LAW OFFICE
OF
GARLAND ALLEN
Your Subtitle text

Model Act Developments & Recent Publications

September 26, 2016 -- Developments since 9/15/2015

1.   Georgia [Allan]  

On 4/27/16 the governor signed into law HB 960 (Act 488), which transfers to the Tax Tribunal for a "show cause" proceeding any future-filed "refund claim of local significance" (a refund claim of more than 10% of the average annual sales and use taxes received by a single locality) that the DOR has not acted upon within 2 years of filing.  After determining if the delay is justified or is the fault of a party, the Tribunal must then send the case back to the DOR for decision on the merits.s  Where delay is the fault of a party, the Tribunal may order the taxpayer to forfeit refund interest or the DOR to pay interest, as well as reasonable attorneys' fees.  Additionally, the Department of Audits and Accounts is empower to asses whether the DOR "followed proper procedures and used appropriate methodology" in acting on the claim.  (Allan, 8/26/16)

2. Hawaii [Durbin]  

In a pay-to-play victory for COST and other taxpayer representatives, on 3/8/16 the Senate passed SB 2923, a bill dealing with tax appeals that had already been passed by the House, after stripping out a DOR-supported provision that would have required a taxpayer to pre-pay tax,interest and penalties as a condition to appealing any assessment over $50,000.  The bill ultimately died in conference committee.  (Durbin, 9/7/16)


3. Illinois  [Beard, Johnson]

Governor Pat Quinn (D) signed HB 5192 (Public Act 97-1129), the “Illinois Independent Tax Tribunal Act,” on August 28, 2012, following unanimous May, 2012, votes in the General Assembly.    

Kudos to the Illinois State Chamber of Commerce and its general counsel, Connie Beard, and to the Taxpayers’ Federation of Illinois and its president, Tom Johnson, who led the effort; Rep. Michael Zalewski (D), our most dedicated and effective sponsor; and COST’s Doug Lindholm and his team. 

According to Connie Beard (8/26/13), even though the Tribunal was scheduled by law to start July 1, 2013, the Governor took no action to set up the tribunal by the end of May.  End-of-session legislation deferred the Tribunal’s start date to January 1, 2014, and funded a partial Tax Tribunal staff for the last 3 months of 2013 and a full complement of 3 judges and personnel starting January 1, 2014. 

In a press release dated September 7, 2013, Governor Quinn announced the nomination of James M. Conway as chief judge.  According to the release, Conway has been a federal prosecutor for 29 years; is currently associate chief of the Criminal Division, in the Chicago office of the US District Attorney, and at some time in the past “led the Financial Crimes section for four years and was the Acting U.S. Attorney for criminal tax matters.” 

Prior to his prosecutorial experience, Conway served as an IRS auditor in Chicago and is a CPA.  Per STN, Conway also has an LLM in taxation.  As far as the press release divulges, Conway does not possess the “substantial knowledge of State tax laws” required by statute.  ISCC, TFI, the Illinois and Chicago bar associations, the Illinois CPA Society and COST are currently considering how to respond to this appointment.

The Tribunal started operation on January 1, 2014.  In late December or early January, Governor Quinn appointed Brian Barov, a long-time Assistant AG for tax litigation with a reputation for expertise and fairness, as the Tribunal’s second judge. 

The Senate convened on January 29 but no nomination hearings had been scheduled as of that date.  COST and the ISCC have come out against Conway’s nomination, but TFI has decided not to oppose Conway’s nomination. Senate confirmation hearings have not been set for the two nominated judges, James Conway, who does not meet the statute’s qualifications, or Brian Barov, who does. 

As of May, 2014, the new tribunal had adopted rules drafted by the CBA, but few cases had been decided.  As of September, 2014, the Tribunal had held no substantive hearings and issued no decisions on contested matters.  A large portion of the cases filed were officer liability involving modest dollars. 

On his first day in office, January 12, 2015, newly elected Gov. Bruce Rauner (R) withdrew all state officer nominations made by outgoing Gov. Pat Quinn (D) that had not been “confirmed” by the Illinois Senate.  The withdrawn appointments included both Tribunal judges. 

As a result, the Tribunal, which has been in operation for over a year, now has no judges and cannot function, creating a major problem for taxpayers whose cases are in mid-hearing at the Tribunal, as well as for taxpayers facing deadlines to file petitions at the Tax Tribunal. 

On January 14, 2015, Gov. Rauner relieved Brian Hamer, the long-time DOR director who actively opposed the Tribunal’s establishment, and on 1/16 appointed as his successor Connie Beard, heroine and champion (along with Tom Johnson) of the Tribunal effort.  It is hoped that Director Beard will be able to salvage the Barov appointment, so that the Tribunal can resume operation quickly. 

Gov. Rauner eventually reappointed Tribunal Chief Judge Conway and Judge Barov.  Director Beard has also recommended the appointment of a third judge in light of the number of cases already filed with the Tribunal.  Full funding for the Tribunal is in the FY16 budget and has completed the hearing process. 

According to Director Beard (9/11/15), the Tribunal received full funding for the coming year.   As of September, 2015, the Tribunal had only issued 2 tax decisions in larger cases, one for the DOR and one for the taxpayer, which the DOR accepted and did not appeal.  Director Beard and others have noted that taxpayers are hesitating to file cases in the Tribunal until practitioners see how it handles larger cases.  

