GILLETTE COMPANY v. FRANCHISE TAX BOARD

Respondent’s Petition for Review

Cal.November 13, 2012

S20658%7 Jn the Supreme Court of the State of California THE GILLETTE COMPANY & SUBSIDIARIES, Plaintiffs and Appellants, Case No. SUPREME COURT . FILED CALIFORNIA FRANCHISE TAX BOARD, AN NOV 1b 32012 AGENCYOF THE STATE OF CALIFORNIA, Defendant and Respondent. Frank A. McGuire Clerk Deputy First Appellate District Division Four, Case No. A130803 © San Francisco County Superior Court, Case No. CGC-10-495911 The Honorable Richard A. Kramer, Judge PETITION FOR REVIEW KAMALAD. HARRIS Attorney General of California MANUEL M. MEDEIROS State Solicitor General KATHLEEN A. KENEALY Chief Assistant Attorney General PAUL D. GIFFORD Senior Assistant Attorney General W. DEANFREEMAN Supervising Deputy Attorney General JOYCE E. HEE 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 uoiieeeeccccccccecccccncecersececccesesaevevesceuuecessnnsssessseeseneeesenapers 1 STATEMENT.......cccccccccccccccccseccccccsceccunnsscuveesseeseeeusaeseccueseseseusscecsetsagaeeeseeans 2 REASONS FOR GRANTING THEPETITION...eeeesaeeeeneeeeves 6 ARGUMENT. uu... .ccccesesecccecececcecsncecccuseeccecseeecsesunaneseseeenbeeseneesecsausasaseeensageeeena 8 1. THE COURT OF APPEAL’S INTERPRETATION OF THE RIGHTS AND OBLIGATIONS OF MEMBER STATES AND PRIVATE PARTIES UNDER THE COMPACT CONFLICTS WITH ESTABLISHED LAW ....ccccccsecccsccenvccuccatesencenscsnsecesevsenseners 8 II. THE COURT OF APPEAL’S DETERMINATION THAT AMENDEDSECTION 25128 IS UNCONSTITUTIONAL AS VIOLATIVE OF THE CONTRACTS CLAUSE CONFLICTS WITH EXISTING LAW .....ccccsececccsscceeueseecesuuvessunusscseneueuneseseeanes 12 Il. THE COURT OF APPEAL’S APPLICATION OF THE REENACTMENT RULE TO AMENDEDSECTION 25128 CONFLICTS WITH ESTABLISHED LAW .....cccccccceessecscseenesseeenes 13 CONCLUSION|rertrrr nner eres reese teenie snes seer tnneeninsnesennneetege 14 TABLE OF AUTHORITIES CASES Bankofthe West v. Superior Court (1992) 2 Cal.4th 1254eeteerre rere eneteeeneneenees Brosnahan y. Brown (1982) 32 Cal.3d 236 vcccccccssescsssssseesssssssesssssseesssseesesssseesessees Department ofPersonnel Administration v. Superior Court (1992) 5 Cal.App.4" 155 vccccccsesssesssecssesseessecstesessnecseeeeeees Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1994) 21 Cal.App.4th 1586 v..ccccsccssssssssssessssssssssessssessensvees Hellman v. Shoulters (1896) 114 Cal. 136accesrnerteeenesneereecsenecsesiesnereeeene Klasjic v. Castaic Lake Water Agency (2004) 121 Cal-App.4th 5 v.ccsccccscsssccssssssssseccsscssssessessessssesesesseees McComb v. Wambaugh (3rd Cir. 1991) 934 F.2d 474 oocccsneeesen ees teeereneeererieeserena People v. Centr-O-Mart (1950) 34 Cal.2d 702 ..cccsssseccssssssssssssssevessessesesssseesesessssssess U.S. Steel Corp. et al. v. Multistate Tax Commission et al. (1978) 434 U.S. 452 (U.S. Steel) ceccccsssssssssessssesssisiessssssnsesneeee U.S. v. Winstar Corp. (1996) 518 U.S. 839 vcescsscssecssssssssssssssssssssevessessesssinmvesssesnssssnes White v. California (2001) 88 Cal.App.4298 o.ccccccscscecssesssssssessssesrerseesssesaseeseeeseesees STATUTES Business & Professions Code § 2435(f) v0... eccecsceeeetereeseeetieeeneeteeees California Corporations Code § 301.5(A) vescsccsssccevesssseesessseesssssssssssesvuersssnsenessesiestasaneeseenes § 1 7002(C)seccsessssssvseessssevsessssvissssssesssssstsneetsessesetsssseeesssssneeesns ii Page eceeeeereenes 9 levee veseeaeens 13 ceveeeenatenees 10 leveeeeneenees 12 eceersesneens 13 eveetenneeenes 10 eveeeeeneeetees 8 beveeteeneesenes 9 letneeeeeness 2,4 eeeteeeeeneeees 8 eensetennenes 13 beceneeetneetees 8 vevneeeeneenevees 8 levee eeneeeeneey 8 California Education Code § 30.S(A) ..ccccccccccseesecseesceetsecsetseersevseecsenecseeneecserseeccrsaesneesneciessesnersesesnereesaees 8 CLSicccccccccecsscenseseeeeceeseneesaeecsseneeteeesaessesseresieesieesnsnenessasesteneestasneesaas 8 § 1629 oe eccccceccsccscsscecsssseseecsecseneceaceensenesieeceneenseeeerateseceeeesetieetaeserenrestaesaeenes 8 § 12300...oeeeseeseeeseesecencecuecneessuceceseeeecennaeseseneecieseateeesuesenetesereratenierenseeeas 8 § 8277 .6(D)...ccccccccccscccsccsesececsceecseeceeecesesesseeecaecaeeeestaeieetneeesnesieeseeenisieeeureeneeaes 8 California Family Code § L7T4OO(D)(1) ..c cc ccccccescesccscecseseeseeeecessecseeecaecesseesacenesseresereseeseaeenseneesneesseenes 8 § 175225(a) ceccecccccsccceecsetecsnecsessesaeecescnecseecsnresesiesssevsevseeeensseresaeestsenecnenentenes 8 California Financial Code SBT veeccccsscccesecesseeseceneecessreerecaesneeesssessesesaaesegeseesieeseeessesaceeesnaaeenseenessreenies 8 S LLOL(C) cc ceeeccsescessecsseseeeeceecsesecaneesecsesseeceesaesaecsesssecaeeceaeensessesserscesesaeeaee 8 California Government Code § 179... eccccccccccsceeeeecetieeteeneeeesneeesaeensasenersenes 8 Civil Code SSS oeccccccccescccssessseeenseeeeveseeeesseeseeeeeeseseeeeesseseeesaeeeecsesereegeetneseeseses 12 § 1636 Lo eecccccsccsesccecsecnsessecesensecsseesceeeseessgeestaeeseestssesesessssesessagasesseseereeesens 9 § 798.8 7(A) ..cecscccccescccceccssccsseseseteeseeecesecseesssesesecserssesteessvssesersseeesseseesgesenecses 8 Code of Civil Procedure § 128(dD)... eeesecececssescenseeesesncesseeaaeesseeseeeeescseeeeetesssesseeseeeeaeepesusesesseeessneees 8 § 1273.O3O(€) oc ceccccsscessessssecessesseeecsessessececcecsessnecessssessseeessesseevessssesssssesseessss © Revenue & Taxation Code S 23701 (D1) .eceeeececccsecessneessecseeeeesssecsseeeessseteseeesseeceesauecesseeesesseseseueeeneesens 8 § D37OUACD)L) voce eccecccesecetseseeseeeesssessesessecesscseeecsecsseesssarecsesesssesteessaesssenaes 8 § 25120-25139 icccccscccssscescesscsesessscecssseesesssessesecseecusesssepreusscstsesesrecuees 11 8 5128 oicececsseteeeeenctsceeeceeeteessaeeessesseecsuseseaessatecssceneeeseseseseeeeseeesteees passim § 38006 oeeeeeseeeeeceesceeeseseectecsenseeeccsecsesessseeesessseessteauseesesseseeensaseneteaes passim § 38006, Article IV, Subd. 9 oo. ccccccccceseceneeccseueresssecssevescsasessaversneeess 1 § 38006, Article X, SUDC. 1 oo. ececceceseecscenssecseerseeceessecresecstersteessnessesnes 2 § 38006, Article XID... ccccssessssssessecesssecscseccsseecssscercessssvssesesenssessseecnaees 12 CONSTITUTIONAL PROVISIONS California Constitution Article 1, § 9 i ciccecccccseesscessecseeserescscecensseecssessessseesssesersesesussesuesstessuesssrenses 2 Article TV, § Qceccccscecneeseesenscecnseesseecesecseessesessessaeecnessatesaesssssaeetserasenses 2 Article 31cc eececccccssscsesseesecsessessececseceeeeeessaeesessccesessecseeesseesseyasessesatenstentens 12 U.S. Constitution Article I, § lO... icccccsssessccssceseeeeccssecsseeesessecsaeeceseecessatuegsseseesseessseesenseeesas 2 iil CouURT RULES Cal. Rules of Court Rule S.11Oieee cccsscscseccecccnunsecececcnsvseevececseseuevseuseessessvesesensussessauneseeguesses 8 Rule 5.1 34(a) ccc cecccsecsccseceennetereeeeeecneeesenessteneeceiecniessensisesninegennesesieeesnnags 8 OTHER AUTHORITIES Senate Bill No. LOLS cocci eeccscessscsssssececesersesseecesseescseeseeessaseseeessreesereaegs 1,3 The Franchise Tax Board of the State of California (“Board”), defendant and respondent, petitions for review of a published decision of the Court of Appeal, First Appellate District, Division Four, filed on October 2, 2012. That decision reversed the order of the San Francisco County Superior Court sustaining without leave to amend the Board’s demurrerto the tax refund complaints filed by appellants Gillette Company and its subsidiaries and other corporateentities. ISSUES PRESENTED In 1974, California joined the Multistate Tax 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.) As originally 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 [hereinafter, “Compact formula”]), or California’s ownalternative 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 apportionment formula. In 1993, California amended section 25128! to require that “[notwithstanding Section 38006,” the taxpayers must apportiontheir business income exclusively using a double-weighted sales factor as the only apportionment formula available to multistate taxpayers. The issues presentedare: ' Unless otherwise indicated,all statutory references are to the Revenue and Taxation Code. (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 income apportionmentprovisions without having to withdraw from the Compact? (2) Whether the 1993 amendmentof section 25128 violated the contracts clause of the state and federal Constitutions? (U.S. Const, art. I, § 10; Cal. Const., art 1, § 9.) (3) Whether the 1993 amendmentof section 25128 violated the reenactmentrule of the California Constitution? (Cal. Const., art. IV, § 9.) STATEMENT In 1966, California enacted the Uniform Division of Income for Tax Purposes Act (Rev. & Tax. Code, § 25120-25139) (UDITPA.) (Stats. 1966, ch. 2, p. 179) As originally adopted, UDITPA required business incomeof multistate corporations to be apportioned to California using the arithmetic average of three factors, a property factor, a payroll factor, and a sales factor. (/bid.; see former Rev. & Tax. Code, § 25128.) The UDITPAalso wasincluded as part of an interstate agreement — the Multistate Tax Compact(hereafter, the Compact) — that became effective in 1967. (Multistate Tax Com., First Ann. Rep. (1968) pp. 1-2; see Stats. 1974, ch. 93, p. 193, § 3; former Rev. & Tax. Code, § 38006, art. X, subd. 1.) The Compact cameinto existence as a model act to establish uniform standards to be observed by states in taxing incomeof interstate businesses. (United States Steel Corp: v. Multistate Tax Commission (1978) 434 U.S. 452, 455-56 (U.S. Steel).) State tax 2 Uniform Division of Income for Tax Purposes Act, 7A part | West’s Uniform Laws Annotated (2002) page 141. administrators and other state leaders drafted the Compact in an effort to avoid federal intervention into state sovereignty over tax issues. The Compactleft states free to adopt and enact through their ownlegislation the portions of the Compact they wished to adopt. Nineteen states are currently Compact member states.” California enacted the Compact in 1974 (formerly codified in section 38006).’ Several Compact provisions are germaneto this dispute. e Article III of the Compact (the “election and apportionment provision”) provided that taxpayers mayelect to apportion their income using the Compact formula or the state’s own apportionment formula. e Article IV of the Compact contained the provisions of the standard UDITPA. e Article X(2) of the Compact provided that “[a]ny party State may withdraw from this compact by enacting a statute repealing the same,”but that “[nJo withdrawal shall affect any liability already incurred by or chargeable to a party State prior to the time of such withdrawal”(i.e., withdrawingstates remain liable for the accrued charges they previously agreed to pay). After the Compact wasenacted,its legality was challenged on the ground that the Compact violated the compact clause of the United States > Compact membersare states that have enacted the Multistate Tax Compactinto their state law. * Section 38006sets forth the text of the Multistate Tax Compact, as enacted by California in 1974. (Stats. 1974, ch. 93, p. 193, § 3.) On June 27, 2012, the Governor signed into law Senate Bill No. 1015, which repealed Part 18 of Division 2 of the Revenue and Taxation Code, including section 38006 et seq. As a result, California is no longer a Compact member. Constitution because Congress had notratified it. Rejecting the challenge, the Supreme Court of the United States held that the compact clause does not require congressional approval to be a valid compact. (U.S. Steel, supra, 434 U.S. at p. 455.) Both before and after California’s 1974 adoption of the Compact, memberstates have, at times, unilaterally superseded, amended, or repealed various Compactprovisionsby statute, including the election and apportionment provisions of the Compact. For example, Florida adopted the Compact in 1967, but in 1972 enactedlegislation that repealed the election and apportionmentprovisions of the Compact. Subsequently, the Multistate Tax Commission (“Commission”), the body that administers the Compact, held a meeting at which all of the memberstates adopted a resolution allowing Florida to remain a memberin good standing of both the Compact and the Commission, despite Florida's repeal of the election and apportionmentprovisions (Articles III and IV) of the Compact. (Exhibit 1 to Petitioner's Request for Judicial Notice.)° Over time, a substantial majority of the memberstates superseded the Compact election provision and adopted their own state mandatory apportionment formulas that departed from the Compact formula. None of these state law changes had any effect on the administration of the Compact, and they neither imposed nor required any reciprocal action or recognition by any other memberstate. Significantly, the Commission and memberstates never objected to such state law changes. In 1993, California amended a portion of its UDITPAstatute, section 25128, to require that most California corporate taxpayers use a > After the matter had been submitted for decision to the Court of Appeal, the Commission reviewedits files, uncovered the Florida resolution and forwarded it to Board counsel. double-weighted sales factor apportionment formula exclusively, “Injotwithstanding Section 38006 [the Compact].” (Stats. 1993, ch. 946 [S.B. 1176].) California taxpayers complied with the new law for more than a decade. In 2006, some taxpayers (including appellants here) beganfiling claims for refund based on the assertion that the Legislature had not intended amendedsection 25128 to supersede the Compact formulaor, if the Legislature did so intend, then amended section 25128 was unconstitutional. The consolidated appeals presently under consideration involve 39 taxpayer-years and claimedtax refundstotaling $34,643,031, plus statutory interest. (AA0004, AA0307, AA0348, AA0613, AA0654, AA0695.) Although section 25128 was amended in 1993, it was not until 2006 that appellants (hereafter referred to collectively as Taxpayers) beganfiling claims for refund alleging they had madeanelection to use the Compact formula instead. (AA0006, AA0309, AA0351, AA0615, AA0656, AA0697.) The Board denied Taxpayers’ claims for refund. Taxpayers brought suits for tax refund alleging that amendedsection 25128 did not override or repeal the election provision of the Compact (former section 38006), and therefore, that they had the right to elect to use the Compact formula and notthe state’s double-weighted sales formula to apportion their business incomefor tax purposes. The Board demurred, contending that the plain language of amended section 25128, which mandates the exclusive use of a double-weighted sales factor, eliminated the taxpayer’s right to elect to use the Compact formula. Thetrial court sustained the Board’s demurrer without leave to amend. Taxpayers appealed. On July 24, 2012, in its original published decision, the Court of Appeal reversed, holding that amended section 25128 could not be construed to supersede former section 38006 because: (1) “under established compact law, the Compact supersedes subsequentconflicting state law;” (2) the federal and state Constitutions prohibit states from passing laws that impair the obligations of contracts; and (3) a construction of section 25128 as limiting section 38006 would “run[ ] afoul of the reenactment clause of the California Constitution.” (Slip Op., p. 16.) Shortly thereafter, the Court of Appeal ordered a rehearing on its own motion and vacated its original opinion. On October 2, 2012, the Court of Appeal issued a new published opinion that again reversed the judgment. This opinion differed in two important respects. First, it was modified to reflect that California had recently withdrawn from the Compactin its entirety by repealing section 38006. (Stats. 2012, ch. 37, § 3, eff. June 27, 2012.) Second, the court held that amended section 25128 is unconstitutional because it contravenes the federal and state constitutional prohibition against state laws that impair the obligations of contracts, and the reenactmentrule of the California Constitution. (Slip Op., p. 20.) The decision becamefinal on November1, 2012, REASONS FOR GRANTING THE PETITION This Court should grant review to settle important questions of law and to secure uniformity of decision: 1. The issuesat the heart of this litigation are issuesoffirst impression potentially affecting tens of thousands of multistate enterprises that do business within and without California, as well as the many more enterprises that do business in the remaining nineteen Compact member states.° The issues are also extremely important to tax administrators ° Each year approximately 80,000 apportioning corporate tax returns — potentially affected by the decision below — are filed with the State of California. throughout the Compactstates and to the business community. Cases raising these same issues have been filed in at least three other states (Texas, Michigan and Oregon) and the decision below will no doubt encouragethe filing of similar suits in other memberstates. 2. The potential financial consequencesofthis litigation are immense. If Taxpayers' legal position is sustained, the Board estimates that California may have to refund up to $750 million in tax and interest to taxpayers raising similar claims. The allowance of those claims would impose an inequitable hardship uponthestate after thirteen years of legislative — and budgetary — reliance upon the constitutionality of amended section 25128. For Taxpayers, who complied with the double-weighted sales formula in filing their original tax returns, and only attempted to “elect” the Compact formula on amendedreturnsfiled years later, the allowanceof their claims would amountto an unwarranted tax windfall. 3. The determination that amended section 25128 unconstitutionally impaired California’s obligations under the Compact conflicts with (a) established case law that requires courts to perform an "impairmentof contracts" analysis prior to deeming statute unconstitutional and (b) the presumption that statutes shall be construed so as to uphold their constitutionality wheneverpossible. 4, Finally, the determination that amended section 25128 violates the reenactmentrule conflicts with established case law that the reenactment rule does not apply to statutes where the existing statute has been repealed (or superseded) in wholeor in part by implication in a subsequent statute. The Court of Appeal’s ruling places in doubt the constitutionality of hundreds of California statutes in which the Legislature supersedes, limits or affects the scope of preexisting statutes by using the phrase notwithstanding.” ARGUMENT 1. THE COURT OF APPEAL’S INTERPRETATION OF THE RIGHTS AND OBLIGATIONS OF MEMBER STATES AND PRIVATE PARTIES UNDER THE COMPACT CONFLICTS WITH ESTABLISHED LAW Non-congressionally approved compacts, such as the Compact, should properly be analyzed as both a statute and a contract. (See McComb v. Wambaugh (3rd Cir. 1991) 934 F.2d 474, 479.) But the Court of Appeal’s literal interpretation of the Compact’s language contradicts established principles of contract and statutory law and fails to take into account the unique status of the Compact as an agreement between sovereign entities. As a purely statutory matter, there is no dispute that one legislature can validly supersede, amend, repeal, and limit the effect of legislation adopted by a prior legislature, so long as there is no unconstitutional impairment of vested rights. (U.S. v. Winstar Corp. (1996) 518 U.S. 839, 872.) In determining whether a compactstatute also imposes ’ LEXIS was unable to perform a search that spansall of the California Codes for such language because it would return more than 3,000 results. However, a sample of California statutes whose constitutionality is now in doubt becausethosestatutes use the “notwithstanding” language contained in amendedsection 25128 are as follows: Rev. & Tax. Code, §§ 23701h(b)(1) and 23701(b)(1); Bus & Prof. Code, § 