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

Heading: Regulatory Organization

Text: The Taxpayers argue that the establishment of the Commission is “a classic characteristic of an interstate compact.” The argument ignores an important point. Although the Compact established the Commission, that body has no authority ordinarily associated with a regulatory organization. Article VI of the Compact authorizes the Commission to “[s]tudy State and local tax systems and particularly types of State and local taxes,” “[d]evelop and recommend proposals for an increase in uniformity or compatibility of State and local tax laws with a view toward encouraging the simplification and improvement of State and local tax law and administration,” and “[c]ompile and publish such information as would, in its judgment, assist the party States in implementation of the compact and taxpayers in complying with State and local tax laws.” (Compact, art. VI, § 3, subds. (a)-(c), italics added.) As the Commission observes, these powers “are strictly limited to an advisory and informational role.” The Commission may also promulgate administrative regulations “in the event that two or more States have uniform provisions relating to specified types of taxes.” (U.S. Steel, supra, 434 U.S. at p. 457; see Compact, art. VII.) However, (footnote continued from previous page) [as of Dec. 31, 2015].) 14 as U.S. Steel observed: “These regulations are advisory only. Each member State has the power to reject, disregard, amend, or modify any rules or regulations promulgated by the Commission. They have no force in any member State until adopted by that State in accordance with its own law.” (U.S. Steel, at p. 457.) While these regulations may play a persuasive role in shaping policy, the Commission‟s inability to bind member states to adopt them further confirms it is not a regulatory organization within the meaning of Northeast Bancorp. Similarly, the Commission may conduct taxpayer audits but only if the member state has passed separate authorizing legislation and expressly requests the audit. (Compact, art. VIII.) In such a case, the Commission acts as “the State‟s auditing agent” and any power of compulsory process derives from the authority vested by the laws of the requesting member state. (U.S. Steel, supra, 434 U.S. at p. 457; Compact, art. VIII, § 4.) Further, although the Commission may “require the attendance of persons and the production of documents in connection with its audits,” it “has no power to punish failures to comply” and “must resort to the courts for compulsory process, as would any auditing agent employed by the individual States.” (U.S. Steel, at p. 475; Compact, art. VIII, §§ 3-4.) Finally, the Compact authorizes the Commission to provide for binding arbitration of disputes between member states. (Compact, art. IX, § 1.) However, the Commission has never adopted such a regulation and no arbitration provisions are currently effective. (See U.S. Steel, supra, 434 U.S. at p. 457, fn. 6.) Indeed, California hesitated to join the Compact due, in part, to concerns that such an arbitration provision would not only displace California institutions as the forum for tax disputes, but that “easy access to arbitration” would lead to “erosion of the state‟s tax base.” (Assem. Com. on Rev. & Tax., analysis of Assem. Bill No. 1304 (1973-1974 Reg. Sess.) as amended June 14, 1973, p. 3.) The Legislature 15 approved California‟s membership upon explicit condition that the Commission not make the arbitration provision effective. An uncodified portion of our enacting statute provided that California would automatically withdraw from the Compact if the Commission changed its voting rules or if the arbitration provision was made effective. (Stats. 1974, ch. 93, § 5, p. 208.)9 As discussed, U.S. Steel held the Compact did not encroach on federal authority in any way that would require congressional approval under the compact clause. The U.S. Steel court observed there is no “delegation of sovereign power to the Commission; each State retains complete freedom to adopt or reject the rules and regulations of the Commission.” (U.S. Steel, supra, 434 U.S. at p. 473.) The Commission simply has no binding regulatory authority upon member states. Whatever power the Commission has to promulgate regulations or conduct audits exists solely at the pleasure of each member state. Further, the only express powers of the Commission independent of authority granted by each member is 9 Section 5 of the enacting statute provided: “This act is hereby repealed and shall have no further force or effect, and this state is withdrawn from the Multistate Tax Compact as set forth in Section 38006 of the Revenue and Taxation Code, on the 10th day after the occurrence of any of the following events after the operative date of this act: [¶] (1) The Multistate Tax Commission adopts any regulation placing in effect Article IX of the Multistate Tax Compact, or any part thereof, as set forth in Section 38006 of the Revenue and Taxation Code, or [¶] (2) The Multistate Tax Commission places in effect any bylaw or regulation or parliamentary ruling for the conduct of its business which permits any matter voted upon to be adopted other than by receiving a majority of the number of member states and a majority of the total population of all the member states according to the current United States Statistical Abstract, or [¶] (3) The entry of a final judgment by any court of competent jurisdiction requiring the Multistate Tax Commission to place in effect Article IX of the Multistate Tax Compact as set forth in Section 38006 of the Revenue and Taxation Code, or requiring or approving any matter to be adopted by the Multistate Tax Commission by the employment of a different manner of voting than that set forth in subparagraph (2) of this section.” (Stats. 