State Supreme Court Upholds Tax on Multinational Firms

In another legal win for financially ailing California, the state Supreme Court has turned down a challenge to $2.8 billion in taxes imposed on domestic-based multinational firms.

The justices unanimously refused to hear an appeal by the Colgate-Palmolive Co. and other multinational firms of a lower court ruling upholding the state’s unitary tax--a since-revised method of taxing a share of firms’ worldwide income.

The action, taken in a brief order filed Thursday, follows a May 11 ruling by the high court upholding the tax against a similar attack by Barclays Bank of London and other foreign-based conglomerates. About $792 million in taxes paid or owed the state was at stake in that case.

The justices Thursday sent the Colgate case back to an appeals panel with directions to reissue its previous opinion upholding the tax, along with modifications in line with the high court’s May ruling.

The justices’ action was welcomed by state officials mindful that California faces an estimated $10.7-billion budget gap that could worsen substantially if the state lost the unitary tax cases. “It is good news for the state,” said state Deputy Atty. Gen. Robert D. Milam. “This is a big money case.”

James P. Kleier of San Francisco, a lawyer for Colgate, said he is hopeful that the U.S. Supreme Court will agree to hear appeals by the multinational firms.

Under the unitary system, the state taxed the firms’ income using a complex formula based on the portion of their property, payroll and sales in California. Most other states base their taxes on the firms’ reported income within a state. In 1988, California adopted a revised system allowing multinational firms that paid a fee to use an alternative method based only on their domestic operations.

Colgate and other firms brought suit in Sacramento seeking to regain taxes paid or owed under the unitary system, arguing that the tax violated the Constitution by conflicting with a national policy against unitary taxation.

The companies won a ruling in December, 1988, when a Superior Court judge struck down the tax. But last August, a state appellate panel in Sacramento upheld the system, saying there was insufficient proof that the tax interfered with U.S. policy.

In its May ruling, the state Supreme Court noted that Congress, which holds power over foreign commerce, has never disapproved of the tax.