2435(f); Civil Code, § 798.87(a); Code Civ, Proc., § 128(b); Code Civ. Proc., § 1273.030(e); Cal. Rules of Court, Rule 5.110; Cal. Rules of Court, Rule 5.134(a); Cal. Corp. Code, § 301.5(a); Cal. Corp. Code, § 17002(c); Cal. Educ. Code, § 30.5(a); Cal. Educ. Code, § 1629; Cal. Educ. Code, § 8277.6(b); Cal. Educ. Code, § 12300; Cal. Educ. Code, § 1251; Cal. Gov. Code, § 179; Cal. Fam. Code, § 17400(b)(1); Cal. Fam. Code, § 17522.5(a); Cal. Fin. Code, § 377; Cal. Fin. Code, § 1101(c). contractual obligations upon a state, a court should apply contract principles -- offer, acceptance, meeting of the minds, consideration, waiver -- all the while taking into accountthe rule that agreements in derogation of state sovereignty, especially tax sovereignty, are narrowly construed. (People v. Centr-O-Mart (1950) 34 Cal.2d 702, 703-704.) In this case, the Court of Appeal improperly conferred contract rights on Taxpayers, who werenotparties to the Compact, by determining California was required to offer taxpayers an election. The court’s reasoning and result conflict with established principles of contract law. In California, “the basic goal of contract interpretation is to give effect to the parties’ mutual intent at the time of contracting.” (Civ. Code, § 1636; Bank ofthe West v. Superior Court (1992) 2 Cal.4th 1254, 1264.) Before California joined the Compact, the memberstates and the Commission passed a unanimousresolution affirming Florida’s unilateral repeal of the election and apportionment provisions of the Compact. They also confirmed that Florida remained a memberin goodstanding of the Compact and of the Commission. Thus, when California adopted the Compact in 1974, California understood that the election provision was not a strict contractual requirement and that a memberstate was not required to withdraw from the Compact to effect any change or modification of the Compact. California also understood that the withdrawal provision of the Compact allowed for partial repeal of Compact terms absent a complete withdrawal from the Compact.* This understanding is relevant in interpreting the agreement between California and the other memberstates. * California participated in the meeting that led to the Florida resolution as reflected in the Commission’s meeting minutes. (Exhibit 1 to the Request for Judicial Notice.) The Court of Appeal dismissed the fact that 15 out of 20 member states had exhibited this understanding of their agreement by enacting mandatory state apportionment formulas with no election provision. The Court of Appeal held that “the course of performance of a contract is only relevant to ascertaining the parties’ intention at the time ofcontracting.” (Slip Op., p. 19, emphasis in original.) But California entered the Compact with the understanding atthe time ofcontracting that memberstates had the ability to deviate from the Compact’s taxing provisions, as demonstrated by Florida and other memberstates’ actions, without withdrawing from the Compact. Therefore, memberstates’ construction and interpretation of the Compactis relevant to construing the terms of the Compact agreed to by California. Moreover, the Court of Appeal has elevated form over substance in frustrating the Legislature’s clear purpose for amending section 25128 in 1993 to preclude multistate taxpayers from using the Compact formula, and for multistate taxpayers to face increased tax liabilities. Under the Court’s reasoning, if the Legislature had simply included the language “repealing Section 38006”instead of “notwithstanding Section 38006,” amended section 25128 would be constitutional. But the proper interpretation should not turn on this fine a distinction of words because applicable California precedent establishes that an existing statute can be repealed by subsequent legislation that applies “notwithstanding”the earlier statute. (Klasjic v. Castaic Lake Water Agency (2004) 121 Cal.App.4th 5, 13; Department of Personnel Administration v. Superior Court (1992) 5 Cal.App.4th 155, 186-193.) The Court of Appeal’s interpretation of the Compactallows taxpayers, as nonparties to the compact, to assert an interpretation of the Compactthat the memberstates themselves do not adhere to and, indeed, reject. The court’s restrictrve Compact interpretation, which requires California to 10 withdraw from the Compactentirely in order to enact subsequent legislation that alters or amendsits apportionment formula, is contrary to the memberstates’ intent and course of action. Not only does the court’s decision conflict with memberstates’ longstanding construction and interpretation of the Compact, but the logical extension of the court’s restrictive interpretation would lead to the inevitable dissolution of the Compact because any memberstate that wanted to deviate in the slightest way from any Compact provision would be required to withdraw fromit. In fact, several other states, including Michigan, Texas and Oregon,are facing similar legal challenges. By addressing this issue, this Court would be providinguseful guidance to these other states, as well. While California has since withdrawn from the Compact, there are nevertheless significant remaining reasonsfor this court to grant review. There have been other modifications and changes to the Revenue and Tax Code provisionsthat are part of the Compact. If these changes are also rendered inapplicable because the affected provisions are contained within the Compact, then the potential monetary exposure of the state could be significantly increased beyond the current $750 million estimate. In short, the other changes that California has made to the UDITPAstatutes (Rev. & Tax. Code, §§ 25120-25139) are now at risk of being invalidated because the decision below has essentially held that the Legislature cannot make changes to Compact provisions without a complete withdrawal. California will potentially face additionallitigation from taxpayers seekingto raise claims for tax refunds based on Compact provisions that conflict with subsequentlegislative changes.. Finally, California is a member of many Compactsthatare still in effect, and this Court’s guidance is important to establish certainty and uniformity far beyond the impact of the Multistate Tax Compact. 11 Il. THE COURT OF APPEAL’S DETERMINATION THAT AMENDED SECTION 25128 IS UNCONSTITUTIONALAS VIOLATIVE OF THE CONTRACTS CLAUSE CONFLICTS WITH EXISTING LAW The Legislature did not impair a contractual duty owed to Taxpayers because Taxpayers had no contractual! right to elect an apportionment formula under former section 38006. As discussed above, the Compact did not require California to completely withdraw to effectuate any changesto its provisions. The Legislature amended section 25128 to mandate the use of a double-weighted sales apportionment formula upon multistate taxpayers. Taxpayers do not have a contractual basis on which to challenge the Legislature as they are neither parties to the Compact, nor intended beneficiaries of contractual rights. (Civ. Code § 1559; Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1994) 21 Cal.App.4th 1586, 1600.) The Court of Appeal reasoned that Taxpayers have standing to enforce the election provision in the Compact because the Compact explicitly gives them an election to choose between the three-factor Compact formulaor state alternative formula. (Slip Op., p. 11.) The decision fails to distinguish between Taxpayers’ statutory rights under the Compact, and Taxpayers’ purported contractual rights under the Compact. Although the Compact imbued Taxpayers with certain statutory rights (which were superseded when the Legislature amended section 25128 in 1993), it did not provide them with contractual rights. Under the Compact, Taxpayers had the statutory right to have their tax liability properly determined according to California law. The Legislature’s action in amending section 25128 also falls within the proper purview of California’s continuing sovereignty overits tax laws, which may not be suspended or surrendered by grant or contract (Cal. Const., art. 31). Since adoption of the new apportionmentformula did not interfere with any legitimate expectations Taxpayers could have had under the 12 Compact, the Court of Appeal erroneously held that amended section 25128 violated Taxpayers’ rights under the contract clauses of the United States and California Constitutions. And this decision conflicts with the jong line of cases holding to the contrary. II. THE COURT OF APPEAL’S APPLICATION OF THE REENACTMENT RULETO AMENDEDSECTION 25128 CONFLICTS WITH ESTABLISHED LAW The Court of Appeal held that amendedsection 25128 was unconstitutional under the reenactmentrule because “the intent of the ‘[nJotwithstanding Section 38006’ language in section 25128is to repeal and supersede the taxpayer election to apportion under the Compact formula,” and this legislative intent “would trigger the reenactmentstatute.” (Slip Op., pp. 20-21.) The court’s ruling conflicts with longstanding California law that the reenactment rule does not apply where onestatute amends or repeals another by implication. (White v. California (2001) 88 Cal.App.4th 298, 313-315; Brosnahan v. Brown (1982) 32 Cal.3d 236, 255- 258; Hellman v. Shoulters (1896) 114 Cal. 136, 153.) The “notwithstanding section 38006” language in amended section 25128 effects a repeal by implication. Amendedsection 25128 intended to mandate a double-weighted sales factor apportionment formula as the sole California apportionment formula method available to multistate taxpayers. It achieves this purpose by implying that any contrary purpose, such as the election provision contained in formersection 38006, is repealed. If the decision below stands, hundreds of California statutes which contain the “notwithstanding”phrase are vulnerable to constitutional challenge. The Court of Appeal stated that “neither the public nor the legislators had adequate notice that the intent of this amendment [to Section 25128] was to eviscerate former section 38006.” (Slip