GILLETTE COMPANY v. FRANCHISE TAX BOARD

Respondent’s Opening Brief on the Merits

Cal.April 17, 2013

Jn the Supreme Court of the State of Caltfornia The Gillette Company & Subsidiaries, Plaintiffs and Appellants, v. California Franchise Tax Board, an Agencyof the State of California, Defendant-Respondent. Case No. 8206587 First Appellate District Division Four, Case No. A130803 San Francisco County Superior Court, Case No. CGC-10-495911 The Honorable Richard A. Kramer, Judge SUPREME COURT FILED OPENING BRIEF ON THE MERITS KAMALAD. HARRIS APR 1 7 2013 Attorney General of California SUSAN DUNCAN LEE Acting Solicitor General KATHLEEN A. KENEALY Frank A. McGuire Clerk Deputy Chief Assistant Attorney General PAUL D, GIFFORD Senior Assistant Attorney General W. DEAN FREEMAN Supervising Deputy Attorney General Lucy F. WANG Deputy Attorney General State Bar No. 199772 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-7004 Telephone: (415) 703-5202 Fax: (415) 703-5480 Email: Lucy.Wang@doj.ca.gov Attorneysfor Defendant and Respondent Franchise Tax Board TABLE OF CONTENTS Page ISSUES PRESENTED. 1... ccccececcsetsseecccnscscseescuceevesseusessstsessgenssauavesevess 1 INTRODUCTIONQu... ccccccccccccsccsecececcersvssseveveccesescsseueevsvsesceseseesusaceessuvseeecesa 2 STATEMENT......ccccccccccccsssesssccscesssccsccaccaceaceccscssecscescsevsccnccsesecacsuscaeraseaseaeers 3 1, CALIFORNIA TAX LAW USES A FORMULA TO APPORTION THE INCOME OF MULTISTATE TAXPAYERS, visccccsssscccnveccescscecsesscccussensescececsensveseusecenerspersesssenss 3 II. THIRTEEN OTHER COMPACT STATES HAVE ALSO . ADOPTED CHANGES IN THE COMPACT——SIMILAR TO THE 1993 AMENDMENT OF REVENUE AND TAXATION CODE SECTION 25128—To ESTABLISH ALTERNATE MANDATORY APPORTIONMENT FORMULAS. ...ccccccssscssceceneeees 5 II]. HISTORY OF THE PRESENT LITIGATION.......ciccccssccecceestseeesoees 8 ARGUMENT 1... cccccccccsssssssssssssssesssvecesccssqecsssesseceesecusuessuececeseeeeeuseusessevseeesens 9 I, AMENDEDSECTION 25128 WAS EFFECTIVE To OVERRIDE THE COMPACT’S ELECTION PROVISION,......ccce0008 9 II. THE LEGISLATURE'S 1993 AMENDMENT OF REVENUE AND TAXATION CODE SECTION 25128, ESTABLISHING AN ALTERNATE MANDATORY DOUBLE-WEIGHTED SALES-FACTOR FORMULA, DID NOT CONFLICT WITH THE COMPACT....ccccsssssscccscscrcccuccvseesvessesecenecessecseessuseusteesssesss 10 A. The MemberStates Intended The Compact To Provide Them The Power And Authority To Override The Election And Apportionment PLOVISIONS........ccscecccsesesecsccssscccrsescsscesseescssensseessesaanness 11 B. Any Surrender OfA State’s Broad Sovereign Authority To Impose The Tax LawsOfIts Choice Must Be Expressed In Unmistakably Plain Language. .....ccceeecessscescsesseserseetsssereeesssesseesees 15 Ill. THE COURT OF APPEAL ERRONEOUSLY RELIED UPON LAW THAT APPLIES TO CONGRESSIONALLY APPROVED COMPACTS...ccccccccscsceccucesesvescessecuenavsesessesesegenvessecseseuuenaseeuanens 18 IV. THERE WAS NO UNCONSTITUTIONAL IMPAIRMENT OF A CONTRACTUAL OBLIGATION. ...cscccsssccsceusescessnsceeressesenssees 19 TABLE OF CONTENTS (continued) Page A. Amended Section 25128 Is Not A Substantial Impairment OfA Contractual Relationship.............. 19 B. Amended Section 25128 Had A Significant And Legitimate Public Purpose.........cceseeesseeerseens 23 C. Amended Section 25128 Was Reasonable And APPLOPTlate. occeesseeecerssesseseesssesssseeneeereseeseesesessseens 24 V. AMENDEDSECTION 25128 DOES NOT VIOLATE THE REENACTMENT RULE.....c:scescesseccesennsnenssesececeeseneeeetersessceseenes 25 CONCLUSIONuu. ccccssesscsssecssecseccssesseesseeaecsaseseeereessssssassseseseteneesseesseeenentes 29 ii TABLE OF AUTHORITIES Page CASES Alabama v. North Carolina (2010) _—iUS. [130 S.Ct, 2295, 176 L.Ed.2d 1070, 1091]... 11 Allied Structural Steel Co, v. Spannaus (1978) 438 U.S. 234 iicccccescssssecenccsesesserseenssessseeseresessceneeserseesesseesseeesaeenes 19 Amana Society v. Colony Inn, Inc. (Lowa 1982) 315 NW2d 10] .scccsesceseterseseseneseseneneeesseaesssesseseseeeesetees 23 American Lung Association v, Wilson (1996) 51 Cal.App.4th 743 oo. cesssesescesscnressseesneeseeessseenecneesesseseneeress 28 Bailey v. North Carolina (1998) 348 N.C. 130 acceeecnsneeseenssesseseesessscssrevessessesaseessseesereeseneserees 21 Brosnahan v, Brown (1982) 32 Cal.3d 236 viseccsserssssrsererssessssesesnssssesesssstscsenesensecssetesenenes 26, 27, 28 Casella v. SouthWest Dealer Services, Inc. (2007) 157 Cal.App.4th 1127cieeeescssesrscesesessensscsseessessesiscsseneeersesans 26 City ofAtascadero v. Merrill Lynch, Pierce, Fenner & Smith (1998) 68 Cal.App.4th 445icsecessesrseseeseseereersesseseesesssenersasseneataseeee 13 City ofEl Paso v. Simmons (1965) 379 U.S. 497 cccecsssssssssssesssssssessscessaesecsevessgnesetaesenetseneeersseetseasneerves 23 Corwin v. Los Angeles Newspaper Service Bureau, Inc. . (1978) 22 Cal.3d 302 vcecscscccsecsecsesesrerssseseeeeaecasrseneseacessesseseressreraeessenees 13 Doe v. Ward (W.D. Pa. 2000) 124 F.Supp.2d 900...eeeeeecnetssssessssecssesessssesserenerens 19 Energy Reserves Group, Inc. v. Kansas Power & Light Co. (1983) 459 U.S. 400.cscctessensenesnscneeseessecreessesesessseresseesssensseessaseaseesntes 19 Erie R. Co. v. Pennsylvania (1875) 88 U.S, 492.cscscsseeeesestscsecsessseseeeseeesessesaessepeesseeseessereecneesreats 15 iit Fireman’s Fund Ins, Co. v. Maryland Casualty Co. (1994) 21 Cal.App.4th 1586 occeesessseenersereeenereeeseessessesssenseeasassenenesses 20 Fourth La Costa Condominium Owners Assn. y. Seith (2008) 159 Cal.App.4th 563 oocccssecceesseeeceneesesensessesessestrssetsssestsssesseneas 24 General Motors Corp. v. Romein (192) 503 ULS. 18]cecccsesccseereseeseersenersseesnessesssessessessssnsevseseseseeees 20, 21 Green v, Biddle (1823) 21 U.S. Lic cccccessesseenecsseseeesesesersessessseessnesseesesseesirssssssnsessuseseeesseens 19 Hellman v. Shoulters ; (1896) 114 Cal. 136 wc ceesecseeseteesenseeesecsneesertecseseasennesssseneassesensasees 25, 27 Hermosa Beach Stop Oil Coalition vy. City ofHermosa Beach (2001) 86 CalApp.4th 534 ocisssessersnsrsssssessssscsersessesstessseseenesenes 19, 24 Int'l Union ofOperating Eng'rs, Local 542 v. Del, River Joint Toll Bridge Comm'n (3d Cir, 2002) 311 F.3d 273asesssssesesssssssevsensesersseeessensesecnseesseseessereseenes 11 Interstate Marina Development Co. v. County ofL.A. (1984) 155 Cal.App.3d 435 co sccsscsssseesscstecssessresererserscsssestesessteasseneees 24 Kaufman & Broad Communities, Inc. y. Performance Plastering (2005) 133 Cal.App.4th 26 iecccscssseseessscnscsessresecssessassscesseseesesenes 26 Lennane vy. Franchise Tax Bd. (1994) 9 Cal4th 263 oo ccccsssesssessesssssesesssersesesrssseseesssereseessssseseeseessess 12 Linton by Arnold v. Commissioner ofHealth & Env't (1995) 65 F.3d 508... ccceseceseceeereeneeeceeeecensssseneeesseseessaeessersssessesneegees 23, 24 Louisville Water Co. v. Clark (1892) 143 ULS. Linsecsestseeeseeessessseessecsesesssscesssesesessesseeeesesseeererensenensenes 15 Mariani v. Price Waterhouse (1999) 70 Cal.App.4th 685 occcesscsssscestesserssrerestesiessesseeseesrerssensers 20 Maryland State Teachers Assn., Inc. v. Hughes supra, 598 F.Supp. at pp. 1360-1361 osceesceseessenecsseseeeeseeneetresrseesesees 22 Maryland State Teachers Assn., Inc..v. Hughes (D.Md, 1984) 594 F, Supp. 1353. ccccecsessercseseeseseeseeteerssenesseeneeeeneenee 21 McComb v. Wambaugh (3rd Cir, 1991) 934 F.2d 474 oocssssscesssevscssceessecseeressecsenssssersessssserenes 10 iv Mobil Oil Corp. v. Rossi (1982) 138 CalApp.3d 256 vo iccsssessecscsessceesseerseeteessrscessssssssseseseneseneegs 22 Northwestern States Portland Cement Co. v. Minnesota (1959) 358 ULS. 450. eeecssnscsseceecsesssscssteersaseneeesesesrerersasesssesersnanesssennenes 4 People v. Coleman (1854) 4 Cal. 46 iecccccessstscneensreessenesteeneeteeseesssaseasenecesatenssarenesieenees 15 Picchione v. Commissioner ofInternal Revenue (Ast Cir, 1971) 440 F.2d 170.cccccecnceesneerseeeseseesesereessesseseseseenessetes 22 Railroad Co. v Peniston (1873) 85 U.S. 2 iccccscssesscsssescssssesssssessessecteseesseseeessseesaeessseeseestessasesesaseas 15 Ryan v. State (1936) 188 Wash. 115... .ccesssesssssseeseseseeteneseseeneneneaseennsseseesecnnenensssvaseees 15 Standard Oil Co. v. Johnson (1938) 10 Cal.2d 758 ooecccecseensesessseseevsescrscessstessssssssssasseresssserer LO Texas v. New Mexico (1983) 462 U.S, S54. eeecesessscssesetsesneessseesssecseernaressaeeveneeceneeneesenetesesenees 18 U.S. Steel Corp. v. Multistate Tax Commission (1978) 434 US. 452.cccccsectcsetneeeeeesssenestesenesesseenenssesseseeseesnncsesseesees 4,10 U.S. Trust Co. v, New Jersey (1977) 431 US. Liccececcscccssssecessecescesssscscsesssssseceseneeeeseneesesaeseesenetevsensens 19, 21 U.S. v. Winstar Corp. (1996) 518 U.S. 839...eee ssceeseseteeeecenessetesenereseaseneeseesagssesseseasaeereens 