Death and taxes. Maybe.
Posted on 06/20/2017 at 12:00 AM by Cody Edwards
We’ve all heard the saying, sometimes attributed to Benjamin Franklin, that nothing in life is certain except death and taxes. But, taxes do not appear to be that certain considering retroactive tax legislation is often used to impose taxes that did not previously exist. See, e.g., Zaber v. City of Dubuque, 789 N.W.2d (634 (Iowa 2010) (six-year retroactive period upheld); In re Estate of Hambleton, 335 P.3d 398 (Wash. 2014) (eight-year retroactive period upheld); Caprio v. New York State Department of Taxation, 37 N.E.3d 707 (N.Y.2015) (three-and-a-half year retroactive period upheld). The retroactive tax legislation trend may continue since, on May 22, 2017, the United States Supreme Court declined to review cases involving retroactive tax legislation, potentially bolstering state legislatures’ penchant for retroactively imposing taxes when they did not get taxation “right” the first time around and leaving taxpayers guessing about the standards for judging the constitutionality of retroactive tax legislation.
On May 22, 2017, the Supreme Court declined to review Gillette Comm. Ops. N. Am. v. Mich. Dep’t of Revenue, 878 N.W.2d 891 (Mich. Ct. App. 2015). At issue was legislation with a six-year retroactive period that was upheld as constitutional by the Michigan Supreme Court. The Iowa Tax Café Blog post recently discussed this case, so I will not discuss it here.
On the same day, the Supreme Court also declined to review Dot Foods Inc. v. Wash. Dep’t of Revenue, 372 P.3d 747 (Wash. 2016) where the issue was a statute with an arguably 27-year (yes, 27 years) retroactive period. In 1983, Washington passed a statute that exempted from Washington B&O tax out-of-state companies that met certain requirements. In 1999, Washington changed its policy to tax out-of-state companies that were previously exempt from Washington B&O tax under the 1983 statute. Dot Foods challenged the new policy, which was ultimately held, in 2009, to be contrary to the plain language of the statute. This resulted in refund claims for tax that was incorrectly paid as a result of the 1999 policy change. In 2010, the Washington legislature, recognizing the fiscal impact of the refund claims, passed a law that would “conform the exemption to the original intent of the legislature.” The statutory language made the legislation retroactive back to the when statute was enacted in 1983. Accordingly, based on the 2010 legislative change, the Washington Department of Revenue denied Dot Foods’ refund claims for taxes paid in certain prior periods. Dot Foods challenged the denial of its refund claims and the Washington Supreme Court ultimately ruled in favor of the state.
Iowa, not one to sit on the sidelines, has enacted two retroactive tax laws since 2007. In 2007, the Iowa legislature enacted Iowa Code § 477A.7, which had a five-and-a-half year retroactive period and precluded taxpayers from seeking a refund of a tax previously deemed to be illegal by the Iowa Supreme Court in Kragnes v. City of Des Moines, 714 N.W.2d 632 (Iowa 2006). The retroactive legislation was challenged and ultimately upheld as constitutional by the Iowa Supreme Court in Zaber v. City of Dubuque. In 2014, the Iowa legislature passed a law that retroactively imposed an excise tax on construction equipment that the Iowa legislature mistakenly repealed in 2008. This legislation was not challenged.
The United States Supreme Court last considered the constitutionality of retroactive tax legislation in 1994 in United States v. Carlton, 512 U.S. 26 (1994). There, the Court held that retroactive legislation passes constitutional muster if the legislation was enacted for a “legitimate purpose furthered by rational means” and the legislature “acted promptly and established only a modest period of retroactivity.”
Protecting the public fisc appears to be a legitimate purpose and retroactive legislation seems to be a rational means of furthering that purpose. However, due to the United States Supreme Court’s failure to review Gillette or Dot Foods, taxpayers and legislatures will continue to wonder what is prompt and modest—although I suspect their definitions of prompt and modest differ.
Given the aforementioned uncertainty surrounding taxes, I’d like Benjamin Franklin to revise his statement about death and taxes. Oh, that’s impossible, there’s one thing that remains certain in life (and it’s not taxes).
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Cody Edwards
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