James Conway’s reappointment as the Tribunal’s Chief Judge was confirmed by the Senate on 1/13/16.  Judge Barov’s reappointment unanimously passed the Senate committee on the same date and is expected to be confirmed, but has not yet been acted on by the full Senate.  According to practitioners Mike Wynne and Fred Marcus, taxpayers are routinely filing cases and the Tribunal is functioning well. 

According to Mike Wynne, taxpayers have complained about the Tribunal’s Internet publication of all documents filed in Tribunal cases, which makes sensitive taxpayer information available somewhat too readily, at least as compared with DOR administrative cases and court cases, where the requested documents are kept in paper files and must be requested individually.  As a result, Chief Judge Conway is considering revising Tribunal rules to make such disclosure less automatic.  (Wynne, Marcus 1/15/16)

4.         Iowa [Daniels, Baker, Adams] 

           According to Bruce Baker of the Nyemaster law firm, who favors adjudication reform, under Iowa’s current system a taxpayer who receives a proposed determination from the DOR may file a protest within 60 days.  If the DOR’s informal process does not result in resolution, the case is assigned to an ALJ in the central hearing agency, the Department of Inspections & Appeals (DIA), who conducts the hearing of record.  After hearing, the ALJ issues a proposed order.  If the taxpayer is dissatisfied, he may appeal to the DOR director, who may overrule the DIA-ALJ’s decision.   

          A taxpayer dissatisfied with the director’s decision may request on-the-record review by the state district court or, as an option, review by the State Tax Review Board, a body with no tax expertise, from whose decision the taxpayer may appeal to the state district court.  No prepayment is required: in fact, the taxpayer does not have the option of paying the tax and suing for a refund in district court.  The district court must uphold the director’s decision unless it is “clearly erroneous, arbitrary or capricious.”  Either party may appeal the district court’s decision directly to the Iowa Supreme Court.  CPAs may represent taxpayers in DIA hearings, but in practice only those representing taxpayers with small cases actually do so.

           In June, 2013, the Iowa legislature passed DOR’s annual “policy” bill, SF 452 (originally HF 634), which became law on 6/20/13.  Among other things, the new law requires the DOR to produce a report by January 1, 2014, that evaluates the “independence, effectiveness, and fairness” of Iowa’s current tax appeals system; recommends any necessary changes; and, in addition, studies “the feasibility of replacing components of these processes with a new consolidated and independent administrative appeals board for tax matters within the executive branch.”

          On May 16, Victoria Daniels, the DOR’s policy and communications chief, explained that the DOR’s priorities are to take the director completely out of the adjudication business and to resolve a pending backlog of almost 800 protests.

          The governor immediately appointed a 14-member advisory committee of eminent practitioners and government stakeholders, including DOR Director Courtney Kay-Decker, Ms. Daniels, and the DIA ALJ who currently hears most tax cases and Bruce Baker, as well as representatives of big business and taxpayer organizations.    

On January 8, 2014, the DOR issued its “study report”  recommending the following important changes: (1) create a “small case proceeding” to expedite cases of limited monetary value, (2) eliminate the director’s right to overturn the DIA ALJ’s decision, so that the DIA’s decision is the final administrative decision, (3) eliminate the State Board of Tax Review,  a body to which taxpayers may now appeal certain decisions, and (4) enhance the tax law training and expertise requirements for the DIA ALJs who hear tax matters, to insure expertise and expedite the issuance of decisions.

The DOR’s legislation was introduced April 7 as Senate Study Bill 3216 and died when the 2014 legislature adjourned in early May.  After running into governmental opposition to the proposed elimination of the DOR’s right to overrule DIA decisions, the DOR agreed to limit the legislation to establishment of the small case proceeding, elimination of state Board of Tax Review jurisdiction over non-property tax disputes, and authorization of a new study of tax adjudication procedures that would allow the DOR to pursue its goal of getting the DOR director out of the adjudication process.

Election year politics scuttled the bill.  Against a backdrop of scandals about “secret” settlements with fired state workers, several newspapers hammered on the bill’s provision that small case hearings and decisions would not be “public.” 

Separately, at a Senate Ways & Means Committee hearing, a minority (Republican) senator picked up on a Des Moines tax attorney’s objections to the proposed small case provisions that would deny the taxpayer the right to appeal, as well as the right to obtain “attorneys’ fees” available in other proceedings—notwithstanding that the taxpayer could obtain both rights simply by not electing the small case proceeding.  Even though the DOR offered to allow appeal, Senate Democrats dropped their support for the bill.  The DOR’s last minute attempt to insert language into other bills authorizing the tax adjudication study report also failed. 

          Per Victoria Daniels (1/21/15), the DOR will propose no legislation to address the Iowa adjudication regime’s serious deficiencies, i.e.,  DIA’s lack of independence (DOR can overrule DIA’s decision) coupled with taxpayer’s inability to get a court hearing of record (taxpayer must exhaust administrative remedies of DOR and DIA before reaching court), DIA judges’ lack of tax expertise, tremendous delay in the DOR’s processing of tax cases,  and a “clearly erroneous, arbitrary or capricious” v. “preponderance of the evidence” standard for overturning the DOR’s decision.  While the DOR is obviously no longer willing to take the lead on reform, Ms. Daniels reported that there is “lots of interest in the business community.”