Op., p. 21.) There is no factual basis for this statement, and the record refutes it. The legislative 13 history confirms the Legislature’s intent for amended section 25128 to preclude corporations from using the equally weighted three-factor apportionment formula contained in section 38006 andlegislative recognition that many taxpayers would face increased tax liabilities as a result. In fact, plaintiff taxpayer, Proctor & Gamble, voiced its opposition to the proposed amendmentof section 25128. Moreover, multistate taxpayers, includingplaintiffs in these actions, filed tax returns using the double-weighted sales factor formula contained in amendedsection 25128 for more than ten years after the 1993 amendment. There is no question the “public” was aware of the amendmentto section 25128. That amendmentdid not violate the reenactment rule. Review ofthe Court of Appeal’s decision is needed to reconcile it with existing law, which clearly establishes that the reenactmentrule does not apply to statutes such as section 25128 that repeal by implication. CONCLUSION For the foregoing reasons, the Franchise Tax Board respectfully requests that the Court grantthis petition for review. Dated: November 13, 2012 Respectfully submitted, KAMALAD. HARRIS Attorney General of California JOYCE E. HEE Supervising Deputy Attorney General |00a Lucy F. WAN Deputy Attorney General Attorneys for Defendant and Respondent Franchise Tax Board SF2010900595 14 CERTIFICATE OF COMPLIANCE I certify that the attached Petition for Review uses a 13 point Times New Romanfont and contains 4,419 words. Dated: November 13, 2012 KAMALA D. HARRIS Attorney General of California Deputy Attorney General Attorneysfor Defendant and Respondent Franchise Tax Board Filed 10/2/12; opinion on rehearing CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR THE GILLETTE COMPANYet al., Plaintiffs and Appellants, A130803 Vv. FRANCHISE TAX BOARD, (San Francisco City & County Super. Ct. Nos. CGC-10-495911, CGC-10-495912, CGC-10-495916, CGC-10-496437, CGC-10-496438, CGC-10-499083) Defendant and Respondent. At the operative times, California was a signatory to the Multistate Tax Compact (Compact). (Former Rev. & Tax. Code,'§ 38001, California’s enactmentof the Compact.) This binding, multistate agreement obligates memberstates to offer its multistate taxpayers the option of using either the Compact’s three-factor formula to apportion and allocate incomeforstate incometax purposes,orthe state’s own alternative apportionment formula. (§ 38006,art. III, subd. 1.) This is one of the Compact’s key mandatory provisions designed to secure a baseline level of uniformity in state income tax systems, a central purpose of the agreement. ' On June 27, 2012,after the oral argumentin this case, the Governorsigned into law Senate Bill No. 1015, which states: “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.) Senate Bill No. 1015, and any issue concerningits effect or validity, werenot before this court. Unless noted otherwise,all statutory references are to the Revenue and Taxation Code. Prior to 1993, California subscribed to a single method of apportioning and allocating income, the Compact formula, which ascribed equal weightto three factors: property, payroll and sales. (Former § 25128, as added by Stats. 1966,ch. 2, § 7, p. 179.) Then, in 1993 the Legislature amended section 25128 to give double weight to the sales factor for most businessactivity, specifying that “[n]otwithstanding Section 38006,all business incomeshall be apportioned to this state by multiplying the [business] income by a fraction, the numerator of whichis the property factor plus the payroll factorplus twice the sales factor, and the denominator of which is four... .” (Former § 25128, subd. (a), italics added, as amendedbyStats. 1993, ch. 946, § 1, p. 5441 y These consolidated appeals brought by appellants the Gillette Company andits subsidiaries, and other corporate entities (Taxpayers),° present the issue of whether, for the tax years at issue since 1993, Taxpayers were entitled to elect the Compact formula, or, as respondent Franchise Tax Board (FTB)asserts, did the 1993 amendmentto section 25128 repeal and supersede that formula, thereby makingthe state formula mandatory? Weconclude that the Compactis a valid multistate compact, and California was bound by it and its apportionmentelection provision throughoutthe years in question because California had not repealed former section 38001 et seq. and withdrawn from the Compact during that timeframe. Accordingly, we reverse thetrial court’s order sustaining the FTB’s demurrer without leave to amend.” ° For purposesofthis appeal, the current version of section 25128, subdivision (a) is similar in all material respects to the 1993 amendment, readingas follows: “Notwithstanding Section 38006,all business incomeshall be apportionedto this state by multiplying the business incomebya fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four... .” * Other appellants are Procter & Gamble Manufacturing Company; Kimberly- Clark Worldwide, Inc., and its subsidiaries; Sigma-Aldrich, Inc.; RB Holdings (USA) Inc., and Jones Apparel Group,Inc. “ Despite the absence of a judgment of dismissal, we deem the order to incorporate such judgment becausethe trial court sustained a demurrerto all causes of action, and all that remains to render the order appealable is the formality of entering a judgmentof dismissal. (Melton v. Boustred (2010) 183 Cal.App.4th 521, 527-528, fn. 1.) I. BACKGROUND A. Historical Context Leading to Enactment ofthe Compact Recognizing the need for uniformity in the apportionmentof corporate incomefor tax purposes amongthe various taxing states, in 1957 the National Conference of Commissioners on Uniform State Laws promulgated the Uniform Division of Income for Tax Purposes Act (UDITPA). (7A pt. 1 West’s U. Laws Ann. (2002) pp. 141-142 & § 9.) To apportion a multistate corporation’s business income amongthe various taxing states, UDITPA usesa three-factor, equally weighted formula consisting of property, payroll and sales receipts. (Ud., § 9.) California adopted the UDITPA in 1966. (§ 25120 et seq.; Stats. 1966, ch. 2, § 7, pp. 177-181.) By 1959, only a few states had adopted the UDITPA. (7A pt. I, West’s U. Laws Ann., supra, p. 141.) Thatyear, the United States Supreme Court delivered its decision in Northwestern Cement Co. v. Minn. (1959) 358 U.S. 450, 452 (Northwestern Cement), holding that “net income from the interstate operations of a foreign corporation may be subjected to state taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same.” Northwestern Cement raised concerns in the business community and within weeksof the decision, Congress commenced hearings, culminating in the passage of Public Law No. 86-272 as an emergency, temporary measure some six monthslater. This law wasintendedto restrict the application of Northwestern Cementand created a subcommittee to study state business taxes and recommendlegislation establishing uniform standards which states would observe in taxing incomeofinterstate companies. (Fatale, Federalism and State Business Activity Tax Nexus; Revisiting Public Law No. 86-272 (Spring 2002) 21 Va. Tax Review, 435, 475-476; U.S. Steel Corp. v. Multistate Tax Comm’n (1978) 434 U.S. 452, 455 (U.S. Steel).) The subsequent study, commonly referred to as the “Willis Report” after Congressman Edwin E. Willis who chaired the subcommittee,” called for federal legislation that would have limited state authority to tax > Fatale, supra, at page 477. interstate business operations and imposed a uniform apportionment regime onthestates. (State Taxation of Interstate Commerce, Rep. of the Special Subcommittee on State Taxation of Interstate Commerce of the Com. on the Judiciary, House of Representatives (Sept. 2, 1965) vol. 4, chs. 38, 39, pp. 1135-1136, 1143, 1161.) In the wake of the Willis Report, Congress introduced a numberofbills incorporating its recommendations. (U.S. Steel, supra, 434 U.S. at p. 456, fn. 4; Sharpe, State Taxation ofInterstate Businesses and the Multistate Tax Compact: The Searchfor a Delicate Uniformity (1974) 11 Colum. J. of Law and Social Problems, 231, 242 & n. 43.) To stave off federal encroachment on their taxing powers and devise workable alternatives that would eliminate the need for congressional action, state tax administrators and other state leaders drafted the Compact; by June 1967, nine states had enacted the Compact, which byits terms becameeffective after seven states had adopted it. (Multistate Tax Com., First Ann. Rep. (1968) pp. 1-2; § 38006, art. X, subd. 1.) B. Compact Provisions® California enacted the Compact in 1974. (Former § 38001, Stats. 1974, ch. 93, § 3, p. 193.) Its purposes are to “1. Facilitate proper determination of State and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionmentdisputes. [{] 2. Promote uniformity or compatibility in significant components of tax systems. [§] 3. Facilitate taxpayer convenience and. compliancein the filing of tax returns .... [{]] 4. Avoid duplicative taxation.” (Former § 38006,art. I.) Article [TV adopts the UDITPAandits equally weighted, three-factor apportionment formula, stating in part: “Atl business income shall be apportionedto this State by multiplying the incomebya fraction, the numerator of whichis the property factor plus the payroll factor plus the sales factor, and the denominator of which1s three.” (Former § 38006, art. IV, subd. 9.) However,article III allows taxpayers the option of apportioning and allocating income pursuant to the UDITPA formula or pursuant to a ° Because the Compact continues to exist despite a memberstate’s repeal ofits enabling legislation, we describe its operative terms in the present tense. 