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


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

PR Newswire

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. 4th 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).

About Ryan
Ryan, an award-winning global tax services and software provider, is the largest Firm in the world dedicated exclusively to business taxes. With global headquarters in Dallas, Texas, the Firm provides an integrated suite of federal, state, local, and international tax services on a multi-jurisdictional basis, including tax recovery, consulting, advocacy, compliance, and technology services. Ryan is a six-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 2,200 professionals and associates serves over 14,000 clients in more than 50 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at "Ryan" and "Firm" refer to the global organizational network and may refer to one or more of the member firms of Ryan International, each of which is a separate legal entity.

Ryan is an award-winning global tax services firm, with the largest indirect and property tax practices in North America and the sixth largest corporate tax practice in the United States. (PRNewsFoto/Ryan)


Mark Nachbar

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