16, 17 United States v. Carlton (1994) 512 U.S. 26... ceeecccesecssenscsssseesecsesssssscsesseseecsserseseeseestsesesenessevanenees 22 United States v. State Water Resources Control Board (1986) 182 Cal.App.3d 82 wceecccccsessseeeesseeetsensesnensseesseseesarsensssseeereaee 22 Valdes v, Cory (1983) 139 Cal.App.3d 773 cc ceccscsccscsecsenecressersesssesssereseiseessssseesersassenees 22 White v. State (2001) 88 Cal.App.4th 298 oocesencerceeseereeseenessesssssasresenseeseessesnenneere28 STATUTES AlaskaStat. § 43.20.07 Li. cecsscccsssssesesesseccssesecesssseesseceacsecseceseeeeesscessevgeessesseeessseaaeeveesneees 7 § 43.20.0772... cccccsesssssccsssesecsssssrcsscssessecsecsssseeeseceaeesecesansaeensessesseesecceeessareraees 7 Ark. Code Ann. § 26-S-1OLee eesessessseccssessseseescescesestnesserecseessessasesaseesessaessesansasenessaaecntenees 7 § 26-51-709 .ccescccsssssccssserscssscsessscscessnseeteeseessserseesseessessnesseesseesesenanensaseneens 7 California Civil Code, § 1559iccessesssereresesriessesenesenersesssessnsentserensatsnsees 20 California Revenue & Taxation Code S Q51OLrc ceccsccscstectsseessessecssscessessersesesseeesseenesseenesseessserseeerseesessevaveaeacsesseeass 4 §§ 25120-25139 aiesccccscssccesecssetsssessaseesssscnseseseressesensseaeesseenspaseaeeaseevsaetaeees 4 SSL8eccceetceseeesseeetseesteeeneecseteesesseseeseesseseesseneneusenescenesssaeeneeesees sedpassim § 25128 (A) ccrcorssssscssesesesserseseesscserssecsnecsenesecsseeseeesesesessqeseeeensoaesseesaeesetsaeea 6 § 38006... ccecsesccessecstsesseeessecsenaeeeseeerecseterseessaseeeecesesssenesasersesneeeeespassim Code of Civil Procedure, § 337......cccscesccsnsessssecersnsenseceereceseteeseseeasestsnsraeeseaeees 20 Dist. of Columbia Code § 47-441 ccccccccsccssesnerersetesseesenessessneecsssssenseserensnersees 7 Colo. Rev.Stat. § 24-60-1301 oc eccccscesscsseseeeseceesteeseseeeseeseessaseressessesseseassesenssssnessesesnseassree 7 § 24-60-1308 vc cscceceserteesecseseecsetessateenenens Vesseeseeseeeaceseesseeraeesseseeeateetaeessesass 7 § 39-22-303.S(4)(A) .ereccesersceserssteeesseeseseessseesesecseseseesesasenseeereesessesesenersnnenses 7 Idaho Code § 63-3027(i)(1) ..ccsscssscssssersecseseceseesessecnepseseeesscersssesssesesaseesersaseneas 7 Kan.Stat. Ann. § 79-3279(A) ...cerscsssrcrsssscsserscesessssacessssecsessssveseaeensenseeeessecsesesessseeseessesensssesenes 7 § 79-4301 vcccccccsecsseresssesesenetessessesssesevseeseeeeaeseeenaseeseessessrssessesesesrseaseeeressrens 7 Mich, Comp. Laws Ann. § 208.1301... eeecccsceeecesessccssssssesesesssessescesssseteeseessessersessssneesessersnsnesereeeneees 6 § 208.1303... cecscsccssscssescsesscnseensssseseseasenessssssesseesssesesonesesanesessrsessesssensseresats 6 Minn, Stat. § 290.171 ceecescesssenersessessesseresessecsssssssssseuesesceessssesseesenescasseess 6 Or. Rev.Stat. § 305.655 ..cccccecccsscsssssssscsessssessecersctesneesesasessassessesseaseadeecsecssssassenscansasceesesesetey 6 § 314.650... cceccsccsstesnesssesretsctseneceseecterssesesecnsesesseusesesessussteneensseeeerseesas 6 Tex. Tax Code Ann. § 171,106(a)ciceeecessensrseeresenssrecersessserseseresreaerestenvas 7 vi Utah Code Ann. § 59-7-3 11 oe ceeccsscesscsseesecenssevetecuecsteseseeecseesenesesteenseceeceesenesensserseessatesseesraees 7 §§ 59-7-312, 59-7-315 and 59-7-317i .eecesscescessessceneccssseessseceneeesssecsaeesaseats 7 CONSTITUTIONAL PROVISIONS California Constitution AIT], § Oicececesectecssererssreessevecesevsceevsreseaesseesessseseeesseeseeeseesseesssseseaseaeenecesenes 1 AITTV, 8 Ou ecscssesscctscesssscsacssesensssesssessecessessasessecseessecseesessaeesaeeesecnnessneegs 2, 25 United States Constitution ATE], § LO.ses eesseeseessesssessecseeseescecssescseesseseessesneseeseceessseeeeeesseresarsersaneenseaee 1 ATT, § 10, CL. 3 ceesceeesecsscetersesessnecsssessssessecessesseeneceseeeseesssesstsseoesseseeseas 9 OTHER AUTHORITIES 14A Cal. Jur, 3d Contracts, § 218... ccsessssecstecesseerseeeesereeesneesesteeseeeuecsaeesaes 13 Eichorn, Note, Cuyler v, Adams and the Characterization ofCompact Law (1991) 77 Va.L.Rev. 1387 .ccssccscsesersrescessessessssasssesenesseesseseessesesseseersnees 18 1 Witkin, Summaryof Cal. Law (10th ed. 2005) Contracts § 749, DP. 837 ccsccsssccssessssseceresssceessessecssesessecsseeeceessesessenecsersressesssceaeenseersaseas 13 Hasday, Jnterstate Compacts in a Democratic Society: The Problem of Permanency (1997) 49 FLLAREV, Liccscceeccscsecsesessesstsesssseesssnsssseresssensessess 18 Or, Admin. R. 1502314.650 ....cccscssessccesssesesssesereccesevscenesesnesseecesesseseseneretensenseas 6 Senate Bill No. 1015eeeeeneseeeeceeeeeesesesesseneseevseesenessensessescsesseeeeeneeesseeae 9 vil ISSUES PRESENTED In 1974, California joined the Multistate Tax Compact (Compact), an interstate agreement between 19 states for their taxation of multistate businesses. (Stats.1974, ch. 93, § 3, p. 193; former Rev. & Tax Code, § 38006, repealed by Stats. 2012, ch. 37 (S.B.1015), § 3, eff. June 27, 2012.) Asoriginally promulgated, California’s Compactstatute allowed taxpayers to elect to apportion their business income using an equally weighted three- factor formula (payroll, property, and sales) (former Rev. & Tax. Code, § 38006,art. IV, subd. 9 [Compact formula]), or California’s own alternative apportionment formula (Rev. & Tax. Code, § 25128). (See former Rev. & Tax Code, § 38006, art. III, subd. 1.) At the time California adopted the Compact, section 38006 and section 25128 set forth the same three-factor apportionmentformula. In 1993, California amended section 25128! to require, “[nJotwithstanding Section 38006,”that taxpayers apportion their business incomeexclusively using a double-weighted sales factor as the only apportionment formula available to multistate taxpayers. The issues presented are: (1) Whether the Court of Appeal erroneously construed the Compact in a mannerthat contravenes the memberstates’ longstanding, consistent construction that permits a memberstate to eliminate or modify the Compact’s election and incomeapportionmentprovisions without having to withdraw from the Compact? (2) Whether the 1993 amendmentof section 25128 violated the contracts clauses of the state and federal Constitutions? (U.S. Const., art. I, § 10; Cal. Const., art I, § 9.) ' Unless otherwise indicated, all statutory references are to the Revenue and Taxation Code. (3) Whether the 1993 amendmentof section 25128 violated the reenactment rule of the California Constitution? (Cal. Const., art. IV, § 9.) INTRODUCTION From 1967 to 1993, California apportioned the income of multistate taxpayers through a formula based on three equally weighted factors: property, payroll, and sales. (Former Rev. & Tax. Code, § 25128.) In 1993, California changed its apportionment formula to double-weight the sales factor. (Rev. & Tax, Code, § 25128.) For manyyears, the appellant taxpayers (collectively “Gillette”) filed original returns complying with the new formula. In 2006, however, Gillette filed claims for refund in excess of $34 million with the Board on the ground that California’s 1993 revision of its apportionment formula wasinvalid. | Gillette claimed that, pursuant to article II, subdivision (1) of the Multistate Tax Compact, which California adopted in 1974, the Board was boundto allow taxpayers to make, annually, an election to use an equally weighted three-factor formula. This provision of the Compact, whichis often referred to as the election provision, states that a taxpayer subject to apportionment mayelect to use the equally weighted three-factor formula in article IV of the Compact rather than the method prescribed by the state’s statute. This formula is the same one that was used in California’s statutes prior to 1993. The Board denied Gillette’s claim. Gillette then filed a tax-refund lawsuit in whichit repeated its claims. After the trial court granted the Board’s demurrer without leave to amend, Gillette appealed. The Court of Appeal held that the Compact is “a binding, enforceable agreement with the other signatory states,” therefore, “under established compact law, the Compact superseded subsequent conflicting state law.” (Slip opn. at p. 16.) The court also held that California’s change of apportionment formula was an unconstitutional impairmentof contract, and violated the reenactment clause. (/bid.) The lower court’s interpretation imposes an unyielding rule that undermines the existence and the purposes of the Compact becauseit prevents a memberstate from changing its apportionment formula unless or until it completely withdraws under the Compact’s withdrawal clause. (Art. X, subd.