4 given state’s alternative apportionmentprovisions: “Any taxpayer subject to an income tax whose incomeis subject to apportionment andallocation for tax purposes pursuant to the laws of a party State... may elect to apportion and allocate his income in the manner provided by the laws of such State . . . without reference to this compact, or mayelect to apportion and allocate in accordance with Article [V.” (Former§ 38006,art. III, subd. 1.) As noted in the Multistate Tax Commission’s Third Annual Report (1969-1970),’ “The Multistate Tax Compact makes UDITPAavailable to each taxpayer on an optional basis, thereby preserving for him the substantial advantages with which lack of uniformity provides him in some states. Thus a corporation whichis selling into a state in which it has little property or payroll will wantto insist upon the use ofthe three-factor formula (sales, property and payroll) which is included in UDITPA becausethat will substantially reduce his tax liability to that state below what it would beif'a single sales factor formula were applied to him[;] on the other hand, he will look with favor upon the application of the single sales factor formula to him by a state from whichheis selling into other states, since that will reduce his tax liability to that state. The Multistate Tax Compactthus preservesthe right of the states to make such alternative formulas available to taxpayers even though it makes uniformity available to taxpayers where and when desired.” (/d. at p. 3.) Article V sets out the rules for sales and use tax credits and exemptions, therein obligating each party state to provide a full credit to taxpayers who previously paid sales or use tax to another state with respect to the same property, and to honorsales and use tax exemption certificates from other states. (Former § 38006, art. V, subd. 1.) The Compact leaves other matters entirely to state control. For example,it -reserves to the states control overthe rate of tax (former § 38006, art. XI, subd. (a)), and simply does not address the composition of a corporation’s tax base. | Aswell, the Compact creates the Multistate Tax Commission (Commission) with powersto study state and local tax systems, develop and recommendproposals for ’ Hereafter, Third Commission Report. greater uniformity of state and local tax laws, and compile and publish information helpful to the states. (Former § 38006,art. VI, subds. 1, 3.) Each party state appoints a memberto the Commission and pays its share of expenses. (d., art. VI, subds. !(a), 4(b).) The Commission may adopt uniform regulations in cases where two or morestates have uniform or similar provisions relating to specific types of taxes. Ud., art. VIL.) However, such regulations are advisory only—eachstate makes its own decision whether to adopt the regulation in accordance with its own law. (/d., art. VII, subd.3.) Additionally, the Commission may perform interstate audits, if requested by a party state; the governing article applies only in states that specifically adoptit by statute. Ud, art. VILL,subds. 1, 2.) Finally, under the Compact, states are free to withdraw from the Compact at any time “by enacting a statute repealing the same.” (Former § 38006,art. X, subd. 2.) C. US. Steel | In 1972, a group of multistate corporate taxpayers brought an action on behalf of themselves andall other such taxpayers threatened with audits by the Commission. The complaint challenged the constitutionality of the Compact on several grounds, including that it was invalid under the compactclause of the United States Constitution.® (U.S. Steel, supra, 434 U.S. at p. 458.) The high court acknowledged that. the compact clause, taken literally, would require the states to obtain congressional approval before entering into any agreement among themselves,“irrespective of form, subject, duration, or interest to the United States.” (U.S. Steel, supra, 434 U.S.at p. 459.) However, it endorsed an interpretation, established by case law,that limited application of the compact clause “ “to agreements that are “directed to the formation of anycombination tending to the increase ofpolitical powerin the States, which may encroach uponor interfere with the just supremacy of the United States.” [Citations.]’ This rule states the proper balance between federal andstate * The compactclauseofarticle I, section 10, clause 3 of the United States Constitution states: “No state shall, without the consent of Congress, ... enter into any agreement or compact with another state, or with a foreign power... .” power with respect to compacts and agreements amongStates.” (/d. at p. 471, mitial quote from Virginia v. Tennessee (1893) 148 U.S. 503, 519.) Framing the test as whether the Compact enhancesstate power with respectto the federal government,the court concluded it did not: “This pact does not purport to authorize the memberStates to exercise any powers they could not exercisein its absence. Noris there any delegation of sovereign power to the Commission; each State retains complete freedom to adoptorreject the rules and regulations of the Commission. Moreover. .. , each State is free to withdraw at any time.” (U.S. Steel, supra, 434 US.at p. 473.) In the end the court rejected all of the plaintiffs’ challengesto the constitutional validity of the Compact. (/d. at p. 479.) D. AmendmentofSection 25128; Litigation Prior to 1993, California required corporations to apportion their business income to California using the standard UDITPA,equally weighted three-factor apportionment formula. (§ 25128, as adopted in 1966; see also former § 38006, art. IV, subd. 9.) In 1993, the Legislature amended this formula to give double weight to the sales factor and specified that the new formula was mandatory, providing in relevantpart: “Notwithstanding Section 38006 [the Compact], all business incomeshall be apportioned to this state by multiplying the [business] incomebya fraction, the numerator of which is the property factor plus the payroll factor plus twice the salesfactor, and the denominator of which is four....” (§ 25128, subd.(a), italics added; Stats. 1993, ch. 946, § 1, p. 5441.) In January 2010, the Taxpayers lodged six complaints for the refund of taxes which the court thereafter consolidated. Therein, they argued that the amended section 25128 did not override or repeal the UDITPA formulaset forth in (former) section 38006, and sought a refund of approximately $34 million. The Taxpayers alleged that they began filing claims for refund in 2006,” based ontheir election to compute their California apportionable income “using the three-factor apportionment formula (property, ” Sigma-Aldrich, Inc., began filing refund claims in 2003; RB Holdings (USA), Inc., began filing refund claims in 2007. payroll, and single-weighted sales) set forth in... § 38006.” The FTB denied the refund claims for the years at issue. The FTB demurred on grounds that the amended section 25128 mandated the exclusive use of the double-weighted sales factor, and accordingto its plain and unambiguous language, negated the Taxpayers’ claim of entitlement to elect the UDITPA formula. Thetrial court agreed that section 25128 “clearly express[ed] an intention to take awaythe alternative under [section] 38006,” and additionally the court in U.S. Steel determined that this alternative statutory scheme “could be obviated in the mannerthat the Legislature did.” Therefore, it sustained the FTB’s demurrer to the complaints without leave to amendand entered judgmentaccordingly. II. DISCUSSION A. Introduction The Taxpayers are adamantthat the Compactis a valid compact, was binding on California during the operative timeframe, and as such, the Legislature could not override and eliminate the (former) section 38006 option for taxpayers to elect the Compact’s apportionment formula. The FTB maintains as a threshold matter that the Taxpayers lack standing to complain of any purported violation of the Compact. On the substantive front, the FTB contends that the plain language of section 25128 mandates the exclusive use of the double-weighted sales apportionment formula, thereby eliminating use of the equally weighted three-factor apportionment formula set forth as a taxpayer option in (former) section 38006. Further, it urges that under California statutory and contractlaw, the Legislature had the power, and in 1993 properly enacted legislation, to repeal the Compactlegislation to the extent necessary to impose this mandatory apportionment formula on taxpayers. B. Nature ofInterstate Compacts Some background on the nature of interstate compacts is in order. These instruments are legislatively enacted, binding and enforceable agreements betweentwo or more states. (Litwak, /nterstate Compact Law: Cases and Materials (Semaphore Press 2011) pp. 5, 12.) Initially used to resolve boundary disputes, today interstate compacts are a staple of interstate cooperation and, in addition to taxes, span a wide range of subject matter and issues includingforest firefighting; water allocation, mining regulation; storage of low level radioactive waste; transportation; environmental preservation and resource conservation; regulation ofelectric energy; higher education and regional cultural development. (Davis, Interstate Compacts in Commerce and Industry (1998) 23 Vt. L.Rev. 133, 139-143.) | As wehave seen, some interstate compacts require congressional consent, but others, that do not infringe on the federal sphere, do not. Questioning whether similar statutes in two states constituted a compact, the Supreme Court has outlined whatit deemed“classic indicia” of such instruments: “We have some doubt as to whether there is an agreement amounting to a compact. The two statutes are similarin that they both require reciprocity and imposea regional limitation, both legislatures favor the establishment of regional banking in New England, and there is evidence of cooperation amonglegislators, officials, bankers, and others in the two States in studying the idea and lobbying for the statutes. But several of the classic indicia of a compact are missing. No joint organization or body has beenestablished to regulate regional banking or for any other purpose. Neither statute is conditioned on action by the other State, and each State is free to modify or repeal its law unilaterally. Most