Opinion ID: 3166818
Heading Depth: 3
Heading Rank: 1

Heading: Reciprocal Obligations

Text: We begin with the “[m]ost important[]” factor: whether the Compact created reciprocal obligations among member states. (Northeast Bancorp, supra, 472 U.S. at p. 175.) The Commission argues the Compact creates no reciprocal 7 Taxpayers argue in passing that the U.S. Steel decision determined the Compact was a binding one, and “[i]f the Court had a doubt about whether the Compact was a binding interstate compact, it would have said so.” The argument is unpersuasive. U.S. Steel concluded only that the compact clause did not require Congress to approve the Compact for it to be valid. (See U.S. Steel, supra, 434 U.S. at pp. 472-478.) The court had no occasion to decide whether the Compact constituted a binding agreement that could not be unilaterally amended by its members. Indeed, U.S. Steel predated Northeast Bancorp, wherein the high court first articulated the factors to consider in determining the binding nature of an interstate agreement. 10 obligations, especially with respect to maintaining the election provision. Like Northeast Bancorp, U.S. Steel emphasized the importance of reciprocity when determining whether a binding interstate compact exists. “[T]he mere form of the interstate agreement cannot be dispositive” of whether the compact clause applies. (U.S. Steel, supra, 434 U.S. at p. 470.) It went on to explain “[a]greements effected through reciprocal legislation may present opportunities for enhancement of state power at the expense of the federal supremacy similar to the threats inherent in a more formalized „compact.‟ ” (Ibid., fn. omitted.) Conversely, as U.S. Steel suggested, simply because an agreement is labeled a “compact” is not dispositive of whether it is binding unless it contains key features, such as reciprocity. (See Northeast Bancorp, supra, 472 U.S. at p. 175.) Taxpayers admit that “party states do not perform or deliver obligations to one [another]” and “have no incentive to enforce the Compact,” which “is not the type of contract where the parties exchange obligations and are in a meaningful position to gauge each other‟s compliance.” Nevertheless, they argue the member states‟ commitment to the UDITPA formula is what prevented congressional intervention, and maintenance of that formula is mutual, reciprocal, and “critical to the effectiveness of the Compact.” As described ante, there is little doubt that, decades ago, the possibility of congressional action helped spur adoption of the Compact. But Taxpayers do not explain how a state‟s elimination of the UDITPA formula renders the Compact less “effective.” More importantly, whether it does or not is a completely different question from whether the Compact constitutes a reciprocal obligation among members. The Compact‟s provision of election between the UDITPA or any other state formula does not create an obligation of member states to each other. Even if maintenance of the election provision in one member state might benefit taxpayers in another state, that benefit to the taxpayer applies whether the taxpayer 11 is from a member or nonmember state. This application is more akin to the adoption of a model law rather than the creation of any mutual obligations among Compact members. We note the Commission, in its amicus curiae brief, does not urge that California‟s decision to discontinue use of the UDITPA formula in any way undermines the effectiveness of the Compact. Indeed, as noted, the UDITPA was promulgated as a model law, and our Legislature adopted it years before joining the Compact. Clearly, the Legislature is free to amend its own legislation even if it is based on a model law. (See Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 772 [noting the Legislature was “free” to amend the UDITPA].) Nothing in the language of the Compact, nor California‟s enactment of it, suggested any change in the Legislature‟s authority to modify the apportionment formula. The Legislative Counsel commented that the Compact did not “alter any state tax.” (Ops. Cal. Legis. Counsel, No. 11600 (May 27, 1973) Multistate Tax Compact (Assem. Bill No. 1304) (1973-1974 Reg. Sess.) 5 Sen. J. (1973-1974 Reg. Sess.) p. 8250.)