At the behest of State Board of Tax Review chair, Jim Elgin, in early 2015 the speaker of the House introduced House File 626, which passed the legislature, was signed by the Governor on 5/22/15, and became effective 7/1/15.  HF 626 dissolved the BTR, eliminating the taxpayer’s current option to appeal the Director’s decision to the BTR but otherwise left the system in place.  As a result, Iowa is left with a classic DOR ALJ system, with prepayment review by the district court on the record, the only difference being that the ALJ is employed by the DIA and has no meaningful tax expertise. 

Per Victoria Daniels (9/8/15), the DOR views HF 626’s changes as a “baby step” toward Model Act reform.  She predicts that the next step will be creation of a small claims procedure within the DIA for cases involving small dollar amounts.  The DOR expects the Iowa Society of CPAs to pursue legislation in 2016 that would create such a small claims proceeding within the DIA, with support from the Iowa Bar Association Tax Section. Use of the SCP would be entirely optional with the taxpayer, non-precedential and non-appealable to the courts and would hopefully permit faster processing of small cases and enable the DOR to focus its litigation resources on larger cases. 

Even with the elimination of the BTR and the addition of the SCP, all of the above-listed defects of Iowa’s present adjudication system and the consequent need for Model Act reform would remain.

On 1/12/16 Cindy Adams, president of the Iowa Society of CPAs, confirmed that the Society is anxious to pursue such legislation.  However, on its lobbyist’s advice, the Society tentatively decided to put that effort off until at least the 2017 legislative session but may change its mind if an opportunity presents itself in the current session.  

On 9/15/16 Ms. Adams reported that the  Society now plans to investigate what it would take to create a "track for small claims" during the 2017 session, as a step toward the eventual creation of an independent tax tribunal.  

5.  Kentucky [Sommer, Horn]

By executive order dated August 8, 2016, Gov. Matthew Bevin (R) created a new Kentucky Claims Commission, which will assume the existing adjudicatory power of the state's Board of Tax Appeals, as well as its Board of Claims and Crime Victims Compensation Board. Effective immediately, the EO terminated the terms of the sitting BTA members and replaced them with persons recently appointed by him to the Crime Victims Compensation Board, which provides funds for the examination of sexual assault victims. 

According to a 9/19 State Tax Notes article by Stephanie Cumings and Eric Yauch, Gov. Bevin claimed that the move would "streamline state government and create efficiency," but the governor's EO made it appear that its main purpose is to save the "exorbitant" compensation of BTA members, which range from $30,000 to $76,190, and their staff.  The head of the new commission will be paid $18,000, while the other members will receive $14,400 per year.  Overall, the governor claimed that the new arrangement will "save $350,000 in costs related to benefits packages paid to employees under the BTA, executive staff costs and outside contract costs."  

Under the EO one member of the Commission must be a victim, relative of a victim, or victim "advocate."   There is no requirement that any member be a licensed attorney or have tax knowledge or expertise.  By contract, the BTA statute required one member to be a lawyer with the qualifications required of state trial court judges.

In the STN report, practitioner Erica Horn characterized the EO as a 'significant step backward in the administrative appeal process in Kentucky" and said it appears to wipe out taxpayers' current right to discovery in tax cases.

The article also quoted practitioner Mark Loyd as wondering whether the General Assembly will cooperate to conform the BTA statute to the EO.  

If the statute must be changed in order to implement the EO, this might be an opportunity for the General Assembly to improve tax adjudication in the state instead.  


6. Louisiana [Calhoun]
  

Under Louisiana’s current adjudication system, a taxpayer who receives a “final assessment” from the DOR can either (1) appeal to the Board of Tax Appeals without prepaying or (2) pay the tax under protest and sue the DOR in the state district court.  Unlike any other state, the DOR retains the option of not issuing a “final assessment” and suing the taxpayer to collect the liability in the district court, thus depriving the taxpayer of the BTA option. 

The BTA is comprised of 3 members appointed by the governor, who are not paid and who historically have little legal or tax expertise.  The BTA provides hearing of record, so that subsequent review in the courts is confined to that record. Currently, a taxpayer may be represented by a CPA at the BTA hearing. 

Locally administered sales and use taxes are excluded from the BTA’s jurisdiction.  Similar only to Alabama and Colorado, Louisiana local government units have broad power to impose sales taxes.  A taxpayer must challenge an assessment before the individual locality and, if not satisfied, by paying the tax and filing suit in the district court.  Locally administered sales taxes have historically been a significant problem for business concerns operating in a number of Louisiana localities.

Ad valorem property taxes are not administered by the DOR and are currently excluded from the BTA’s jurisdiction.     
During 2003, 2009 and 2010 (HB 924) various proposals for replacing the BTA were proposed but went nowhere.  Principal issues continued to be cost—the current BTA has volunteer judges and a very small budget—and regular judges’ opposition to “losing jurisdiction” to a specialized court or tribunal.

After floating various proposals, on March 14, 2013, Governor Bobby Jindal’s (R) office released his proposal for comprehensive tax reform, including two options for creating a new Louisiana Tax Court to displace the current Board of Tax Appeals.  SB 230 would have created an executive branch tax court similar to the Model Act tribunal.  By contrast, HB 585 and HB 515 would have created a specialized court within the judicial branch, a step that would have required the public to approve a constitutional amendment and the Legislature to pass a bill setting it up.    