(2).) The Compactis notthat brittle; member states intendedit to allow a flexible approach consistent with addressing issues of multistate concern, while maintaining their own sovereignty to effectuate tax policies that address their unique concerns. In many respects, memberstates will find commonground,but in other respects—as here—divergentinterests will dictate multiple approaches. In fact, fourteen memberstates have already eliminated the equally weighted three-factor formula as an option. The decision below misconstrued the Compact. It declined to give proper consideration to memberstates’ intent and construction of the Compactto allow flexibility to do precisely what California did in adopting- a different apportionment formula. It failed to apply the correct rules of statutory construction for alleged surrenders of a state’s tax sovereignty. It incorrectly applied the laws of congressionally approved compactsto this non-congressionally approved compact. And it applied incorrect rules regarding impairmentof contracts and reenactment. This Court should reject the lower court’s short-sighted approach; adopt the Board’s position, which is supported by the Multistate Tax Commission and the Compact’s memberstates; and affirm the judgment of the superior court granting the Board’s demurrer without leave to amend. STATEMENT L. CALIFORNIA TAX LAW USES A FORMULA TO APPORTION THE INCOME OF MULTISTATE TAXPAYERS. California has long provided for the use of various factors to apportion the incomeof multistate taxpayers that is attributable to sources within this state. Prior to 1966, California relied on “sales, purchases, expenses of manufacture, payroll, value andsitus of tangible property[.]” (Former Rev. & Tax. Code, § 25101.) In 1966, when California adopted the provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA), a modellaw for the state taxation of multistate taxpayers (former Rev. & Tax. Code, §§ 25120-25139), the apportionment formula waschangedto three equally weighted factors: payroll, property, and sales. (Stats. 1966, ch. 2, p. 179; Rev. & Tax. Code, §§ 25120-25139.) The formula remained the same when California adopted the Compact in 1974. (See Multistate Tax Com., First Ann. Rep. (1968) pp. 1-2; Stats. 1974, ch. 93, p. 193, § 3; former Rev. & Tax. Code, § 38006,art. X, subd. 1,) The Compactis generally understood to have been formed as a response bystates to their concerns that Congress might—following the Supreme Court decision ofNorthwestern States Portland Cement Co.v. Minnesota (1959) 358 U.S. 450—imposerules for the state tax treatment of multistate businesses. (U.S. Steel Corp. v. Multistate Tax Commission (1978) 434 U.S. 452, 455.) State tax administrators and other state leaders drafted the Compactas part ofan effort to discourage the enactment of federal legislation that would haveinfringed ontraditional state sovereignty over tax issues. (/d. at pp. 454-455.) By the time the Compact became effective in California in 1974, six different attempts to deal with the subject ofstate taxation had died in Congress. (/d. at p. 456.) This unbrokenstring of congressional inaction continuesto this day. The purposes of the Compactare “(1) facilitating proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of . apportionmentdisputes; (2) promoting uniformity and compatibility in state tax systems;(3) facilitating taxpayer convenience and compliancein the filing of tax returns and in other phases of tax administration; and (4) avoiding duplicative taxation.” (U.S. Steel Corp. v. Multistate Tax Commission, supra, 434 U.S. at p. 456; former Rev. & Tax. Code, § 38006, art. I.) In addition, as the Multistate Tax Commission explainedinits amicusletter in support of the Board’s petition for review (MTC Amicus), one of the Compact’s purposes was “preserving memberstates’ sovereign authority to effectuate their own tax policies.” (MTC Amicusat p. 1; italics in original.) The Compactleft states free to adopt and enact throughtheir . ownlegislation the portions of the Compact they wished. Eighteen states are currently Compact member states.” The Compacthas several provisions whichare at issue in this case. Article II, subdivision (1) contains the election provision, which provides that a taxpayer subject to apportionment may annually elect to apportion income underarticle IV of the Compact rather than under the laws ofthe state. Article IV contains the standard UDITPAprovisions, and includes section 9, which contains the equally weighted three-factor apportionment formula. Article X, subdivision (2) contains a withdrawal clause providing that “[a]ny party State may withdraw from this compact by enacting a statute repealing the same[.]” The Compact contains no provisionsrelating to amendment. Il. THIRTEEN OTHER COMPACT STATES HAVE ALSO ADOPTED CHANGESIN THE COMPACT—SIMILAR TO THE 1993 AMENDMENT OF REVENUE AND TAXATION CODE SECTION 25128—To ESTABLISH ALTERNATE MANDATORY APPORTIONMENT FORMULAS. Both before and after California’s 1974 adoption of the Compact, thirteen other memberstates have individually superseded, amended, or repealed various Compact provisions by statute, including the election and apportionmentprovisions, without objection from any other members. * Memberstates are those that have enacted the Compactinto their state law. At the time the presentlitigation commenced, there were 20 memberstates. In 1971, Florida—oneof seven original Compact memberstates— repealed articles III and IV, which contained the election and apportionmentprovisions. (Board’s Request for Judicial Notice, filed concurrently with this brief in this Court on or about April 17, 2013 (RIN), Exs. B, C.) Shortly thereafter, at a Commission meeting, all memberstates unanimously adopted a resolution affirming that Florida remained a memberin good standing of both the Compact and the Commission. The resolution noted that “Florida view[ed] its position as fully consistent with the principles of the Multistate Tax Compact,” and that Florida’s partial repeal “adher[ed] to the spirit of the Compact[.]” (d., Ex. A.)° Like California, most other Compact memberstates have superseded and repealed (expressly or by implication) the Compact’s election and apportionmentprovisions. In 1986, Minnesota increased the weighting of its sales factor from 33 percent (the equally weightedthree-factor formula) to 70 percent, and in 1987 repealed articles HI and IV ofits version of the Compactaltogether. In 1989, Oregon double-weighted (50 percent) its sales factor.” Between 1991 and 1997, Michigan increased the weight given to the sales factor from 40 percent to 80 percent.° . In 1993, California joined this trend by double-weighting the sales factor. (Rev. & Tax. Code, § 25128, subd.(a) [‘“Notwithstanding Section 38006, all business incomeshall be apportioned . . . [by] a fraction, the > Board counsel only became awareofthis resolution on September 25, 2012. Accordingly, it was not provided to either court below. * Board’s Request for Judicial Notice in Support of Respondent’s Brief, filed below on August 9, 2011, and granted on October 31, 2011 (RJN-COA), Exs, 28 (Minn.Stat. § 290.171) and 29 (excerpt from Minn. Session Laws, 1987 Regular Session, ch. 268, art. 1, §§ 74, 75). > RJN-COA,Ex. 31 (Or. Rev.Stat. § 305.655); Ex. 32 (Or.Rev. Stat. § 314.650); and Ex. 33 (Or. Admin. R. 150-314.650). ° RJN-COA,Ex. 25 (Mich. Comp. Laws Ann, § 208.1301); and Ex. 26 (Mich. Comp. Laws Ann, § 208.1303). numeratorofwhichis the property factor plus the payroll factor plus twice the sales factor, and the denominator of whichis four]’’.) Since 1993, the trend has continued unabatedin other states. In 1995, Arkansas moved to a double-weighted (50 percent) sales factor.’ In 1996, Idaho moved to a double-weighted (50 percent) sales factor.® In 2006, Texas revised its franchise tax law, but kept the single-factor apportionment formulaitfirst initiated in 1991.? In 2009, Colorado began requiring taxpayers to apportion their income using a 100 percent-weighted sales factor.’ In 2010, Utah eliminated the property and payroll factors and moved to a 100 percent-weighted sales factor for most multistate taxpayers. " In 2010, Alabama began requiring multistate companies to double-weight (50 percent) their sales factor.” Three other Compact members (Hawaii, Kansas, and the District of Columbia) have also departed from the Compact’s formula.”? 7 RIN-COA,Ex. 8 (Ark. Code Ann. § 26-51-709); Ex. 9 (Ark. Corp. Inc. Tax Regs. 1.26-51-709; and Ex. 10 (Ark. Code Ann. § 26-5-101 [Arkansas’ Compact; see especially art. IV, § 9 thereof]). ® RJN-COA,Ex. 18 (Idaho Code § 63-3027(i)(1)). ? RJN-COA,Ex. 36 (Tex. Tax Code Ann. § 171.106(a)). 