importantly, neither statute requires a reciprocation ofthe regionallimitation.” (Northeast Bancorp v. Board ofGovernors, FRS (1985) 472 U.S. 159, 175 (Bancorp).) The Ninth Circuit Court of Appeals has aptly summarized Bancorp assetting forth three primary indicia: “These are establishment of a joint organization for regulatory purposes; conditional consent by memberstatesin which each state is not free to modify orrepeal its participation unilaterally; and state enactments which require reciprocal action for their effectiveness.” (Seattle Master. Builders v. Pacific N.W. Elec. Power (9th Cir. 1986) 786 F.2d 1359, 1363.) Where,as here, federal congressional consent was neither given nor required, the Compact must be construed as state law. (McComb v. Wambaugh (3d Cir. 1991) 934 F.2d 474, 479.) Moreover, since interstate compacts are agreements enacted into state law, they have dual functions as enforceable contracts between memberstates and as statutes with legal standing within each state; and thus we interpret them as both. (Aveline v. Bd. ofProbation and Parole (1999) 729 A.2d 1254, 1257; see Broun etal., The Evolving Use and the Changing Role ofInterstate Compacts (ABA 2006) § 1.2.2, pp. 15-24 (Broun on Compacts); 1A Sutherland, Statutory Construction (7th ed. 2009) § 32:5; In re C.B. (2010) 188 Cal.App.4th 1024, 1031 [recognizing that Interstate Compact on Placement of Children shares characteristics of both contractual agreements and statutory law].) The contractual nature of a compact is demonstrated by its adoption: “There is an offer (a proposalto enactvirtually verbatim statutes by each memberstate), an acceptance (enactmentof the statutes by the member states), and consideration (the settlement of a dispute, creation of an association, or some mechanism to address an issue of mutual interest.)” (Broun on Compacts, supra, § 1.2.2, p. 18.) Asis true of other contracts, the contract clause of the United States Constitution shields compacts from impairmentbythe states. (Aveline v. Bd. ofProbation and Parole, supra, 729 A.2dat p. 1257, fn. 10.) Therefore, upon entering a compact, “it takes precedence over the subsequentstatutes of signatory states and, as such, a state may not unilaterally nullify, revoke or amend oneofits compacts if the compact does not so provide.” (bid.; accord, Intern. Unionv. Del. River Joint Toll Bridge (3d Cir. 2002) 311 F.3d 273, 281.) Thus interstate compacts are unique in that they empoweronestate legislature—namely the one that enacted the agreement—to bindall future legislatures to certain principles governing the subject matter of the compact. (Broun on Compacts, supra, § 1.2.2, p. 17.) As explained and summarized in C.T. Hellmuth v. Washington Metro. Area Trans. (D.Md. 1976) 414 F.Supp. 408, 409 (Hellmuth): “Upon entering into an interstate compact, a state effectively surrenders a portion of its sovereignty; the compact governs the relations of the parties with respect to the subject matter of the agreementand is superior to both prior and subsequent law. Further, when enacted, a compact constitutes not only law, but a contract which may not be amended, modified, or otherwise altered without the consentof all parties. It, therefore, appears settled that one party may not enact legislation which would impose burdens upon the compact absent the concurrence 10 of the other signatories.” Cast a little differently, “[i]t is within the competency of a State, which is a party to a compact with another State, to legislate in respect of matters covered by the compact so long as such legislative action is in approbation and notin reprobation of the compact.” (Henderson v. Delaware River Joint Toll Bridge Com’m (1949) 66 A.2d 843, 849-450.) Nor may states amend a compact by enacting legislation that is substantially similar, unless the compact itself contains language enablinga state or states to modify it through legislation “ ‘concurred in’ ” by the other states. (Intern. Unionv. Del. River Joint Toll Bridge, supra, 311 F.3d at pp. 276-280.) C. Taxpayers Have Standing to Pursue These Actions The FTBasserts that even if California breached its obligations under the Compact, the Taxpayers have no judicial remedy, are notparties to the agreement and have no enforceable rights underit. First, this is an action for the refund of corporate taxes paid to the state pursuant to section 19382, and without question the Taxpayers have standing in such an action to claim “that the tax computed and assessed is void in whole or in part... .” bid.) Furthermore, the Compact, at former section 38006,article HI, subdivision 1 explicitly gives taxpayers whose incomeis subject to apportionmentandallocation under the laws ofa party state the option to elect to apportion its taxes under UDITPA,the Compact formula. This is a right specifically extended notto the party states but to taxpayersas third parties regulated under the Compact, and as such Taxpayers may seek to enforce this right as part of its tax refund suit. Moreover, the stated purposes ofthe Compact explicitly embrace taxpayer interests. These purposesinclude facilitating (1) “proper determination of State and local tax liability of multistate taxpayers, including the equitable apportionmentof tax bases” and (2) “taxpayer convenience.” (Former § 38006,art. I, subds. 1, 3.) 7 Alabama v. North Carolina (2010) ___~*U.S.___ [130 S.Ct. 2295], characterized as “particularly instructive” by the FTB,is not. There, the Supreme Court ruled that the agency created by the Compact could not bring claims for breach of compact by a party state in a stand-alone action under the Supreme Court’s originaljurisdiction because it 1] had “neither a contractual right to performance by the party States nor enforceable statutory rights under [the compact].” (Ud. at p. 2315.) Our case has nothing to do with the unique features of federal original jurisdiction. (U.S. Const., art. III, § 2, cl. 2.) In any event, in contrast, here the codified compact extends the right to election to appropriate taxpayers. Wefind the decision in Borough ofMorrisville v. Delaware Riv. Bas. Com’n (E.D.Pa. 1975) 399 F.Supp. 469, 472-473, footnote 3 persuasive. There, the plaintiff municipalities who used water from the Delaware River claimedthat the compact commission in question exceededits authority and violated the compact and federal law by imposing certain water charges. Resolving the standing issue in favor of the plaintiffs, the district court further stated that “ ‘[t]o hold that the Compact is an agreement betweenthe political signatories imputing only to those signatories standing to challenge actions pursuant to it would be unduly narrow in view ofthe direct impact on plaintiffs and other taxpayers.’ (Ud. at p. 473.) This view is reinforced by commentators: “For the mostpart, interstate compacts have not created any privately assertable rights .... However, this is not invariably the case. For example, water allocation compacts, while they apportion water amongstates, may affect the rights of individual water users in such a way as to make them properparties to suits. In such situations, the governing fact is that compacts are statutory law. Consequently, the assertion of private rights created or otherwise affected by a compactis procedurally similar to the assertion of such rights conferred by other statutes of the jurisdiction dealing with similar subject matter.” (Zimmerman & Wendell, The Lawand Use of Interstate Compacts (The Council of State Governments 1976) Compact Law,ch. 1, pp. 14-15.) D. The Compact Is a Valid, Enforceable Interstate Compact Toreiterate, the high court in U.S. Steel upheld the facial validity of the Compact against various constitutional challenges. (U.S. Steel, supra, 434 U.S. at pp. 473-479.) A numberof years ago, our own Attorney General acknowledged the binding force ofthe Compactat the time. (80 Ops.Cal.Atty.Gen. 213, 214 (1997): by virtue of enacting the Compactas part of the law ofthis state, the Compact made California a memberof the 12 Commission and the only way to withdraw from commission membership was by enacting repealing legislation.) Moreover, the Compactsatisfies indicia of a compact. (See Seattle Master Builders v. Pacific N.W. Elec. Power, supra, 786 F.2d at p. 1363.) The Commissionis an operational body charged with duties and powers in furtherance of the Compact’s purposes. It oversees the Compact, is composed of tax administrators from all member states, and is financed through a process of allocation and apportionment. (Former § 38006, art. VI.) Meeting on at least an annualbasis, and with representation from each signatory state, the Commissionis a vehicle for continuing cooperative action among thosestates. Additionally, the Compact builds in binding reciprocal obligations that advance uniformity. First, as we have discussed, it secures an election for multistate taxpayers to opt for apportioning their business income under UDITPA,the Compact formula,or in accordance with the state’s own apportionment formula. (Former § 38006,art. III, subd. 1.) The election provision is not optional for party states. Because any multistate taxpayer “may elect” either approach, the party states must make the election available. Asset forth above, the Commission has explained that the mandate to make UDITPA available on an optional basis to taxpayers preserves “the substantial advantages with which lack of uniformity provides [the taxpayer] in somestates.” (Third Commission Report, supra, at p. 3.) Thus the Compactreservesto the states the right to provide taxpayers with alternative formulas, while at the same time making uniformity available when and where desired. (/bid.) Aswell, the Compact commits eachstate to provide sales and use tax credits and exemptions. (Former § 38006, art. V.) Again, the sales and use tax provisions are mandatory on signatory states. Finally, the Compact provides fora state’s orderly withdrawal, namely by enacting a statute repealing the Compact. However, any repealing legislation must