Minnesota could wind up owing hundreds of millions of dollars in tax refunds if the state loses a pending tax court case, the state solicitor general told a panel of judges Thursday.

The Minnesota Tax Court heard three hours of arguments in the case, which has to do with how multistate corporations calculate tax liability in Minnesota.

“Whatever decision might be made here is going to be applied to other cases,” Alan Gilbert told the three judges on the tax court panel. “If appellants prevail in this matter, the state will have to refund up to a total of $700 million to affected multistate taxpayers.”

The court has three months to make its ruling. Any decision is widely expected to be appealed to the Minnesota Supreme Court.

In the case at issue Thursday, Dallas-based Kimberly-Clark Corp. is arguing it deserves a refund of $1.2 million plus interest, claiming in its 2013 appeal that it should have been able to use a different formula for calculating tax liability in 2007-09 that would have saved it money.

The conflict is over the validity of Minnesota’s elimination in 1987 of an option for multistate businesses to use an alternate tax formula.

According to the state, Kimberly-Clark has no right to have its taxes calculated under a formula that Minnesota abandoned.

The company claims that formula remained a viable choice for the years it’s seeking refunds.

As a member of the Multistate Tax Compact until 2013, Minnesota was required to allow businesses to choose the alternate formula, Kimberly-Clark says. States that enter into a multistate compact can’t just drop pieces of it they don’t like, the company argues.

“Minnesota’s elimination of the compact election was illegal, and the appellant is entitled to use the compact’s apportionment formula to compute its income taxes,” Amy Silverstein, attorney for Kimberly-Clark, told the court.

But Gilbert cited a portion of the state constitution that reads “the power of taxation shall never be surrendered, suspended or contracted away” to support his argument that the state’s taxing sovereignty cannot be impaired.

“That is a broad mandate in terms of what the Legislature cannot do and what you need to do as judges in this case in interpreting that provision,” he said.

Minnesota is one of five states where similar multistate-compact cases are pending.

State leaders have said the potential for $700 million in refunds has caused them to rethink plans for the projected $1.87 billion state budget surplus. The Pioneer Press revealed the number in a story earlier this month based on court filings from Gilbert.

Senate Majority Leader Tom Bakk has said he plans to set aside some of the surplus to prepare for the potential refunds, and House Speaker Kurt Daudt said he’s open to doing that as well.

Under state law, tax refunds of more than $50 million are paid in five annual installments. State budget officials confirmed that means the $700 million in refunds related to this litigation — if it came about — would be paid in chunks of $140 million each year for five years.

Doug Belden can be reached at 651-228-5136. Follow him at twitter.com/dbeldenpipress.