SB 230 would have been easier to implement, but would continue to allow the DOR to thwart taxpayer access to the BTA; would require the governor to appoint judges from persons “nominated by the Legislature;” and would allow the appointment of a lawyer licensed for at least 5 years who has “seven years tax experience” (a loose standard that would seem to permit termed-out legislators who chaired tax committees, local assessors and federal tax preparers to qualify).

          Per the BTA’s Ann Faust (5/3/13), the Legislature reacted badly to the Jindal Administration’s tax overhaul package once it became clear that its proposal for eliminating the income tax and increasing/broadening the sales tax did not “pencil out.”  In response, the Administration arranged for the Legislature to hold its entire tax package until 2014, including SB 230’s proposal for an executive branch tax court.  

          Meanwhile, BTA Judge Cade Cole informally proposed two useful changes to the existing system that went nowhere due to opposition from the relevant government units, i.e., (1) consolidating the adjudication of local tax appeals at the BTA, and (2) eliminating the DOR’s current right to sue a taxpayer on a proposed assessment in district court.           

          Per Jaye Calhoun (9/10/13), the above bills died with the end of the spring legislative session and the Administration does not appear to be considering further legislation.  Meanwhile, Judge Cole is currently working with stakeholders to develop reform legislation that would address the adjudication of local tax disputes and the cost of reform, for possible introduction in 2014.  According to Judge Cole, the cost issue could potentially be solved by morphing the current BTA into a modern tax court with more tax expertise.

          As of January 7, 2014, BTA Judge Cade Cole was developing legislation for 2014 introduction that would increase the legal and tax expertise of future BTA judges, give the BTA jurisdiction over all local sales and use tax disputes, eliminate current BTA jurisdiction over a number of non-tax matters, and allow appeal of BTA decisions directly to the appellate court.  The current draft legislation would also require the governor to appoint 3 new BTA members who meet new, enhanced tax expertise requirements by September 1; limit the terms of BTA judges; and authorize the governor to “establish the compensation” of BTA members and officers.  Property tax matters now decided by the Tax Commission would continue to be excluded from the BTA’s jurisdiction.

          Implementing legislation, HB 798 (Rep. Julie Stokes) and 863 (Rep. Mike Danahay), was introduced in late February and was endorsed by COST in late March.  As of April 30, HB 798 had passed the House and was poised to clear the Senate, while HB 863 had cleared the House but been sent back to the Senate’s Finance Committee under a rule requiring higher-cost bills to be considered twice by that committee.    

          Judge Cole (5/1/14) is currently attempting to add to HB 863 tax expertise requirements for the 3rd seat on the BTA, which presently do not exist.  The Senate Finance hearing is scheduled for Monday.  Both bills should clear the Legislature by the end of next week.  Though keeping his distance in the wake of last year’s tax reform fiasco, Gov. Jindal is reportedly supportive of the bills’ “concept.”  Positive press about the bills, after passage and before the governor acts, would be most helpful to the effort. 

          These bills were finally enacted as Act 640 of 2014 (6/12/14) and Act 198 of 2014(7/1/14) and became effective on 7/1/14.  The legislation makes the BTA more like a tax-expert state tax tribunal, requiring the governor to appoint new judges subject to the enhanced requirements by September 1, and provides taxpayers with a vehicle for contesting local taxes much more efficiently.  Unfortunately, the new laws continue the DOR’s right to deprive taxpayers of access to the BTA by suing the taxpayer on a proposed assessment in the district court.  

          Per Jaye Calhoun (1/13/15), Gov. Jindal appointed Kernon Hand, a respected New Orleans federal tax lawyer, as the 3rd member of the BTA, fulfilling the law’s new requirement that 2 of 3 members have tax expertise.  It is too early to tell how the BTA’s new local tax jurisdiction will turn out, but the DOR filed far fewer end-of-the-year lawsuits in 2014, i.e., the DOR did not use its ability to circumvent the BTA to the same extent as in prior years. Practitioners see problems with the process that need to be fixed, but are generally pleased with the reforms made so far.

Gov. Jindal has signed another piece of reform legislation whose enactment was spearheaded by BTA Member Cade Cole, our hero of the hour.  Act 210 of 2015 (HB 338), effective July 1, 2015, removes a signal unfairness in the Louisiana system, i.e.,  the DOR’s current power to prevent a taxpayer from appealing to the BTA by preemptively suing the taxpayer on a tax liability before issuing a final notice of deficiency appealable to the BTA,


7.       New Mexico [
Van Denzen]


New Mexico has historically had a standard APA system, with a Bureau of Hearings within the Department of Tax and Revenue, whose decisions are appealable on a prepayment basis to the state trial court.  A dissatisfied taxpayer also had the option of filing a refund claim and suing in the state trial court.

In 2005 or 2006, SALT Committee member Curtis Schwartz spearheaded an effort to move the Bureau’s only hearing officer out of the DOTR.  That effort foundered over DMV’s insistence that any separate hearing agency should also hear DUI license revocation actions.

On April 7, 2015, the NM governor signed SB 356, the “Administrative Hearings Office Act” attached to the Department of Finance and Administration.  As structured, the new AHO promises to fulfill the Model Act’s and Curtis Schwartz’s goals of an independent, prepayment, tax-expert adjudication forum of record in New Mexico.    

