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Microsoft Corporation v. Franchise Tax Board

139 P.3d 1169, 39 Cal. 4th 750, 47 Cal. Rptr. 3d 216 (2006)

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Microsoft Corporation v. Franchise Tax Board

California Supreme Court

139 P.3d 1169, 39 Cal. 4th 750, 47 Cal. Rptr. 3d 216 (2006)

Facts

Microsoft Corporation (plaintiff) was a software company based in the state of Washington that did business in California. Microsoft invested its excess revenue in short-term marketable securities, some of which it redeemed upon maturity. On its 1991 California income-tax return, Microsoft included the amount of money it received by redeeming its marketable securities in its gross receipts. The California Franchise Tax Board (the board) (defendant) disallowed Microsoft from including the full redemption amount in its gross receipts, instead only allowing Microsoft to include the difference between the redemption amount and the purchase price of the securities. California had adopted the Uniform Division of Income for Tax Purposes Act (the uniform tax act) and used a three-factor apportionment formula—which considered property, payroll, and sales—to calculate a company’s income assignable to the state. When Microsoft included the full redemption amount in its gross receipts, Microsoft’s total sales increased, and its proportion of sales attributable to California fell from 11 percent to 3 percent. This cut Microsoft’s California income-tax liability in half. Microsoft filed a lawsuit in California state court seeking a tax refund and arguing that it should be allowed to include the full redemption amount in its gross receipts. The trial court held that Microsoft could include the full redemption amount in its gross receipts. The court of appeals reversed, holding that the board was authorized to exclude Microsoft’s redemption amount in excess of its gain from its gross receipts under § 25137 of California’s tax code. That section, which codified the uniform tax act’s relief provision, authorized the board to use an alternate formula for calculating a company’s tax liability if applying the standard three-factor apportionment formula would produce unreasonable results. Microsoft appealed.

Rule of Law

Issue

Holding and Reasoning (Werdegar, J.)

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