be prospective in nature, because it cannot “affect any liability already incurred by or chargeable to a party State prior to the time of such withdrawal.” (Former § 38006, 13 art. X, subd. 2.) Although noticeto sister states is not specifically required, by requiring repealing state legislation, the processitself calls for a measured,deliberative decision prior to withdrawal. Moreover, advance notice could easily be accomplished through the work of the Commission. Nevertheless, the right to withdraw is unilateral. Citing Bancorp, the FTB suggests that the withdrawal provision renders the Compact somethingless than a binding agreement. However,this type of withdrawal provision is commonin other interstate compacts and has not been the death knell rendering them nonbinding and invalid. California is a party to a numberofinterstate compacts containing virtually identical withdrawal provisions, coupled with some type of notice requirement. (See Gov. Code, § 66801 (art. X, subd. (c)) [delineating withdrawal provision for Tahoe Regional Planning Compact]; Veh. Code, §15027 [same for Driver License Compact]; Welf. & Inst. Code, § 1400, art. XI, subd. (a) [same for Interstate Compact on Juveniles]; Pen. Code, § 11180, art. XII, § A [Interstate Compact for Adult Offender Supervision]; Ed. Code, § 12510, art. VIII [Compact for Education].) Furthermore, the situation in Bancorp, cited by theFTB,differs dramatically from the case at hand. There, Massachusetts and Connecticut enacted similar statutes allowing regional interstate banking acquisitions. However, unlike former section 38006, these statutes were not jointly entered into as a binding agreement; they did not create an administrative body nor did they require reciprocation in key respects; and they could be changed as well as repealedat will. (Bancorp, supra, 472 U.S.at p. 175.) The FTBalso points to a recent Commission documentthat refers to the Compact as a “model law” and “not truly a compact.”'” The Commission’s statements do notalter the reality that the Compact was binding on California throughoutthe timeframeatissue. Indeed, the Compact operates as a model lawas to those states that choose to be associate "0 Multistate Tax Compact, Suggested State Legislation and Enabling Act, accessed on the Website of the Multistate Tax Commission on October 1, 2012. 14 members, rather than signatory members. Pursuant to the Commission bylaws, the Commission may grant associate membership to states which have not enacted the Compact but which have, for example, enacted legislation that makes effective adoption of the Compact dependent on a subsequent condition. (Third Commission Report, supra, at p. 96.) Before the Legislature enacted the Compact, California was an associate member. Atthe relevant time, California was a full Compact member, having enacted the Compact “into law and entered into [it] with all jurisdictions legally joining therein ....” (Former § 38001.) That the Compact did not “enter into force” until enacted into law by sevenstates also distinguishes it from a model law. The FTBalso intimates that the Compact is invalid underarticle 13, clause 31 of our state Constitution, which states: “The power to tax may not be surrendered or suspended by grant or contract.” But of course by entering the Compact, California neither surrendered nor suspendedits taxing powers. California retained full control of its tax base, tax rate and tax revenues; it simply obligateditself to provide taxpayers with an option to use UDITPAorthe state formula until such time as it withdrew from the Compact. E. California Cannot Unilaterally Repeal Compact Terms The thrust of the FTB on appealis this: Confirming the Legislature’s authority to amend, repeal or supersede existingstatutes, it proceeds to urge as a matter of statutory construction that the Legislature’s choice of the “[nJotwithstanding Section 38006” language in section 25128 overrode formersection 38006, thus excising the taxpayer option to use UDITPA,the Compact apportionment formula. Indeed, it goes so far as to say that this language constituted “a repeal of section 38006 to the extent necessary to impose a mandatory double-weighted sales apportionment formula upon taxpayers.” Werethis simply a matter of statutory construction involving two statutes— section 25128 and former section 38006—we would at least entertain the FTB’s argumentthat section 25128 overrode the former section 38006 taxpayer election to apportion under the Compact formula, and mandatedthe exclusive use of the double- | weighted sales apportionment formulaat the pertinent times. This is the clear import of 15 the statutory language. However, so construed section 25128 is invalid because it completely ignores the dual nature of former section 38006. Onceonefilters in the reality that former section 38006 was not just a statute but was also the codification of the Compact in California, and that through this enactment California entered a binding, enforceable agreement with the other signatory states, the multiple flaws in the FTB’s position become apparent. 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. 1. The Compact Superseded Section 25128 Byits very nature an interstate compact shifts some ofa state’s authority to another state or states. Thus signatory states cede a level of sovereignty over matters covered in a compactin favor of pursuing multilateral action to resolve a dispute or regulate an interstate affair. (Hess v. Port Authority Trans-Hudson Corporation (1994) 513 US. 30, 42; Broun on Compacts, supra, § 1.2.2, p. 23.) Because the Compactis both a statute and a binding agreement among sovereign signatory states, having entered into it, California could not, by subsequent legislation, unilaterally alter or amendits terms. Indeed, as an interstate compact the Compact is superior to prior and subsequent the statutory law ofmemberstates. (McComb v. Wambaugh, supra, 934 F.2d at p. 479; Hellmuth, supra, 414 F.Supp.at p. 409.) This meansthat at the times in question, the Compact trumped section 25128, such that, contrary to the FTB’s assertion, section 25128 could not override the UDITPA election offered to multistate taxpayers in former section 38006,article IU, subdivision 1. It bears repeating that the Compact requires states to offer this taxpayer option. Ifa state could unilaterally delete this baseline uniformity provision, it would render the binding nature of the Compactillusory and contribute to defeating one of its key purposes, namely to “[p]romote uniformity or compatibility in significant components of tax 16 systems.” (Former § 38006,art. I, subd. 2.) Because the Compact takes precedent over subsequent conflicting legislation, these outcomes cannot cometo pass. The FTB offers an alternative argument, namely that the UDITPAelection can be superseded and repealed pursuant to the Compact’s own withdrawalprovision. Specifically, it casts the withdrawal clause as a flexible tool giving memberstates the “means of overriding any and all of its provisions, including the election and apportionment provisions. Memberstates can simply utilize the unrestricted withdrawal provision .. . to repeal and withdraw from the Multistate Tax Compact, in whole or in part.” As a matter of compact law, this cannot be. Having established that the Compact is a binding, valid compact, we construe and apply it accordingto its terms. (Texasv. New Mexico (1983) 462 U.S. 554, 564.) In part because compacts are agreements among sovereign states, we will not read absent terms into themordictate relief inconsistent with their express terms. (Alabama 'v. North Carolina, supra, 130 S.Ct at p. 2313.) With these concepts in mind,it is obvious that the plain language ofthe withdrawalprovision, enabling a party state to withdraw from the Compact “by enacting a statute repealing the same,” allows only for complete withdrawal from the Compact. After withdrawal, a state remainsliable for any obligations incurred prior to withdrawal. Faced with the desire to escape an obligation under the Compact, a state’s only optionis to withdraw completely by enacting a repealing statute. That is what the plain language says, and wewill not read into that language an inconsistent term allowing for piecemeal amendmentor elimination of compact provisions. At the time of the trial court’s ruling and the submission of the caseto this court after oral argument, California had not withdrawn from the Compact. The FTB refers us to Alabama v. North Carolina, supra, involving the same compact withdrawal provision, to support its position that we shouldnot restrictively interpret the withdrawal provisions of the Compact. The FTB focuses on the following passage: “The Compact imposes no limitation on North Carolina’s exerciseof its statutory right to withdraw. ... There is no restriction upon a party State’s enactment of 17 suchalaw....” (Alabama v. North Carolina, supra, 130 S.Ct. at p. 2313, italics omitted.) However, the FTB omits the context, which is crucial. North Carolina withdrew from the compact in question by enacting a law repealing its status as a memberstate, as required by the compact. (Id. at p. 2304.) Theplaintiffs alleged that North Carolina withdrew in badfaith to avoid monetary sanctions. Holding that there wasno limitation on North Carolina’s exercise of its withdrawal right, the Supreme Court explained that there was nothing in the compact suggesting that there were certain purposes for which the conferred withdrawal power could not be employed. (dd.at p. 2313.) In context, it is apparent that the case does not support the principle ofpartial withdrawal or piecemeal alteration or amendment. Rather, the withdrawal provisioncalls for withdrawal from the Compact by passing a law repealing the Compact, period. In further support ofits position that the withdrawal provision should be construed to permit partial repeal or unilateral amendment, the FTB interprets the severability clause as providingfor liberal construction of Compact provisions. This standard