Effective July 1, 2015, the Act creates a new independent, prepayment forum (“AHO”) staffed by a chief hearing officer (“CHO”).  For the first 6 months, the current DOTR hearing officer, Brian Van Denzen, will serve as Interim CHO.  During that period a bipartisan selection committee will propose a slate of tax expert candidates from which the Governor will appoint a new CHO.   The CHO is required to be an attorney with the precise level of state tax expertise and experience required by the Model Act.  The CHO’s term is 6 years and may be reappointed.

The AHO has jurisdiction not only over all protests of DOTR decisions under the Tax Administration Act, but also all property tax protests, driver’s license revocation and other DMV protests, as well as  disputes involving certification of a business as a “resident business or manufacturer” entitled to preference in the NM state government’s procurement process.  

The AHO’s decision in a tax matter is appealable of right directly to the state appellate court, bypassing the state trial court.   The existing refund remedy in the state trial court will continue to be available to taxpayers willing to pre-pay the tax in dispute. 

          There are concerns with the new AHO regime.  While the CHO is required to be a state tax expert attorney, the only requirements for the hearing officers working under him are “competency” and adherence to a “hearing office code of conduct” to be promulgated by the CHO.  Unless the CHO hears and decides all tax cases, the statute’s expertise requirement may not fulfill the Model Act objectives.    

Also, the initial CHO is the DOTR’s current hearings bureau chief, which does not contribute to the public perception of independence from the DOTR.  Moreover, the CHO selection committee must be a chaired by a former hearings bureau chief, a former CHO or other tax expert who is not a candidate for the CHO job. 

The new statute also allows CPAs and other nonlawyers to represent taxpayers, even though the record is made there and is appealable through the courts.  If a case in which a taxpayer was represented by a non-lawyer CPA is appealed to the courts, the courts may well strike down the statute’s representation provisions, or perhaps even the entire statute.

Similarly the new statute specifically states that the rules of evidence do not apply.  Will this threaten the legality of the new forum?

The effort to create an independent tax forum in New Mexico began 2 or 3 years ago as an attempt to improve NM’s business environment, with an eye on COST’s procedural scorecard.  The New Mexico Tax Research Institute, on whose board Curtis sat, and the Albuquerque Chamber of Commerce and Industry spearheaded the reform effort.  With the support of the DOTR and the Governor, SB 356 passed almost unanimously in both houses. 

          On paper, and hopefully in practice, the new AHO stands a good chance of achieving all of the principal goals of the Model Act in New Mexico. 

8.       Washington [DeLappe, Fujita, Durbin]            

          Under the current regime, a taxpayer may appeal a DOR excise tax assessment to the DOR’s internal Appeals Division (AD).   The taxpayer may appeal an adverse AD decision to the state Board of Tax Appeals (“BTA”).  

           The BTA is a 3-member body independent of the DOR whose members are appointed by the governor, but they do not always have legal or tax expertise. Most of the BTA’s docket consist of property tax cases appealed from CBOEs.  For excise tax cases, the taxpayer must pay or bond the liability in order to stay DOR collection during the BTA hearing process.

            The taxpayer may choose an “informal” BTA hearing, in which case the result is not appealable to the courts, or a “formal” hearing that is subject to judicial review. Though binding on the parties, a BTA decision is not precedential and the DOR routinely ignores pro-taxpayer cases.    

Either party may appeal an adverse formal BTA ruling to the superior court, which reviews the BTA decision on the record.  A losing taxpayer may appeal of right to the appellate court and may receive discretionary review by the state supreme court.       

Instead of seeking BTA review, the excise or property taxpayer may pay the liability and sue for refund in the superior court, with the record made there and subsequent review as in the case of a BTA decision.  A taxpayer who elects to have an “informal hearing” at the BTA can pursue a refund in the superior court without regard to the BTA hearing, i.e., de novo.  Many non-property tax practitioners currently avoid the BTA and choose to litigate in the superior court instead.                

Starting in early 2012, the Washington State Bar Association’s (WSBA’s) SALT Committee formed a Tax Dispute Resolution Subcommittee, headed by Garry Fujita, to study the need for reform of the state’s system for adjudicating excise tax disputes.  By 2013, the subcommittee determined to pursue replacement of the BTA with an independent tax tribunal or court.  By WSBA Tax Section Resolution, dated November 18, 2013, the Tax Section formally recommended that the state create an independent tribunal and offered “attributes” that any such tribunal should have, e.g., no pay-to-play, tax expertise for judges, informal non-record proceeding at which CPAs could represent taxpayers, direct appellate court appeal and published decisions.             

During 2013, Sen. John Braun, an influential legislator and chair of the Senate Trade & Economic Development Committee, became interested in sponsoring Model Act legislation.  As of January 13, 2014, Sen. Braun’s draft legislation (S-6176) would replace the current BTA with an independent tribunal and would generally follow the Model Act. Senator Braun has also proposed an alternate bill that would introduce a few changes to the current BTA.  The Association of Washington Business is supporting Sen. Braun’s effort. 

On November 22, 2013, I testified at the Committee’s “work session” at the invitation of Michelle DeLappe, WSBA SALT Committee chair, and subsequently provided comments on draft S-6176.                

According to Garry Fujita (4/24/14), Sen. Braun introduced his bill as S.3193 in early 2014, but loose estimates of the cost seem to have helped the key legislators agree to sit on it.”

