The Long and Winding Road for Harley-Davidson in California Apportionment Land

DALLAS, Aug. 24, 2018 /PRNewswire/ -- The case of Harley-Davidson alleging discrimination by the California income tax apportionment structure has had a long history through the California court system. The essence of the challenge is that under California law, a unitary group of intrastate taxpayers has the choice to file a combined California income tax return or separate returns. However, a unitary group of interstate taxpayers may only file a combined tax return. 

The first hearing on this issue at a trial court was in the Superior Court of San Diego County. The state filed a demurrer to dismiss Harley-Davidson's action for a refund, which was denied by the California Franchise Tax Board (FTB). A demurrer is a pleading that objects to the pleading by the opposing party. Here, the FTB asked the court to dismiss Harley-Davidson's refund complaint, saying that there was no discrimination. The trial court sustained the Board's demurrer to Harley-Davidson's commerce clause challenge to the California Tax Code. The Court of Appeal, Fourth District reviewed the trial court's decision, overruled its finding,¹ and remanded the case back to the trial court.  

The case was reheard on the facts at the Superior Court of San Diego County, with a finding that whether or not the state's disparate of apportionment methodology for intrastate versus interstate unitary groups was discriminatory, the state had a legitimate purpose for the discrimination. The legitimate reason was to apportion and tax all California source revenue, and the court ruled this goal could not be accomplished by any other reasonable method.

On August 23, 2018, the California Court of Appeal, Fourth Appellate District, in a decision not certified for publication, agreed with the trial court. The Court of Appeal reasoned that the state has a legitimate interest in taxing all income of an interstate unitary group. The combined method of reporting for unitary groups has been upheld as constitutional in numerous cases.² Interstate unitary groups have the ability to shift income out of California if they were allowed to file their returns on a separate company basis. While intrastate California unitary groups earn all their income in California, reporting on a separate or combined basis is virtually irrelevant because all income of the group is attributable to California in either case. The Court of Appeal did not address Harley-Davidson's claims that different reporting mechanisms also affect the use of tax attributes among the group. However, unless Harley-Davidson steers for the California Supreme Court, this would appear to be the end of the road for this motorcycle adventure.

¹ Harley-Davidson v. FTB, 237 Cal. App. 4^th 193 (5/28/2015).
² Container Corp. of America v. FTB, 463 U.S. 159 (1983); Barclays Bank PLC v. FTB, 512 U.S. 298 (1994); Butler Brothers v. McClogan, 315 U.S. 501 (1942).

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