10 RIN-COA,Ex. 11 (Colo. Rev,Stat. § 39-22-303.5(4)(a)); Ex. 12 (Colo. Rev. Stat. § 24-60-1308); and Ex. 13 (Colo. Rev.Stat. § 24-60-1301 [Colorado’s Compact law].) ~ | RIN-COA, Ex. 39 (Utah Code Ann. §§ 59-7-312, 59-7-315 and 59-7-317); Ex. 40 (S.B. 165, Utah 58" Legislature, 2010 Gen. Sess.); and Ex. 41 (Utah Code Ann. § 59-7-311). 12 RIN-COA,Ex. 5 (2011 Ala. H.B. 434 (Jun.9, 2011). '3 RJN-COA,Ex.6 (Alaska Stat. § 43.20.071); Ex. 7 (AlaskaStat. § 43,20.072); Ex. 19 (Kan. Stat. Ann. § 79-4301); Ex. 20 (Kan. Stat. Ann. § 79-3279(a)); Ex. 39 (Utah Code Ann. §§ 59-7-312, 59-7-315 and 59-7- 317); Ex. 40 (S.B. 165, Utah 58th Legislature, 2010 Gen. Sess.); Ex. 41 (Utah Code Ann. § 59-7-311); Ex. 14 (Dist. of Columbia Code § 47-441). These changes have not affected the Compact’s administration, or imposed obligations on other memberstates or the Commission. And neither the Commission, nor any memberstate, has objected to any of these changesthroughoutthe forty-five year history of the Compact. Itl. HISTORY OF THE PRESENTLITIGATION. Gillette and the other appellant taxpayers complied with the new law for more than a decade. Then, in 2006, they filed claims for refund on the groundsthat the Legislature had not intended amendedsection 25128 to supersede the Compact formulaor, if the Legislature did so intend, amended section 25128 was unconstitutional. (AA0003, AA0306, AA0347, AA0612, AA0653.)'* The combined refund claimsinvolve six taxpayers, 39 taxpayer-years, and claimed tax refundstotaling approximately $34 million (plus statutory interest).'° The Board denied the refund claims and the appellant taxpayers brought refundsuits alleging that amended section 25128 did not override or repeal the election and apportionment provisions of the Compact, and that they hadthe right to elect to use the Compact’s equally weighted three- factor formula. The Board’s demurrer was sustained without leave to amend. (AA0283-84.) Appellant taxpayers appealed. The Board argued on appealthat the legislative intent to impose a mandatory double-weighted sales formula wasclear, and that the Legislature’s action was neither invalid nor unconstitutional. (AA0007, '4 The designation “AA”refers to the Appellants’ Appendix filed in the Court of Appeal. 'S Refunds are being sought for taxable years 1993 through 2005. (See AA0004, AA0307, AA0348, AA0613, AA0654, AA0695.) Forat least 37 of the 39 taxpayer-yearsat issue, the originally filed returns apportioned incomeusing the double-weighted sales formula required by amendedsection 25128. (See AA0004, AA0307, AA0348, AA0613, AA0654, AA0695.) AA0309, AA0352, AA0616, AA0657, AA0698). The Court of Appeal disagreed and reversed the judgmentofthe trial court. After oral argument in the Court of Appeal, Senate Bill No. 1015 became law on July 27, 2012. It provided for California’s complete withdrawal from the Compact and the Commission,andstates that: “Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code is repealed.” (Stats. 2012, ch. 37, § 3, eff. June 27, 2012.)'% The Board petitioned this Court for review on November13, 2012. Its petition was supported by amicusletters from the Multistate Tax Commission, and from Attorneys General representing 18 of the then 19 Compactstates. This Court granted review on January 16, 2013. ARGUMENT I. AMENDED SECTION 25128 WAS EFFECTIVE TO OVERRIDE THE COMPACT’S ELECTION PROVISION. Sovereign states may enter into mutual agreements, or compacts, between themselves, The federal constitution’s compact clause provides that “[n]o State shall, without the Consent of Congress . . . enter into any Agreement or Compact with another State[.]” (U.S. Const., art. I, § 10,cl. 3.) The clauseis not to be readstrictly, but only as requiring congressional consent for compactsthat “tend[] to the increase of political powerin the States, which may encroach uponor interfere with the just supremacy of '© Senate Bill No. 1015 does not reduce the importanceofthis case. Review remains forward-looking because (1) potential refund claims may exceed $750 million, (2) adoption of the Board’s construction may result in California rejoining the Compact and Commission, (3) the same issues are pending in otherstates, (4) impairment and reenactment remain significant on a prospective basis, and (5) the reasoning in the decision below could possibly be extended to apply to other laws that vary from the Compact,to other compacts, and to other revenue streams. the United States.” (U.S. Steel Corp. v. Multistate Tax Commission, supra, 434 U.S. 452, 471.) In 1974, California became a memberof the Multistate Tax Compact, which does not require (id, at p. 479), nor has ever received, congressional approval. The Court of Appeal held below that amended section 25128 was invalid and unconstitutional for three reasons: First, under established compact law, the Compact superseded subsequent conflicting state law. Second, the federal and state Constitutions prohibit states from passing laws that impair the obligations of contracts. Andfinally, the FTB’s construction of the effect of the amendedsection 25128 runs afoul of the reenactment clause of the California Constitution. (Slip opn.at p. 16.) First, the Court of Appeal’s determination that under established compact law, the Compact superseded subsequent conflicting state law is incorrect, and may be answeredin two distinct ways: (1) amended section 25128 does not conflict with the Compact; and (2) the established compact law that the court relied upon applies to congressionally approved compacts. Second, amended section 25128 did not violate the impairment clauses of the federalandstate constitutions. _ Third, amended section 25128 did not violate the reenactmentrule. IJ. ‘THE LEGISLATURE'S 1993 AMENDMENT OF REVENUE AND TAXATION CODE SECTION 25128, ESTABLISHING AN ALTERNATE MANDATORY DOUBLE-WEIGHTED SALES- FACTOR FORMULA, DID NOT CONFLICT WITH THE COMPACT. A non-congressionally approved compactis “construedasstate law.” (McComb v. Wambaugh(3rd Cir. 1991) 934 F.2d 474, 479.) Since “in some contexts [a compact] is a contract between the participating states” (ibid.), it has a dual nature and mustbe interpreted by looking at both state statutory and state contract law. 10 The Court of Appeal acknowledgedthat, as a statute, the “clear import” of amended section 25128 was to impose the mandatory use of the double-weighted sales-factor formula. (Slip opn. at p. 15.) Nevertheless,it concluded that—givenits “dual nature” (id. at p. 16)—the Compact “superseded subsequent conflicting state law.” (Ibid.; emphasis added.) However, for two reasons, amended section 25128 did not conflict with the Compact. First, the Compact’s history showsthat the memberstates’ intent and construction of the Compact wasto allow them to changetheir state lawsto establish alternate mandatory apportionment formulas, Second,states retain the authority to make or change tax laws, unless that right has been surrendered in terms that are unmistakably clear. This “doctrine of unmistakability” is a rule of construction, the effect of which is that the prior grant of a tax exemption will not be construedto limit a state’s right to change the law to withdraw the exemption, unless there is a plain statement surrenderingthat right. A. THE MEMBERSTATES INTENDED THE COMPACT TO PROVIDE THEM THE POWER AND AUTHORITY TO OVERRIDE THE ELECTION AND APPORTIONMENT PROVISIONS. In construing a multistate compact, the most importanttask is to determine the memberstates’ intent. Wnt'l Union ofOperating Eng'rs, Local 542 v, Del. River Joint Toll Bridge Comm'n (3d Cir. 2002) 311 F.3d 273, 281 [“{court’s] role in interpreting the Compactis, therefore, to effectuate the clear intent of [the] sovereign states”]; Alabama v. North Carolina (2010) _—_-*US. [130 S.Ct. 2295, 2317, 176 L.Ed.2d 1070, 1091][conc. opn. of Kennedy,J.] [“Court’s duty in interpreting a compact involves ascertaining the intent of the parties.”].) This is consistent with the well-settled rule that “‘[iJn construing statutes, we must determine and 11 effectuate legislative intent.’” (Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263, 268, quoting Woods v. Young (1991) 53 Cal.3d 315, 323.) While the Compact’s original election and apportionmentprovisions _ did set out a particular apportionment formula, nothing in the text ofthe Compact prevented a memberstate from repealing the original provision or formula, or from enacting its own mandatory formula. Thestates understood that they had the latitude to make these changes, and this understanding has consistently been borne out by their actions. In 1972, Florida repealed the election and apportionment provisions of the Compact, an action unanimously affirmed by the other member states. Since 1972, a steady stream of memberstates have rejected the original three-factor formula and movedto alternate formulas. Somestates have followed California and accomplished this through legislation that applies “notwithstanding” the Compact, while others have simply ainended ' their state’s Compactlegislation. Other memberstates have repealed articles III and IV of the Compact entirely, and one jurisdiction joined the Compact without ever having adopted the election provision. The memberstates’ actions support an inference that they intended to allow for the adoption ofan alternate mandatory apportionment formula."” Indeed, as the Multistate Tax Commission explained in its amicusletter in support of the Board’s petition for review, one of the Compact’s purposes was“preserving memberstates’ sovereign authority to effectuate their own tax policies.” (MTC Amicusatp.1; italics in original.) The Court of Appeal declined to consider the memberstates’ actions as evidence ofthe intent of the parties to the Compact, and held that “the '7 See section II of the Board’s Statementin this brief, commencing aboveat pagefive, detailing the various changes to the Compact made by California and thirteen other memberstates. 