According to Michelle DeLappe and Garry (4/25/14), key members of WSBA’s Subcommittee and representatives of some large Washington companies met on April 25 to determine next steps.  According to Garry, most of that group favored using the Model Act as the starting point for a new bill, “ideally” to create a judicial tax court.  The companies, with the help of COST and TEI, intend to propose legislation to the DOR by late summer, with the objective of getting the DOR to request such legislation for introduction in the Budget Session in January, 2015.

As of 9/15/14, Sen. Braun introduced legislation for the 2015 session based on 2014’s SB 6175 and SB 6176, which would, respectively, make modest changes to the current BTA and established a real Model Act tribunal.   Braun asked the Association of Washington Business to submit comments by 9/19 on these bills, as well as on the concept of establishing a judicial tax court similar to Oregon’s. 

According to Garry Fujita and Michelle DeLappe (1/21/15), exploration of the possibility of creating a judicial tax court led practitioner Bill Severson to conclude that the state constitution would allow the legislature to establish a tax court within the Court of Appeals.  Bill then worked with Sen. Braun’s staff to develop a bill that Sen. Braun introduced on 1/20/15 as SB5449.

SB5449 would establish a “tax division” within the state Court of Appeals, with jurisdiction over most state and local tax matters, including property tax valuation issues.  Unlike the present situation at the BTA, the tax division would be required to stay collection of a tax in dispute except in frivolous or jeopardy cases. 

The current BTA staff and facilities (but not its members) would be transferred to the new tax division on 7/1/17.  The tax division would be composed of a “main department” (MD) and a “commissioner department” (CD).  The 3 MD judges would have at least 5 years’ SALT practice experience, be a resident of one of 3 regions of the state, have to run for election every 6 years and be paid the same as other appellate court judges.

An unknown number of CD commissioners, with at least 3 years’ tax experience, would be appointed by the governor.  The MD would decide, presumably pursuant to rule, which cases would initially be decided by an individual MD judge or by the 3 MD judges sitting en banc.  All other cases would be heard and decided by a single commissioner of the CD.

A CD decision would be neither published nor precedential, but could be appealed to the MD by either party.  Every MD hearing, whether initial or an “appeal” from a CD decision, would be de novo and its decisions would be published and constitute appellate court precedent.  Appeal from an MD decision would be to the Washington Supreme Court, which would have to take en banc decisions but would have discretion to appeals of single judge MD decisions.

SB 5449’s creative approach would give Washington taxpayers a new, completely independent, pre-payment, fairly tax-expert, forum for the hearing of record and would therefore potentially achieve the Model Act’s main goals.  Since it would be a judicial branch court, the MD could decide constitutional issues, a significant plus.

At the same time, requiring each MD judge to be resident of a specific part of the state and run for election every 6 years, with an initial term as short as 2 years, could make it difficult to find qualified judges.  And SB 5449’s CD does not really constitute a small claims division, since any size case could land there.  Because appeal therefrom is de novo, the DOR would not have a strong incentive to appeal an adverse CD decision in a close case and risk making the decision apply to other taxpayers. At the same time, the DOR could potentially pressure CD-victorious small taxpayer with limited resources to give up and pay the disputed tax, simply by filing an appeal to the MD.

The Association of Washington Business supports the bill, the state bar’s Tax Section is expected to support, and the DOR is “neutral.”  BTA staff are opposed and the appellate judges have raised issues in an apparent effort to derail the bill, but have not come out against it.

          
SB 5449 failed passage in 2015, largely due to constitutional and other issues raised by appellate judge Marlin Appelwick, former House Democrat Leader, in a memorandum to legislators.   Supporters have drafted a rebutting memorandum, with input from our Committee on what other states are doing.  Supporters hope to persuade legislators that Judge Appelwick’s contentions are not well founded and to pursue SB 5449 in 2016.       

Sen. Braun reintroduced SB 5449 on 1/11/16, with a colleague introducing companion bill HB 2111 in the House on the same date.  As previously reported, these bills are modelled on the Model Act.      

Supporters delivered their rebuttal memorandum to Judge Appelwick.  In their meeting with him, the judge seemed not entirely convinced, but indicated that he and his Court of Appeals judges would not actively oppose the pending legislation.


On 1/21/16 Brett Durbin also reported that a working group was developing Taxpayer Bill of Rights (“TABOR”) legislation and had received nearly 25 suggestions of provisions for inclusion.  In the last couple of years, the DOR has been aggressive about pursuing assessments based on weak authority.  Brett Durbin hoped that the working group will adopt a provision that he crafted, which would promote more reasonable assessments and settlements by imposing a no-fault penalty on the DOR, similar to that imposed on taxpayers, if an assessment is ultimately determined by the courts to be incorrect.   

The 2016 "short session" saw no significant action on SB 5449 or its companion bill.  Though those bills are officially dead, sponsor Senator Braun plans to go forward in 2017 with a new approach, that is, a constitutional amendment that which would allow the establishment of a stand-alone, statewide, judicial tax court.  If enacted, this proposal would have to go to the voters for approval.