clause says that if any provisionis declared invalid, the remaining provisions will not be affected. In other words,if a court declares any provision unconstitutional or invalid,it will be severed to avoid invalidation of the entire Compact. (Former § 38006,art. XII.) How this clause advances the FTB’s causeis not apparent to this court. It has nothing to do with liberal construction or the validity of state action to alter or amend existing Compact provisions. | Taking a slightly different tact, the FTB points out that a numberofpartiesto the Compact have adoptedstatutes over the years that deviate from the Compact’s taxing provisions. According to materials furnished in the FTB’s request for judicial notice and summarized in its brief, 14 of 20 memberstates have passed some variation of a mandatory, state-specific apportionment formula that departs from the Compact provisions. The states have accomplishedthis in a variety of ways. The FTB recommendsthat we considerthe extrinsic evidenceofthis “course of conduct” in ascertaining whether the Compact is reasonably susceptible to an _ interpretation that rendersits taxing provisions nonbinding and capable of being 18 amended, superseded andrepealed, in wholeor part, by memberstates. Both parties concurthat the key is whether the Compactis reasonably susceptible to the interpretation offered. (Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 980.)'" It is not. As we have demonstrated, the Compact’s express, unambiguous terms require extending taxpayers the option of electing UDITPA,and set forth reciprocal repeal terms allowing a memberstate to cease its participation andreclaim its sovereignty. As important, the proffered interpretation runs counterto the express purposes of the Compact, which includefacilitating “equitable apportionmentof tax bases” and promoting “uniformity or compatibility in significant components of tax systems.” (Former § 38006,art. I, subds. 1, 2.) The FTB’s interpretation, that the Compact does not require states to provide multistate taxpayers with the election to use the UDITPA formula, would eviscerate the availability of a common formula forall taxpayers to use as an alternative, thereby diluting a potent uniformity provision of the Compact. Moreover, the course of performanceof a contract is only relevant to ascertaining the parties’ intention at the time ofcontracting. (Civ. Code, § 1636; Cedars-Sinai Medical Center v. Shewry, supra, 137 Cal.App. 4th at p. 983.) The express, stated purposes of the Compact are a much truer measureof that intent than the subsequent statutory changes to state apportionment formulae. Similarly, the purpose of admitting course of performance evidence is grounded in common sense: “[W]hen the parties perform undera contract, without objection or dispute, they are fulfilling their understanding of the terms of the contract.” (Employers '! The FTB addsthat “[iJn interpreting a compact, ‘the parties’ course of performance under the Compactis highly significant,’ ” quoting Alabama v. North | Carolina, supra, 130 S.Ct. at page 2309. As a general statement this is highly misleading. The court’s reference to the course of performancepertained to “whether, in terminating its efforts to obtain a license, North Carolina failed to take whatthe parties considered ‘appropriate’ steps... .” (Alabama v. North Carolina, supra, 130 S.Ct.at p. 2309.) The compactin question obligated the defendant to take appropriate stepsto ensure that an application to construct and operate the facility in question was filed and issued by the proper authority. (Id. at p. 2303.) The issue was what constituted “appropriate steps” under the compact. Of course, in this particular context, the parties’ course of performance would help flesh out that concept. 19 Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 922.) The course of performancedoctrine is thus premised on the assumption that one party’s response to another party’s action is probative of their understanding of the contract terms. But in the context of the Compact, the memberstates do not perform or deliver their obligations to one another, unlike a typical contract in which a party provides services or goodsto the other party, who in turns monitors the first party’s compliance with contract terms. Thus the foundation for finding course of performance evidence relevant andreliable is faulty. For example, in Cedars-Sinai, the reviewing court concluded that course of conduct performance wasnotrelevantto interpret a disputed provision because the conduct in question had nothing to do with providing incentives to monitor or enforce contract compliance. (Cedars-Sinai Medical Center v. Shewry, supra, 137 Cal.App.4th at p. 983.) F. The FTB’s Construction Violates the Federal and State Constitutional Prohibition Against Impairment of Contracts Ourfederal and state Constitutions forbid enactmentof state laws that impair contractual obligations. “No state shall... pass any. . . law impairing the obligation of contracts ....” (U.S. Const., art. I, § 10, cl. 1.) “A... law impairingthe obligation of contracts may not be passed.” (Cal. Const., art. I, § 9.) This constitutional prohibition extends to interstate compacts. (Green v. Biddle (1823) 21 U.S. 1, 12-13, 17 [Kentucky | law that narrowed rights and diminished interests of landowners under compact between Kentucky and Virginia violated compact and was unconstitutional]; Doe v. Ward (W.D.Pa. 2000) 124 F.Supp.2d 900, 915, fn. 20.) Section 25128, by its plain terms, sought to override and disable California’s obligation under the Compactto afford taxpayersthe option of apportioning income under the UDITPA formula. Tothis extent, and during the tax years at issue, section 25128 was unconstitutional as violative of the prohibition against impairing contracts. G. The FTB’s Construction Runs Afoul ofthe Constitutional Reenactment Rule The FTB is adamantthat the intent of the “[n]otwithstanding [former] Section 38006” languagein section 25128 wasto repeal and supersede the taxpayerelection to 20 apportion under the Compact formula. Ata minimumthis outcome would have eliminated or rewritten article II], subdivision | and eliminated article IV, subdivision 9 of formersection 38006. However, this result flies in the face of the California Constitution, article IV, section 9, stating in part: “A statute may not be amended by referenceto its title. A section of a statute may not beamended unlessthe section is re- enacted as amended.” Long ago our Supreme Court expressed the purpose of the reenactment rule as avoiding “ ‘the enactmentof statutes in terms so blind that legislators themselves [are] sometimes deceived in regard to their effect, and the public, from the difficulty of making the necessary examination and comparison, fail[s] to become appraised[sic] of the changes made in the laws.’ ” (Hellmanv. Shoulters (1896) 114 Cal. 136, 152; accord American Lung Assn. v. Wilson (1996) 51 Cal.App.4th 743, 748.) Clearly the reenactmentrule applies to acts “ ‘which are in terms .. . amendatory of some former act.’ [Citation.]” (American Lung Assn. v. Wilson, supra, 51 Cal.App.4th atp. 749.) Its applicability does not depend on the method of amendment, butrather “on whether legislators and the public have been reasonably notified of direct changesin the law.” ([bid.) The FTB’s construct triggers the reenactmentstatute becauseit posits that the 1993 amendmentto section 25128 repealed and superseded the UDITPA apportionment formula. Nonetheless, the purportedly deleted UDITPAelection remained in former section 38006. The Legislature did not repeal, amend or reenact any part of the Compact at the time, and thus neither the public nor the legislators had adequate notice that the intent of this amendment wasto eviscerate former section 38006. 21 UI. DISPOSITION The judgmentof dismissal is reversed. FTto bear costs on appeal. Reardon,J. Weconcur: Ruvolo, PJ. Sepulveda, J. ” Retired Associate Justice of the Court of Appeal, First Appellate District, assigned by the Chief Justice pursuantto article VI, section 6 of the California Constitution. 22 Trial Court: Trial Judge: Counsel for Appellants: Counsel for Amici Curiae on Behalf of Appellants: Counsel for Respondent: Counsel for Amicus Curiae on Behalf of Respondent: San Francisco Superior Court Hon. Richard A. Kramer Silverstein & Pomerantz, Amy L. Silverstein, Edwin P. Antolin, Johanna W. Roberts and Charles E. Olson BraunHagey & Borden and Matthew Borden Jeffrey B. Litwak Wm. Gregory Turner Law Offices of Miriam Hiser and Miriam Hiser Masters, Mullins & Arrington and Richard L. Masters Kamala D. Harris, Attorney General Paul D. Gifford, Senior Assistant Attorney General Joyce E. Hee, Supervising Deputy Attorney General Lucy F. Wang, Deputy Attorney General Joe Huddleston, Shirley Sicilian and Sheldon Laskin 23 DECLARATION OF SERVICE BY U.S. MAIL Case Name: TheGillette Company & Subsidiaries v California Franchise Tax Board Court of Appeal Case No.: A130803 San Francisco Superior Court Case No. CGC10495911 1 declare: I am employedin the Office of the Attorney General, whichis the office ofa memberofthe California State Bar, at which member's direction this service is made. I am 18 years of age or older and nota 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 that same day in the ordinary course of business. On November 13, 2012, I served the attached PETITION FOR REVIEW by placing a true copy thereof enclosed in a sealed envelope with postage thereon fully prepaid, in 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. Edwin P. Antolin, Esq. Silverstein & Pomerantz LLP 55 Hawthorne Street, Suite 440 San Francisco CA 94105 Clerk of the Court Court of Appeal First Appellate District 350 McAllister Street San Francisco CA 94102 Clerk of the Court San Francisco Superior Court 400 McAllister Street San Francisco CA 94102 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 November 13, 2012, at San Francisco, California. oo, Yn Joan Randolph Weojoantsnlld Declarant Signature