the Compact. It was Kimberly-Clark's position that under the Compact as adopted by Minnesota, if Minnesota did not want to comply with the provisions of the Compact, it was required to enact a statute to repeal the Compact in full.5 Although Articles III and IV of the Compact were repealed in 1987, it was Kimberly-Clark's position that because Minnesota did not repeal the Compact in full until 2013, Minnesota remained bound to allow taxpayers the election to use the provisions of Articles III and IV for tax periods prior to the 2013 repeal date.

The Department argued that since Articles III and IV of the Compact were repealed in 1987, taxpayers were no longer allowed to make the election to utilize an equally-weighted three factor apportionment formula. Additionally, under a provision contained in the Minnesota Constitution, "[t]he power of taxation shall never be surrendered, suspended or contracted away" and therefore, Minnesota could not surrender its power to tax under the Constitution.6 The Department also relied on the U.S. Supreme Court's decision in U.S. Steel Corporation in which the Supreme Court held that Compact member states retain the freedom to adopt or reject rules and regulations of the Commission.7 The Department rejected Kimberly-Clark's claim for refund and took the position that Minnesota has the freedom to repeal provisions contained in the Compact. The case was heard before all three judges of the Minnesota Tax Court.

Application of Compact Clause

Based on its application of the law, the Tax Court granted the Commissioner's motion for summary judgment. Summary judgment is proper when there are no genuine issues of material fact shown through the pleadings and the record in the case.8 Because the parties filed cross-motions for summary judgment, the Court determined there were no issues of material fact.

In evaluating Minnesota's repeal of Articles III and IV of the Compact, the Tax Court first looked at the Compact Clause of the U.S. Constitution. The Compact Clause states: "No State shall, without the Consent of Congress ... enter into any agreement or compact with another State ...."9 The clause's literal interpretation was rejected by the U.S. Supreme Court, which held that the, "application of the Compact Clause is limited to agreements that are directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States."10 Since Congress was not required to approve the Multistate Tax Compact, the Tax Court said that the Compact is to be construed as state law.

The Tax Court looked at the interpretation of the Compact as a statute versus a contract. Statutes are interpreted to, "ascertain and effectuate the intention of the legislature."11 Alternatively, contracts are interpreted to "ascertain and enforce the intent of the parties."12 The Tax Court stated that it assumed that the Compact created binding obligations for Minnesota because it was a contract, rejecting the Commissioner's claim that the Compact is a model law with only advisory effect.

Application of Unmistakability Doctrine

Considering the Compact as a contract, the Tax Court then considered the application of the unmistakability doctrine in order to determine whether the state's sovereign powers were constricted by the contract. Under the unmistakability doctrine, sovereign powers remain intact unless surrendered in unmistakable terms.13 The Court stated that there was a clear-statement requirement to satisfy the unmistakable doctrine test because "[s]tates rarely relinquish their sovereign powers, so when they do we would expect a clear indication of such devolution ...."14 The Tax Court rejected Kimberly-Clark's argument that the unmistakability doctrine does not apply to the Compact. In fact, the Tax Court agreed with the notion that interstate compacts actually exemplify implementation of the unmistakability doctrine. The Tax Court also rejected Kimberly-Clark's position that the Compact contained language prohibiting Minnesota from separately repealing Articles III and IV without repealing the entire Compact. The Tax Court pointed to Article IX of the Compact, dealing with arbitration, as a section of the Compact that in contrast to Articles III and IV, had specific language binding states to that section. As a result, the Tax Court held that because there was no language in the Compact as adopted by Minnesota stating that the specific provisions of Articles III and IV of the Compact could not be altered or repealed, Minnesota retained the power to repeal the provisions of Articles III and IV without repealing the Compact in its entirety.

The Tax Court also considered whether the withdrawal provisions contained in Article X(2) of the Compact satisfied the unmistakability doctrine and would require the state to repeal the Compact in whole. The Tax Court determined that while the withdrawal provision provided guidance on how a state could withdraw from the entire Compact, this provision did not explicitly provide that a state was surrendering its sovereignty with regards to making changes to the Compact.