Separately,  the DOR has changed the rules governing its Appeals Division, now called the Administrative Review and Hearings Division.  ARHD decisions may be reviewed by the Board of Tax Appeals but, as before, are not APA decisions appealable of right to the courts.  WAC 458-20-100 clarifies that the ARHD's hearing officers are DOR employees and not independent ALJs subject to limitations on
ex parte communications.   The revised rule also responds to complaints about delay by imposing new requirements designed to streamline the ARHD process and shorten the time to decision. (DeLappe, 8/23/16).  

September 15, 2015 -  New Mexico is the latest

See items below marked "NEW" for most recent developments: 

1.           Illinois  [Beard, Johnson]—

Governor Pat Quinn (D) signed HB 5192 (Public Act 97-1129), the “Illinois Independent Tax Tribunal Act,” on August 28, 2012, following unanimous May, 2012, votes in the General Assembly.    

Kudos to the Illinois State Chamber of Commerce and its general counsel, Connie Beard, and to the Taxpayers’ Federation of Illinois and its president, Tom Johnson, who led the effort; Rep. Michael Zalewski (D), our most dedicated and effective sponsor; and COST’s Doug Lindholm and his team. 

According to Connie Beard (8/26/13), even though the Tribunal was scheduled by law to start July 1, 2013, the Governor took no action to set up the tribunal by the end of May.  End-of-session legislation deferred the Tribunal’s start date to January 1, 2014, and funded a partial Tax Tribunal staff for the last 3 months of 2013 and a full complement of 3 judges and personnel starting January 1, 2014. 

In a press release dated September 7, 2013, Governor Quinn announced the nomination of James M. Conway as chief judge.  According to the release, Conway has been a federal prosecutor for 29 years; is currently associate chief of the Criminal Division, in the Chicago office of the US District Attorney, and at some time in the past “led the Financial Crimes section for four years and was the Acting U.S. Attorney for criminal tax matters.” 

Prior to his prosecutorial experience, Conway served as an IRS auditor in Chicago and is a CPA.  Per STN, Conway also has an LLM in taxation.  As far as the press release divulges, Conway does not possess the “substantial knowledge of State tax laws” required by statute.  ISCC, TFI, the Illinois and Chicago bar associations, the Illinois CPA Society and COST are currently considering how to respond to this appointment.

The Tribunal started operation on January 1, 2014.  In late December or early January, Governor Quinn appointed Brian Barov, a long-time Assistant AG for tax litigation with a reputation for expertise and fairness, as the Tribunal’s second judge. 

The Senate convened on January 29 but no nomination hearings had been scheduled as of that date.  COST and the ISCC have come out against Conway’s nomination, but TFI has decided not to oppose Conway’s nomination. Senate confirmation hearings have not been set for the two nominated judges, James Conway, who does not meet the statute’s qualifications, or Brian Barov, who does. 

As of May, 2014, the new tribunal had adopted rules drafted by the CBA, but few cases had been decided.  As of September, 2014, the Tribunal had held no substantive hearings and issued no decisions on contested matters.  A large portion of the cases filed were officer liability involving modest dollars. 

On his first day in office, January 12, 2015, newly elected Gov. Bruce Rauner (R) withdrew all state officer nominations made by outgoing Gov. Pat Quinn (D) that had not been “confirmed” by the Illinois Senate.  The withdrawn appointments included both Tribunal judges. 

As a result, the Tribunal, which has been in operation for over a year, now has no judges and cannot function, creating a major problem for taxpayers whose cases are in mid-hearing at the Tribunal, as well as for taxpayers facing deadlines to file petitions at the Tax Tribunal. 

On January 14, 2015, Gov. Rauner relieved Brian Hamer, the long-time DOR director who actively opposed the Tribunal’s establishment, and on 1/16 appointed as his successor Connie Beard, heroine and champion (along with Tom Johnson) of the Tribunal effort.  It is hoped that Director Beard will be able to salvage the Barov appointment, so that the Tribunal can resume operation quickly. 

Gov. Rauner eventually reappointed Tribunal Chief Judge Conway and Judge Barov.  Director Beard has also recommended the appointment of a third judge in light of the number of cases already filed with the Tribunal.  Full funding for the Tribunal is in the FY16 budget and has completed the hearing process. 

NEW:   According to Director Beard (9/11/15), the Tribunal received full funding for the coming year.   So far, the Tribunal has only issued 2 tax decisions in larger cases, one for the DOR and one for the taxpayer, which the DOR accepted and did not appeal.  Director Beard and others have noted that taxpayers are hesitating to file cases in the Tribunal until practitioners  see how it handles larger cases.   Unless this standoff breaks, it could be some time until taxpayers start realizing the full benefits of the Tribunal.

2.         Iowa [Daniels, Baker]—

           According to Bruce Baker of the Nyemaster law firm, who favors adjudication reform, under Iowa’s current system a taxpayer who receives a proposed determination from the DOR may file a protest within 60 days.  If the DOR’s informal process does not result in resolution, the case is assigned to an ALJ in the central hearing agency, the Department of Inspections & Appeals (DIA), who conducts the hearing of record.  After hearing, the ALJ issues a proposed order.  If the taxpayer is dissatisfied, he may appeal to the DOR director, who may overrule the DIA-ALJ’s decision.   