1974, ch. 93, § 5, p. 208.) 16 purely advisory. It may study tax laws, make proposals, and publish data. (Compact, art. VI, § 3.) Because the Commission lacks any binding authority over the member states, it is not a joint regulatory organization as contemplated by Northeast Bancorp. (Northeast Bancorp, supra, 472 U.S. at p. 175.)10 Nothing in the language of former section 38006, the circumstances of its enactment, the subsequent conduct of other members states, or the position taken by the Commission, indicate our Legislature intended to be bound by the taxpayer election provision. C. The Reenactment Rule Does Not Bar the Legislature’s Amendment of Section 25128 Taxpayers alternatively argue that the Legislature‟s amendment of section 25128 is invalid because it violates the reenactment rule. That rule derives from article IV, section 9 of our Constitution, stating: “A statute shall embrace but one subject, which shall be expressed in its title. If a statute embraces a subject not expressed in its title, only the part not expressed is void. A statute may not be amended by reference to its title. A section of a statute may not be amended unless the section is re-enacted as amended.” (Italics added.) One purpose of this provision “is to „make sure legislators are not operating in the blind when they amend legislation, and to make sure the public can become apprised of changes in the law.‟ ” (St. John’s Well Child and Family Center v. Schwarzenegger (2010) 10 See also In re Manuel P. (1989) 215 Cal.App.3d 48, 66-67 (statute regarding the deportation of minor wards did not create an interstate agreement within the meaning of Northeast Bancorp); compare with Seattle Master Builders, supra, 786 F.2d at p. 1363 (concluding the Pacific Northwest Electric Power and Conservation Planning Council constituted a compact agency within the meaning of Northeast Bancorp). 17 50 Cal.4th 960, 983, fn. 20; Hellman v. Shoulters (1896) 114 Cal. 136, 152 (Hellman).) Generally, the reenactment rule does not apply to statutes that act to “amend” others only by implication. (Hellman, supra, 114 Cal. at p. 152.) We reasoned long ago in Hellman: “To say that every statute which thus affects the operation of another is therefore an amendment of it, would introduce into the law an element of uncertainty which no one can estimate. It is impossible for the wisest legislator to know in advance how every statute proposed would affect the operation of existing laws.” (Ibid.) The Legislature‟s 1993 amendment of section 25128 replaced the equal-weighted UDITPA apportionment formula with a different formula double-counting the sales factor. This amendment expressly referenced the Compact, stating that it applied “[n]otwithstanding Section 38006 . . . .” (§ 25128(a) as amended by Stats. 1993, ch. 946, § 1, p. 5441.) Although Taxpayers note that the legislative bill analyses of the amendment did not refer to the Compact or the election provision expressly, reference to the Compact in section 25128(a) itself is strong evidence that the Legislature acted with the Compact in mind. “Even without a re-enactment, the legislators and the public have been reasonably notified of the changes in the law.” (White v. State of California (2001) 88 Cal.App.4th 298, 315; see Brosnahan v. Brown (1982) 32 Cal.3d 236, 256-257.) So too here. Even without a reenactment of section 38006 to eliminate the election language, the amendment of section 25128 did not violate the reenactment rule. D. The Legislature Intended to Supersede the Compact’s Election Provision Having concluded the Legislature had the unilateral authority to eliminate the Compact‟s election provision, we must determine whether it intended to do so. 18 Taxpayers suggest it did not, arguing that the Legislature intended section 25128‟s double-sales factor formula to apply only “if the Compact Formula is not elected.” Both the language of section 25128 and its legislative history defeat such a claim. First, section 25128(a) explicitly provides that “all business income shall be apportioned to this state by” using the formula it sets out, “[n]otwithstanding Section 38006 [i.e., the Compact] . . . .” (Italics added.) There is no ambiguity in this language. The Assembly Committee on Revenue and Taxation‟s analysis of the bill explained the need for the amendment: “California and most other states have used an equal weighted three-factor apportionment formula for many years. This formula has been retained largely out of a belief that uniformity among states is the best way to ensure that corporations are not subject to double taxation or that some income „falls through the crack‟. While any apportionment formula may be somewhat arbitrary, supporters of the current system argue that it is still in California‟s best interest to remain uniform with other states. [¶] However, while uniformity in apportionment methods existed between states in the 1960‟s and may still be a desirable principle, this uniformity has been eroded significantly in recent years by the actions of other states. Currently twenty-five other states at least provide an option to certain taxpayers to place an additional weight on the sales factor in their apportionment formulas . . . . [¶] Proponents believe that California‟s continued reliance upon the three-factor apportionment system results in discriminatory taxation against California-based companies, particularly given the additional weight given to sales factors by other states.” (Assem. Com. on Rev. & Tax., analysis of Sen. Bill No. 1176 (1993-1994 Reg. Sess.) as introduced Mar. 5, 1993, pp. 2-3; see also Sen. Com. on Rev. & Tax., analysis of Sen. Bill No. 1176 (1993-1994 Reg. Sess.) as introduced Mar. 5, 1993, p. 2.) In light of the statute‟s language and this legislative history, there is no credible argument that the Legislature intended to retain the Compact‟s election provision. 19