[IMGCAP(1)]Several factors have led an increasing number of states to implement specialized state tax tribunals to resolve state tax controversies.
First, state and local tax compliance has become increasingly complex, especially with regard to business carried on in multiple states. Second, states have become more and more aggressive in attempting to collect revenues as state revenues from taxes have declined. Third, existing mechanisms for resolving state tax disputes have become progressively more unworkable.
In states without a specialized tribunal, a taxpayer in a dispute with a state department of revenue often faces a number of hurdles in getting that dispute resolved in a fair and speedy manner. In many states, taxpayers are forced to attempt to resolve such a dispute before an administrative body that is not independent from the Department of Revenue, thereby creating concerns regarding the objectivity of the decisions of such a body. For example, before Georgia legislatively created a state tax tribunal in 2013, the Georgia Revenue Commissioner could, and occasionally did, overturn the findings of the state’s administrative law judges.
Another problem is that many states have a “pay to play” requirement, meaning that the taxpayer must either post a bond to cover the taxes in dispute or actually pay the taxes in order to appeal a tax assessment. Ideally, a taxpayer should be able to have an impartial third party decide a tax dispute with a state revenue agency before having to pay anything to cover the disputed assessment.
Another issue is the cost and complexity of resolving a state tax dispute in a state’s general trial courts. Few would dispute that state taxation is a highly specialized body of law, and some taxpayers and practitioners believe that trial courts of general jurisdiction are ill-equipped to resolve such disputes. This is exacerbated by the fact that such courts typically hear very few state tax cases to begin with. When such cases are decided against the taxpayer, there may not be a direct appeal to the state’s appellate courts (e.g., Georgia), meaning that review of the trial court’s decision may be discretionary. Accordingly, the taxpayer may only get one bite at the apple and that bite should really count.
Another problem with resolving state tax disputes in general trial courts is that decisions of such courts do not create binding legal precedent. Accordingly, taxpayers and practitioners may not be aware of such decisions and may not rely upon them when litigating the same issue in another county’s trial court. Accordingly, an identical legal issue could be decided differently by different trial courts depending on which county the taxpayer chooses to litigate the matter. Further, decisions of administrative law judges and general jurisdiction trial courts are typically not published. Therefore, taxpayers and practitioners can’t use these decisions as a basis to resolve areas of unsettled law.
Yet another problem is the cost of litigation in a general jurisdiction trial court. Some taxpayers and practitioners believe that discovery is largely a one-way street in state tax litigation, with the state often engaging in expansive discovery and motions practice. Further, certain state attorney generals have been accused by practitioners of engaging in borderline abusive litigation practices involving unnecessary discovery, refusal to stipulate known facts, and making multiple, legally dubious motions that end up significantly increasing the cost of litigating a state tax dispute.
Even absent borderline abusive trial practices, the cost of litigation often makes it impractical from a cost-benefit standpoint to litigate any state tax controversy involving less than a significant sum of money. Some taxpayers believe that state departments of revenue take advantage of this equation by refusing to settle smaller tax assessments, knowing that the taxpayer is unlikely to litigate the matter due to cost. This means that having an independent body hear your tax dispute is out of reach for most individuals and small businesses.
Attributes of State Tax Tribunals
Accordingly, in an effort to increase independence, uniformity and fairness in state tax decisions, to streamline the resolution of tax disputes, and to increase access to justice to more participants, many states have turned to specialized state tax tribunals. These state tax tribunals usually have the following attributes:
• No “pay to play” requirement to challenge a tax assessment;
• Judges have specialized tax knowledge and experience;
• Decisions are published and court follows its own precedent in deciding current cases;
• Streamlined filing and discovery rules (including a small claims division, where a taxpayer can appear with their CPA and need not be represented by legal counsel); and,
• Relaxed rules of evidence.
These tribunals may be created as “executive branch” tribunals or as “judicial branch” courts of limited/special jurisdiction.
According to a study published by the AICPA in March of 2013, 27 states have created executive branch state tax tribunals, six states have created judicial branch state tax courts, and seven states had pending legislation to create state tax courts/tribunals. States with executive branch courts include Alaska, Delaware, District of Columbia, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Montana, New Hampshire, New York, North Carolina, Ohio, South Carolina, Texas, Washington, West Virginia, Wisconsin and Wyoming. States with judicial branch courts include Arizona, Connecticut, Hawaii, Indiana, New Jersey and Oregon.
Executive branch courts are typically easier to create legislatively but have certain limitations (e.g., they can’t resolve constitutional challenges to state statutes or regulations). Judicial branch courts can hear constitutional challenges and may have greater powers than executive branch courts (e.g., the power to grant equitable remedies), but they are typically harder to implement legislatively.
Peter Stathopoulos is a shareholder at Bennett Thrasher in Atlanta, where he leads the firm’s state and local tax consulting practice. He has extensive experience in helping clients reduce their effective state tax rates through multistate tax planning and in resolving state tax controversies from the audit level through litigation in state trial and appellate courts. He would like to thank Ana Wade, a staff accountant in the firm’s state and local tax consulting practice, for her help in writing this article.
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