By Robert Merten and Madison Barnett
The San Diego County Superior Court determined that California’s combined filing regime—which requires interstate taxpayers to use combined reporting but permits intrastate taxpayers to choose between combined or separate reporting—does not violate the US Constitution’s Commerce Clause. The court acknowledged that (1) the interstate and intrastate unitary businesses were being treated differently, and (2) a triable issue of fact existed on whether such differential treatment resulted in discrimination against interstate businesses. The court nevertheless upheld the constitutionality of California’s statute granting intrastate taxpayers the option to file a separate return. The court reasoned that, even if discrimination against interstate taxpayers could be shown, the statute would survive strict scrutiny because the state has a legitimate interest “in preventing the manipulation and hiding of taxable income” by requiring combined reporting “to ensure that all business income from interstate business is accurately accounted for and that it is fairly apportioned.”
The court’s order was issued on remand from a 2015 Court of Appeal opinion that reversed the trial court’s previous order dismissing the taxpayer’s constitutional challenge. The taxpayer has appealed this order, bringing the case back to the Fourth District Court of Appeal for further disposition. Harley Davidson, Inc. v. California Franchise Tax Board, Minute Order, Case No. 37-2011-00100846-CU-MC-CTL (Oct. 31, 2016), on remand from, 187 Cal. Rptr. 3d 672 (Cal. App. 4th 2015), appeal docketed, Case No. D071669 (Cal. App. 4th Dec. 27, 2016).