Historical Treatment of States Repealing Provisions of Compact

Additionally, the Tax Court examined the history of the Compact and determined that the Compact drafters would not have intended to relinquish state sovereign authority and contract away the states' taxing powers, as the drafters were state tax officials and attorney generals. This was the case even though the general purpose of the Compact was an increase in state uniformity and a reduction in the risk of Congressional intervention in this area. In the Tax Court's view, the history surrounding the states' course of performance under the Compact, which allowed for significant departures from Articles III and IV of the Compact by states without requiring full withdrawal from the Compact, also supported the notion that state sovereign authority was not surrendered.15

The Tax Court also noted that, when Minnesota adopted the Compact in 1983, the state did not consider itself bound to enact the Model Act version of the Compact. When Minnesota enacted the Compact in 1983, the nonbusiness income portions of the Compact were clearly omitted. The Tax Court concluded that this action manifested the Minnesota legislature's "understanding that member States were free to adopt or alter the Compact's allocation and apportionment provisions as they saw fit."

The Tax Court concluded that Kimberly-Clark did not carry its burden to prove that the repeal of Articles III and IV of the Compact in 1987 was unconstitutional and therefore granted the Commissioner's motion for summary judgment.16 Assuming that Kimberly- Clark will appeal this decision by the Tax Court, their appeal will be made directly to the Minnesota Supreme Court.


Taxpayers have brought similar cases in California, Oregon, Texas and Michigan asserting their right to make an election under the provisions of Article III of the Compact to use the equally-weighted three-factor apportionment formula. Interestingly, the Tax Court briefly addressed the Michigan litigation, focusing on the Michigan Supreme Court's dissenting opinion which stated that the Compact created no contractual obligation to adhere to Articles III and IV of the Compact.17 The Tax Court noted that since the Michigan Supreme Court determined that Michigan had not repealed the Compact when its decision was issued, and because the Compact's election provision was in effect during the year at issue in the litigation, the majority had no reason to analyze whether the Compact contractually obligated the state not to alter Articles III and IV of the Compact.

However, the history of the Compact in Minnesota presents different factual issues from the cases that are being litigated in these other states because, back in 1987, Minnesota repealed Articles III and IV of the Compact which contained the provision allowing taxpayers to elect to use the equally-weighted three-factor apportionment formula. As a result, Kimberly-Clark had a difficult and heavy burden to convince the Tax Court that it needed to restore the provisions of Articles III and IV which had been repealed in 1987.

This decision by the Tax Court represents a significant victory for the state because the attorney for the state had advised the Tax Court that a decision against the state would require the state to potentially pay $700 million in refunds to similarly situated taxpayers who would file amended returns electing the use of the equally-weighted three-factor apportionment formula. The Tax Court did not reference this statement in its opinion.


1 Kimberly-Clark Corp. v. Comm'r of Revenue, Minnesota Tax Court, File No. 8670-R, June 19, 2015.

2 MINN. STAT. § 290.191, subd. 2.

3 See Act of May 28, 1987, ch. 268, art. 1, § 74, 1987 MINN. LAWS 1039, 1098-112, 1156.

4 Id. at § 75, 127, 1987 MINN. LAWS 1039, 1112-19, 1156.

5 MINN. STAT. § 290.171, Article X(2) (1983 Supp.).

6 See MINN. CONST. art X, § 1.

7 See U.S. Steel Corp. v. Multistate Tax Commission, 434 U.S. 452, 473 (1978).

8 Minn. R. Civ. P. 56.03.

9 U.S. CONST. art. I, § 10, cl. 3.

10 U.S. Steel, 434 U.S. at 471.

11 MINN. STAT. § 645.16 (2014).

12 Valspar Refinish, Inc. v. Gaylord's Inc., 764 N.W.2d 359, 364 (Minn. 2009).

13 See generally United States v. Winstar Corp., 518 U.S. 839 (1996).

14 Tarrant Regional Water Dist. v. Herrmann, 133 S. Ct. 2120, 2133 (2013).

15 As an example, the Tax Court cited to Florida's repeal of Articles III and IV of the Compact only five years after joining as a founding member of the Compact, yet Florida continued to be treated as a member of the Compact. The Tax Court also pointed to Minnesota's continuing treatment as a member to the Compact after the 1987 repeal of Articles III and IV.

16 While all three justices of the Tax Court found in favor of the Department, the Chief Justice concurred specially to state her disagreement with section III of the Tax Court's decision. The Chief Justice pointed to mischaracterizations of the taxpayer's position as stated in the taxpayer's actual submissions to the Tax Court.

17 International Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014), reh'g denied, 855 N.W.2d 512 (2014). Note that following Michigan's subsequent enactment of legislation that retroactively repealed the Michigan statutes adopting the Compact effective January 1, 2008, the Michigan Court of Claims denied the taxpayer's election to use the equally-weighted threefactor apportionment formula provided in the Compact. International Business Machines Corp. v. Department of Treasury, Michigan Court of Claims, No. 11-000033-MT, April 28, 2015.

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