12 course of performance of a contract is only relevant to ascertaining the parties’ intention at the time ofcontracting.” (See slip opn.at p. 19; emphasis in original.) However, contract law supports the Board’s position because “in interpreting a contract, courts may properly considerthe acts and conduct ofthe parties following the contract’s execution.” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith (1998) 68 Cal.App.4th 445, 474.) In fact, the lower court was obligated to consider the memberstates’ actions because“[t]he acts of the parties . . . [are] one of the mostreliable meansofarriving at their intention[.]” (14A Cal. Jur. 3d Contracts, § 218.) “TT]t is a court’s duty to give effect to the intention of the parties where such intention is not wholly at variance with the correct legal interpretation of the terms of the contract, and a practical construction placed by the parties on the instrument is the best evidence oftheir intention.” (Ibid.; emphasis added.) Witkin agrees that “[t]he conduct of the parties maybe,in effect, a practical construction thereof, for they are probablyleast likely to be mistaken as to the intent.” (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 749, p. 837.) Thus, this Court has explained that “even if... the words [of the contract] standing alone might mean onething to the members ofthis court, where the parties have demonstrated by their actions . . . that to them the contract [means] something quite different, the meaning and intent of the parties should be enforced.” (Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1978) 22 Cal.3d 302, 314; internal quotation marks and citations omitted.) Atthe time California entered the Compact, the memberstates had clearly spoken throughtheirratification of the Florida resolution, and had thus affirmed that a membercould repeal the election and apportionment provisions. And the memberstates have continued to speak through their actions for the 40 years.since. Under the Commission’s and memberstates’ 13 construction of the Compact, the original apportionment formula was never intended to precludea state from enacting a different mandatory formula through subsequentlegislation. (MTC Amicusat p. 2 [“Commission’s longstanding position [is] that the Compact does not prohibit the action taken in 1993 by California or by most other Compact memberstates before and after that date”’].) The memberstates’ continuing course of conductis also relevant in light of the Compact’s unilateral withdrawal provision. (Art. X, subd. (2).) Each day for the last 40 years, every memberstate (including California) has had the absolute right to withdraw from the Compact. This meansthat memberstates did not just makethe initial decision to join the Compact, but to remain in the Compact, even as various members modify their own mandatory formulas. It is hardly creditable that they would doso if they did not understand the Compactas allowing states the flexibility to make these choices. As the amicuscuriae letter of Texas and 14 other Compact jurisdictions (Texas AC)stated in support of the Board’s petition for review, “States have necessarily relied on this commoninterpretation in choosing to join and remain in the Compact.” (Texas ACat p. 4.) Construing the Compact as allowing for amendmentofthe apportionment formula without completely withdrawing from the Compact is also good policy. Leaving memberstates with only an all-or-nothing choice of complete withdrawal would create the absurd result that, despite all of the beneficial reasons for becoming and remaining a Compact member, a state must completely withdraw if it wanted to changeits apportionment formula. Indeed, if every memberstate that has changedits apportionment formula were required to completely withdraw,it could threaten the Compact’s ongoing viability. In the final analysis, the formation, adoption, and amendmentofthe Compactare political calculations that member states must make, and are 14 intended to make. When properly construed,it is clear that amended section 25128 did not conflict with the Compact. B. ANY SURRENDER OF A STATE’S BROAD SOVEREIGN AUTHORITY TO IMPOSE THE TAX LAWSOF ITS CHOICE MUST BE EXPRESSED IN UNMISTAKABLY PLAIN LANGUAGE. Every state has the powerto tax. “[T]he taxing powerof a State is one ofits attributes of sovereignty [.]” (Railroad Co. v Peniston (1873) 85 U.S. 21, 29; People v. Coleman (1854) 4 Cal. 46, 49.) “There is no subject over whichit is of greater moment for the State to preserve its power than that of taxation.” (Louisville Water Co. v. Clark (1892) 143 U.S. 1, 13.) The Court of Appeal’s determination that amended section 25128 was superseded by the Compact’s election and apportionment provisions necessarily, and erroneously, presumed that California sublimatedits sovereign taxation authority by participating in the Compact. In - | determining whether states have surrendered this power, courts have long utilized a rule of construction—the unmistakability doctrine—that requires such surrenders must be expressed in unmistakably plain terms. The doctrine has been applied in avariety of circumstances. In 1938, this Court was asked to determine the validity of a tax on fuel sales on national park lands that California had conveyed to the federal government. The taxpayer argued that California had ceded exclusive jurisdiction over the lands in question to the United States, and had thus surrenderedits sovereign right to impose taxes there. The Court disagreed and, quoting Ryan y. State (1936) 188 Wash. 115, noted that “‘[t]he taxing powerof the state is never presumed to have been relinquished unless the language in which the surrender is madeis clear and unmistakable.’” (Standard Oil Co. v. Johnson (1938) 10 Cal.2d 758, 767; quoting Ryan v. State, supra, 188 Wash.at p. 131.) Ryan in turn looked to Erie R. Co. v. Pennsylvania (1875) 88 U.S. 492, where the Supreme Court acknowledgedthat state 15 may contract to provide tax exemptionsor limitations, but “the language in which the surrender is made must be clear and unmistakable.” (Ud. at p. 499.) | While the text of the Compact does not expressly allow California to adopt a new formula, neither does it waive or surrender in unmistakably plain terms California’s sovereign right to enact subsequentlegislation to change the formula. Asthe principal opinion (by Justice Souter, with three Justices concurring and three Justices concurring in the judgment) explained in U.S. v. Winstar Corp. (1996) 518 U.S. 839, “unmistakability [is] needed for waiver, not reservation.” (/d. at p. 878.) “In Winstar, the federal government argued that under the unmistakability doctrine, any limitation on Congress’ future regulatory authority was required to be expressed in unmistakable terms. (U.S.v. Winstar Corp., supra, 518 U.S.at p. 871.) In the government’s view,this meant that the prior agreements allowing certain thrifts to use supervisory good will for specific time periods to meet capital requirements “should not be construed to waive Congress's authority to enact a subsequent bar to [that practice].” (/bid.) The Court’s principal opinion rejected the government’s argument, but in doing so it reaffirmed the unmistakability doctrine, stating that “[s]overeign power... governsall contracts subject to the sovereign’s jurisdiction, and will remain intact unless surrendered in unmistakable terms.” (U.S. v. Winstar Corp., supra, 518 U.S. at pp. 871-872; citations and internal quotation marks omitted.) The Court concludedthat the doctrine did not apply to the decision under review because the government’s promise to indemnify “did not implicate its sovereign powers at all[.]” (Id. at p. 887.) The opinion contrasted that situation, however, with claimslike the one Gillette makes here, “such as a claim for rebate under an agreementfor a tax exemption.” (/d. at p. 880.) Thus, the Court 16 explained, “[g]ranting a [tax] rebate, like enjoining enforcement, would simply block the exercise of the taxing power, . . . and the unmistakability doctrine would haveto besatisfied.” (/bid.) The Court explained that the doctrine is a canon of construction that applies to prevent the inference of “an unstated term exempting the other contracting party from the application of a subsequent sovereign act[.]” (U.S. v. Winstar Corp., supra, 518 U.S.at p. 878.) Applying the unmistakability doctrine to the present case meansthat California’s mere grant of a tax benefit (i.e., acquiescenceto a particular apportionment formula) under the Compact, without more, does not “exempt[]... [another] party from the application of a subsequent sovereign act” (U.S. v. Winstar Corp., supra, 518 U.S. at p. 878), such as amended section 25128. In construing the Compact against the Board, the Court of Appeal turned the doctrine on its head. In effect, the lower court required California to reserveits right to enact subsequentlegislation in unmistakable terms, rather than requiring a surrender or waiverofthat right to be in unmistakable terms. This was error because “unmistakability [is] needed for waiver, not reservation.” (/bid.) The Compact’s withdrawal provision does not affect either the application of the unmistakability doctrine in the first instance, or the Compact’s construction under the doctrine. The unmistakability doctrine is a rule of construction that applies regardless of the withdrawalprovision. The withdrawal provision simply says that states may withdraw by enacting legislation repealing the Compact. The provision does not expressly addressa state’s right to tax, nor doesit require surrender ofa state’s right to tax. This is insufficient to establish an unmistakable surrender of California’s right to amendits tax laws to establish a different apportionment formula. 17 UI. THE COURT OF APPEAL ERRONEOUSLY RELIED UPON LAW THAT APPLIES TO CONGRESSIONALLY APPROVED COMPACTS. Therule that the lower court relied on—“under established compact law, the Compact superseded subsequent conflicting state law”(slip opn.at p. 16)—applies to compacts that have received congressional approval. In the case of a non-congressionally approved compact, the issue is whether there is a constitutionally prohibited impairment of a contract obligation. The Court of Appeal’s error is a common one. “The case law [under the Compact Clause] is jumbled and confused.” (Eichorn, Note, Cuylerv. Adams and the Characterization ofCompact Law (1991) 77 Va.L.Rev. 1387.) “[N]either the courts northe scholarly literature has produced a coherent explanation of the status of noncompactinterstate agreements under the contract impairment cases.” (Hasday, Interstate Compacts in a Democratic Society: The Problem ofPermanency (1997) 49 FLL.Rev.1, 40.) Nevertheless, it was an error, and should be corrected. Congressional approval“transforms an interstate compact... into a law of the United States” (Texas v. New Mexico (1983) 462 U.S. 554, 564; citations and internal quotation marks omitted), which supersedes state law under the supremacy clause. Non-congressionally approved compacts are not transformed into federal law, and thus there is no supremacy clause analysis. Their construction is purely a matter ofstate statutory and contract law principles, and requires a separate analysis under each. As a matter ofstatutory law,it is well established that a statute can be amended, repealed or superseded, in whole orin part, by a subsequently enacted statute. (1A Sutherland, Statutes and Statutory Construction (7th ed. 2009) § 23:3, pp. 432-433.) As amatter of contract law, later-enacted statutes that conflict with a person’s vested contract rights are not automatically invalid, but must be examined underthe principles of impairment of contracts. 18 IV. THERE WAS NO UNCONSTITUTIONAL IMPAIRMENT OF A CONTRACTUAL OBLIGATION. To determine under modern contract clause analysis whethera state law has unconstitutionally impaired contract rights, courts use a three-prong test.'8 (Energy Reserves Group, Inc. v. Kansas Power & Light Co. (1983) 459 U.S. 400, 411-413.) The threshold inquiry is “whether the state law has, in fact, operated as a substantial impairment of a contractual relationship.” (Jd. at p. 411.) Second, assuming a substantial impairment, the state must have a significant and legitimate public purpose behind the regulation. (/d. at p. 412.) Third, assuming legitimate public purpose, whetherthe adjustmentofthe “the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purposejustifying [the legislation's] adoption.” (bid., citing U.S. Trust Co. v. New Jersey (1977) 431 U.S. 1, 22.) Had the lower court used this three-prongtest, it would have found no unconstitutional impairment. A. AMENDED SECTION 25128 IS NOT A SUBSTANTIAL IMPAIRMENT OF A CONTRACTUAL RELATIONSHIP. Thefirst prong of the impairment analysis—whether there is a substantial impairment of a contractual relationship (Energy Reserves - Group, Inc. v. Kansas Power & Light Co., supra, 459 U.S. at p. 411, citing Allied Structural Steel Co. v. Spannaus (1978) 438 U.S. 234, 244, and U.S. '8 The cases relied on by the lower court do not apply. Greenv. Biddle (1823) 21 U.S. 1 is a 190-year old case decided before the “modern era” of impairmentclause jurisprudence. (Hermosa Beach Stop Oil Coalition v. City ofHermosa Beach (2001) 86 Cal.App.4th 534, 559 [foundation of modern contract analysis “is [U.S. Trust Co. v. New Jersey (1977) 431 U.S. 1], a 1977 United States Supreme Court decision that, for the first time in nearly 40 years, overturned a state law as violating the contract clause”].) Doe v. Ward (W.D.Pa. 2000) 124 F.Supp.2d 900, 911 was decided “[w]ithout ruling on the constitutional issues[.]” 19 Trust Co. v. New Jersey, supra, 431 U.S. at p. 17)—is a threshold inquiry with three components:“whetherthere is a contractual relationship,_ whether a change in law impairs that contractual relationship, and whether the impairmentis substantial.” (General Motors Corp. v. Romein (1992) 503 U.S. 181, 186.) A negative answer to any componentestablishes that there is no constitutional violation. Thefirst component determines whether a contractualrelationship exists between the taxpayers and the Compact memberstates. The taxpayers are not parties to the Compact,nor are they third-party beneficiaries. The Court of Appeal concluded that the election provision “is a right specifically extended not to the party states but to taxpayers as third parties regulated under the Compact.” (Slip opn. at p. 11.) However, for a contract to bestow third party beneficiary rights, it “must be made expressly for the benefit of the third person,” (Fireman’s Fund Ins. Co. v. Maryland Casualty Co, (1994) 21 Cal.App.4th 1586, 1600, emphasis in original), or made for a “class for whose benefit the contract was created” (Mariani v. Price Waterhouse (1999) 70 Cal.App.4th 685, 699, quoting Outdoor Services, Inc. v. Pabagold, Inc. (1986) 185 Cal. App.3d. 676, 681). Moreover, a third party may enforce a contract only when it was “made expressly” for that party’s benefit. (Civ. Code, § 1559.) Taxpayers have not demonstrated, and cannot demonstrate, that the Compact provides them with any contractual—as opposedto purely statutory—rights. In addition, becausethe trial court granted its demurrer, the Board has not filed any answers below,and thushasyet to raise its affirmative defenses, Nevertheless, the general four-year statute of limitations for asserting a breach of contract has long passed. (Code Civ. Proc., § 337.) The second component, “whether a change in law impairs[the] contractual relationship” (General Motors Corp. v. Romein, supra, 503 20 U.S. at p. 186), requires that the state’s action mustalter the obligations or duties of the parties to the contract. (Allied Structural Steel Co. v. Spannaus, supra, 438 U.S. at p. 244.) However,the right to elect an apportionment formula was not a binding contractual obligation on Compact memberstates because amended section 25128 did not conflict with the Compact. The history of the Compact demonstrates that memberstates intended and construedit to allow for subsequent changes to the apportionment formulas. And, when properly construed, the Compact did not unmistakably surrender memberstates’ rights to subsequently enact alternate mandatory apportionment formulas. Because there was no conflict, amendedsection 25128 did not “impair[] [the] contractual relationship” (General Motors Corp. v. Romein, supra, 503 U.S.at p. 186), and accordingly did not violate either the state or federal prohibition on the impairmentof contracts. The third component—“whether the impairmentis substantial” (General Motors Corp. v. Romein, supra, 503 U.S.at p. 186)—looksto the “legitimate expectationsofthe contracting parties.” (U.S. Trust Co. v. New Jersey, supra, 431 U.S. at pp. 19-20 fn.17; Maryland State Teachers Assn., Inc. v. Hughes (D.Md. 1984) 594 F. Supp. 1353, 1360-1361.) This in turn examines (1) whether the complaining party’s contract right was a vested right; (2) if it was vested, whether and to what extent there wasreliance by the complaining party; and (3) whether the alleged impairment ofthe contractual obligation was prospective or retroactive. First, Bailey v. North Carolina (1998) 348 N.C. 130 explained that decisions as to whether a government-provided pension had been impaired by a subsequentlegislative act were “rooted in the protection of expectational interests upon which individuals have relied throughtheir actions, thus gaining a vested right.” (/d. at pp. 143-146, emphasis added; 21 United States v. State Water Resources Control Board (1986) 182 Cal.App.3d 82, 100, 101, 106, 107; Valdes v. Cory (1983) 139 Cal.App.3d 773, 785 [impairment of contract premised upon finding that “employee pension beneficiaries have a vested interest in the integrity and security of the source of funding for the payment of benefits’”].) Because member states had the unilateral right to withdraw from the Compact at any time, neither the election provision nor the equally weighted three-factor formula were vested rights for any prospective tax years.” Appellant taxpayers do not claim that California could not change its apportionment formula, but that it had to withdraw from the Compact before doing so; however, there is no vested right (or reasonable expectation) in requiring California to follow a procedure that did not affect them. Second, the court examines “whether the parties have relied on the preexisting contract right and the extent to which the [state action] violates the reasonable expectations of the parties.” (United States v. State Water Resources Control Board, supra, 182 Cal.App.3d 82, 146-147; Mobil Oil Corp. v. Rossi (1982) 138 Cal.App.3d 256, 263-264 [“trial court must consider the extent of reliance”].) Because every memberstate had the unilateral right to withdraw, no one—notGillette, not memberstates, and not the federal government—could rely on the equally weighted three- factor formula not being changed. Third, because amended section 25128 operated prospectively only to future tax years there was no substantial impairment. (Maryland State ' «Tax legislation is not a promise, and a taxpayer has no vested right in the [tax code].” (United States v. Carlton (1994) 512 US. 26, 33.) “T]he government[has not] ever represented that future years would not bring changesin the tax laws. Such changesare as inevitable as taxation itself.” (Picchione v. Commissioner ofInternal Revenue (1st Cir. 1971) 440 F.2d 170, 173, citing Welch v. Henry (1938) 305 U.S. 134, 146.) 22 Teachers Assn., Inc. v. Hughes, supra, 598 F.Supp. at pp. 1360-1361 [very important prerequisite to the applicability of the Contract Clauseat all to an asserted impairmentof a contract by state legislative action is that the challenged law operate with retrospective, not prospective effect”].) “Laws whichrestrict a party to those gains reasonably to be expected from the contract are not subject to attack under the Contract Clause, notwithstanding that they technically alter an obligation of a contract.” - (City ofEl Paso v. Simmons (1965) 379 U.S. 497, 515.) B. AMENDED SECTION 25128 HAD A SIGNIFICANT AND LEGITIMATE PUBLIC PURPOSE. The second prong asks whether“‘the state has a ‘significant and legitimate public purpose behind the regulation’ alleged to impair the contract, such as the ‘remedying of a broad and general social or economic problem.’” (Linton by Arnold v. Commissioner ofHealth & Env’t (1995) 65 F.3d 508, 517, citing Energy Reserves Group, Inc. v. Kansas Power & Light Co., supra, 459 U.S. at p. 411.) A satisfactory purpose includes “the use of reasonable means to safeguard the economic structure upon which the good of all depends.” (Amana Society v. Colony Inn, Inc. (lowa 1982) 315 NW2d 101, 112, emphasis in original, quoting Home Building & Loan Association v. Blaisdell (1934) 290 U.S. 398, 442.) California sought here to readjust the in-state incidence of taxation between corporations to conform to the trend of states moving toward a more heavily weighted sales-factor componentoftheir apportionment formulas,” and to promote both uniformity (one of the Compact’s stated purposes) and in-state economic development. California also sought to treat taxpayers the same. 2 See footnote 17, above. 23 This is not the type of case where courts have found an unconstitutional impairment of a contractual obligation. Thestate is not seeking “to repudiate debts it has incurred undera contract.” (Interstate Marina Development Co. v. County ofL.A. (1984) 155 Cal.App.3d 435, 448.) This case does not involve the borrowing of money,or the promising of vested pension benefits. It simply involves a prospective changein the incidence of taxation amongthe various businesses conducting operations in this state. The state’s action is valid becauseit is attempting to “achieve the legitimate purpose of promoting the welfare of its people.” (Hermosa Beach Stop Oil Coalition v. City ofHermosa Beach, supra, 86 Cal.App.4th at p. 564, quoting Interstate Marina Development Co. v. County ofLos Angeles (1984) 155 Cal. App. 3d 435, 448.) C. AMENDED SECTION 25128 WAS REASONABLE AND APPROPRIATE. The third prong is whether, assuming a significant and legitimate public purpose, the “adjustment of rights and responsibilities [is] . . . reasonable [and]... appropriate[.]” (Linton by Arnold v. Commissioner of Health & Env’t, supra, 65 F.3d at p. 517, citing Energy Reserves Group, Inc. v. Kansas Power & Light Co., supra, 459 U.S. at p. 411.) In Fourth La Costa Condominium Owners Assn. v. Seith (2008) 159 Cal.App.4th 563, the court upheld a state law allowing condominium owners associations to reduce the percentage of votes necessary to amend their declaration of covenants, conditions and restrictions because “the statutes have a significant and legitimate public purpose and act by appropriate means.” (Id. at p. 585, quoting Barrett v. Dawson (1998) 61 Cal.App.4th 1048, 1055.) So does amendedsection 25128. The purpose of amended section 25128 was to modify the in-state incidence of taxation, to move toward a more heavily weighted sales-factor formula, and to promote in-state economic development. Doing this by 24 amending section 25128 to modify the Compact’s original equally weighted three-factor formula, in a fashion that did not generate moretotal tax revenues, or repudiate any debts, was reasonable and appropriate. V. AMENDED SECTION 25128 DOES NOT VIOLATE THE REENACTMENT RULE. Amendedsection 25128 requires that taxpayers must use the double- weighted sales apportionment formula, and thus it completely eliminates the option of electing the equally weighted three-factor formula pursuantto the Compact’s election and apportionmentprovisions. The Court of Appeal held that because the Legislature did not “repeal, amend or reenact any part of the Compactat the time,” amended section 25128 violated the “reenactment rule” because “neither the public nor the legislators had adequate notice that the intent of this amendment wasto eviscerate former section 38006.” (Slip opn. at p. 21.) The reenactmentrule seeks to avoid “the enactmentof statutes in terms so blind that legislators themselves[are] sometimesdeceived in regard to their effect, and the public, from the difficulty of making the necessary examination and comparison, failed to become appraised of the changes madein the laws.” (Hellman v. Shoulters (1896) 114 Cal. 136, 152; citation and internal quotation marks omitted.) It is well settled, though,thatthat “the provision should be reasonably construed andlimited in its application to the specific evil which it was designed to remedy. It is “I Ag set forth in the California Constitution, the reenactment rule provides: A statute may not be amendedbyreferencetoits title. A section of a statute may not be amended unless the section is re-enacted as amended. (Cal. Const., art. IV, § 9.) 25 not to be technically measured, nor used as a weaponforstriking down legislation which maynot reasonably besaid to have been enacted contrary to the specified method[.]” (Brosnahan v. Brown (1982) 32 Cal.3d 236, 256; citations omitted.) While one of the purposes of the reenactmentrule is to preventthe confusion that can result when statutes are amendedindirectly, there was no confusion created by the amendmentto section 25128. The legislative history establishes that both legislators and the public were awarethat the 1993 amendmentof section 25128 would require the mandatory use ofthe double-weighted sales factor for most business activity, and would eliminate the option of electing UDITPA’s equally weighted three-factor apportionment formula. (Casella v. SouthWest Dealer Services, Inc. (2007) 157 Cal.App.4th 1127, 1137 [the legislative history of a statute, including legislation and committee reports is the proper subject ofjudicial notice]; Kaufman & Broad Communities, Inc. v. Performance Plastering (2005) 133 Cal.App.4th 26, 39-40[judicial notice taken of Enrolled Bill Reports].) The Bill Analysis for amended section 25128 stated the “[t]he bill would havethe effect of . . . increasing the tax on most businesses based in other states[.]” (See RIN-COA,Ex. 1.) “[S]ome taxpayers would experience a tax decrease while others would experience a tax increase” and there would be “winners and losers.” (/bid.) The Enrolled Bill Report for SB 1176 similarly noted that “[t]his bill increases taxes on corporations with a relatively small presence in California,” and that “[f]or some out-of- state manufacturers, this measure would . . . rais[e] their taxes.” (RJN- COA,Ex. 2.) This history showsthat there was ample notice that amended section 25128 completely eliminated the option of electingthe equally weighted three-factor formula. Had the election not been eliminated, the proposed amendmentof section 25128 would not have increased anyone’s taxes. (RJN-COA,Ex. 3.) This is also undoubtedly why many out-of-state 26 corporations, including appellant Proctor & Gamble, opposed the amendment. (RJN-COA,Ex.3.) Furthermore, as a practical matter, amending section 25128 without repealing or amending the Compact did not create confusion because a multistate taxpayer cannot in any event determineits tax liability by looking only at the Compact. For example, California’s Corporation Tax Law is set forth in Part 11 of the Revenue and Taxation Code, whereas the | Compactis set forth in Part 18. Yet Part 18 cannot stand alone becauseitis missing all the provisions relating to the determination of income, deductions, credits and tax rates. Thus, even if a taxpayer wanted to use the Compact’s election and apportionmentprovisions,it still must use other laws to determine whether it would be advantageous to makethe election. California’s tax forms also provided notice since they clearly show that double-weighting the sales factor has been required since 1993. (RJN, Ex. D [Form 100 and Schedule R, and instructions thereto, for 1993].) Moreover, the reenactmentrule does not apply to statutes, like amended section 25128, which repeal or modify by implication only preexisting statutory provisions. (See Brosnahan v. Brown, supra, 32 Cal.3d at p. 256; Hellman v. Shoulters, supra, 114 Cal. at p. 153 [reenactmentrule does not apply to statutes which amend others by implication as it would almost prohibit legislation].) The petitioners in Brosnahan claimed that Proposition 8 (the Victims’ Bill of Rights), which affected ten sections of the Penal Code and the Welfare and Institutions Code, was void to the extent it amended or repealed by implication various statutory provisions that were not identified within the propositionitself. This Court disagreed, explaining: “‘To say that every statute which thus affects the operation of anotheris therefore an amendmentofit would introduce into law an elementor uncertainty which no one can estimate. It is impossiblefor the wisest legislator to know in advance how every statute 27 proposed would affect the operation ofexisting laws.’” (Brosnahanv. Brown, supra, 32 Cal.3rd at p. 257 [emphasis in original], quoting Hellman v. Shoulters, supra, 114 Cal. at p. 152.) The Court of Appeal’s reliance on American Lung Associationv. Wilson (1996) 51 Cal.App.4th 743 is misplaced. American Lung is an exception to the general rule—that reenactment does not apply to implied repeals or modifications—and applies only where “the new code section directly amends anotherexisting statute, and the legislators and the public would not be reasonably notified of the direct change in the law unless the existing statute is reenacted.” (White v. State (2001) 88 Cal.App.4th 298, 314-315.) It does not apply here, however, because there was ample and reasonable notice. Amended section 25128 does not violate the reenactment rule because its “notwithstanding section 38006” language is an implied repeal of the Compact’s election and apportionment provisions set out in former section 38006. Were the lower court’s reasoning to prevail, hundreds of California statutes which contain the “notwithstanding” phrase would be called into question as purported violations of the reenactmentrule. 28 CONCLUSION The amendment of Revenue and Taxation Code section 25128 did not violate the Compact,or the impairment or reenactmentprovisions. The decision of the Court of Appeal must be vacated and the judgmentofthe trial court granting the Board’s demurrer without leave to amend affirmed. Dated: April 17, 2013 SF2010900595 40686987.doc Respectfully submitted, KAMALAD, HARRIS Attorney General of California SUSAN DUNCAN LEE Acting Solicitor General KATHLEEN A, KENEALY Chief Assistant Attorney General PAUL D, GIFFORD Senior Assistant Attorney General W. DEAN FREEMAN . Supervising Deputy Attorney General Lucy F. WANG Deputy Attorney General W. DEAN FREEMAN Supervising Deputy Attorney General Attorneysfor Defendant and Respondent Franchise Tax Board 29 CERTIFICATE OF COMPLIANCE I certify that the attached Respondent Opening Brief on Merits uses a 13 point Times New Romanfont and contains 8,392 words. Dated: April 17, 2013 KAMALAD, HARRIS Attorney General of California SUSAN DUNCAN LEE Acting Solicitor General KATHLEEN A. KENEALY Chief Assistant Attorney General PAUL D, GIFFORD Senior Assistant Attorney General W. DEAN FREEMAN- Supervising Deputy Attorney General Lucy F. WANG Deputy Attorney General Wo Ddve byr W. DEAN FREEMAN Supervising Deputy Attorney.General Attorneysfor Defendant and Respondent Franchise Tax Board DECLARATION OF SERVICE BY U.S. MAIL Case Name: The Gillette Company & Subsidiaries v California Franchise Tax Board Supreme Court Case No. 8206587 Court of Appeal Case No.: A130803 San Francisco Superior Court Case No. CGC10495911 I declare: I am employedin the Office of the Attorney General, which is the office of a memberofthe California State Bar, at which member's direction this service is made, I am 18 year's of age or older and not a party to this matter. I am familiar with the business practice at the Office of the Attorney General for collection and processing of correspondence for mailing with the United States Postal Service. In accordance with that practice, correspondenceplaced in the internal mail collection system at the Office of the Attorney General is deposited with the United States Postal Service with postage thereon fully prepaid that same day in the ordinary course of business, On April 17, 2013, I served the attached OPENING BRIEF ON THE MERITSbyplacing a true copy thereof enclosed in a sealed envelopein the internal mail collection system at the Office of the Attorney General at 455 Golden Gate Avenue, Suite 11000, San Francisco, CA 94102-7004, addressed as follows: AmyL, Silverstein, Esq. Jeffrey B. Litwak EdwinP. Antolin, Esq. 1608 NE Knott Street Silverstein & Pomerantz LLP Portland OR 97212 55 Hawthorne Street, Suite 440 San Francisco CA 94105 Clerk of the Court Cory Fong, Tax Commissioner Court of Appeal Office of State TaxCommissioner First Appellate District State of North Dakota 350 McAllister Street 600 E. Boulevard Avenue, Department 127 San Francisco CA 94102 Bismarck ND 58505-0599 Clerk of the Court Lawrence G. Wasden San Francisco Superior Court Attorney General, State of Idaho 400 McAllister Street State of Idaho Office of the Attorney General San Francisco CA 94102 P.O. Box 83720 Boise ID 83720-0010 Ellen F. Rosenblum R, Bruce Johnson Attorney General, State of Oregon Commission Chair Departmentof Justice Utah State Tax Commission Justice Building 210North 1950 West 1162 Court Street NE Salt Lake City UT 84134 Salem OR 97301-4096 I declare under penalty of perjury under the laws of the State of California the foregoing is true and correct and that this declaration was executed on April 17, 2013, at San Francisco, California. Joan Randolph FhQRawlMl Declarant Signature SF2010900595 40687723 .doc