          A taxpayer dissatisfied with the director’s decision may request on-the-record review by the state district court or, as an option, review by the State Tax Review Board, a body with no tax expertise, from whose decision the taxpayer may appeal to the state district court.  No prepayment is required: in fact, the taxpayer does not have the option of paying the tax and suing for a refund in district court.  The district court must uphold the director’s decision unless it is “clearly erroneous, arbitrary or capricious.”  Either party may appeal the district court’s decision directly to the Iowa Supreme Court.  CPAs may represent taxpayers in DIA hearings, but in practice only those representing taxpayers with small cases actually do so.

           In June, 2013, the Iowa legislature passed DOR’s annual “policy” bill, SF 452 (originally HF 634), which became law on 6/20/13.  Among other things, the new law requires the DOR to produce a report by January 1, 2014, that evaluates the “independence, effectiveness, and fairness” of Iowa’s current tax appeals system; recommends any necessary changes; and, in addition, studies “the feasibility of replacing components of these processes with a new consolidated and independent administrative appeals board for tax matters within the executive branch.”

          On May 16, Victoria Daniels, the DOR’s policy and communications chief, explained that the DOR’s priorities are to take the director completely out of the adjudication business and to resolve a pending backlog of almost 800 protests.

          The governor immediately appointed a 14-member advisory committee of eminent practitioners and government stakeholders, including DOR Director Courtney Kay-Decker, Ms. Daniels, and the DIA ALJ who currently hears most tax cases and Bruce Baker, as well as representatives of big business and taxpayer organizations.    

On January 8, 2014, the DOR issued its “study report”  recommending the following important changes: (1) create a “small case proceeding” to expedite cases of limited monetary value, (2) eliminate the director’s right to overturn the DIA ALJ’s decision, so that the DIA’s decision is the final administrative decision, (3) eliminate the State Board of Tax Review,  a body to which taxpayers may now appeal certain decisions, and (4) enhance the tax law training and expertise requirements for the DIA ALJs who hear tax matters, to insure expertise and expedite the issuance of decisions.

The DOR’s legislation was introduced April 7 as Senate Study Bill 3216 and died when the 2014 legislature adjourned in early May.  After running into governmental opposition to the proposed elimination of the DOR’s right to overrule DIA decisions, the DOR agreed to limit the legislation to establishment of the small case proceeding, elimination of state Board of Tax Review jurisdiction over non-property tax disputes, and authorization of a new study of tax adjudication procedures that would allow the DOR to pursue its goal of getting the DOR director out of the adjudication process.

Election year politics scuttled the bill.  Against a backdrop of scandals about “secret” settlements with fired state workers, several newspapers hammered on the bill’s provision that small case hearings and decisions would not be “public.” 

Separately, at a Senate Ways & Means Committee hearing, a minority (Republican) senator picked up on a Des Moines tax attorney’s objections to the proposed small case provisions that would deny the taxpayer the right to appeal, as well as the right to obtain “attorneys’ fees” available in other proceedings—notwithstanding that the taxpayer could obtain both rights simply by not electing the small case proceeding.  Even though the DOR offered to allow appeal, Senate Democrats dropped their support for the bill.  The DOR’s last minute attempt to insert language into other bills authorizing the tax adjudication study report also failed. 

          Per Victoria Daniels (1/21/15), the DOR will propose no legislation to address the Iowa adjudication regime’s serious deficiencies, i.e.,  DIA’s lack of independence (DOR can overrule DIA’s decision) coupled with taxpayer’s inability to get a court hearing of record (taxpayer must exhaust administrative remedies of DOR and DIA before reaching court), DIA judges’ lack of tax expertise, tremendous delay in the DOR’s processing of tax cases,  and a “clearly erroneous, arbitrary or capricious” v. “preponderance of the evidence” standard for overturning the DOR’s decision.  While the DOR is obviously no longer willing to take the lead on reform, Ms. Daniels reported that there is “lots of interest in the business community.”

NEW:  At the behest of State Board of Tax Review chair, Jim Elgin, in early 2015 the speaker of the House introduced House File 626, which passed the legislature, was signed by the Governor on 5/22/15, and became effective 7/1/15.  HF 626 dissolved the BTR, eliminating the taxpayer’s current option to appeal the Director’s decision to the BTR but otherwise left the system in place.  As a result, Iowa is left with a classic DOR ALJ system, with prepayment review by the district court on the record, the only difference being that the ALJ is employed by the DIA and has no meaningful tax expertise. 

Per Victoria Daniels (9/8/15), the DOR views HF 626’s changes as a “baby step” toward Model Act reform.  She predicts that the next step will be creation of a small claims procedure within the DIA for cases involving small dollar amounts.  The DOR expects the Iowa Society of CPAs to pursue legislation in 2016 that would create such a small claims proceeding within the DIA, with support from the Iowa Bar Association Tax Section. Use of the SCP would be entirely optional with the taxpayer, non-precedential and non-appealable to the courts and would hopefully permit faster processing of small cases and enable the DOR to focus its litigation resources on larger cases. 

Even with the elimination of the BTR and the addition of the SCP, all of the above-listed defects of Iowa’s present adjudication system and the consequent need for Model Act reform would remain.

3.       Louisiana [Calhoun]—
  

Under Louisiana’s current adjudication system, a taxpayer who receives a “final assessment” from the DOR can either (1) appeal to the Board of Tax Appeals without prepaying or (2) pay the tax under protest and sue the DOR in the state district court.  Unlike any other state, the DOR retains the option of not issuing a “final assessment” and suing the taxpayer to collect the liability in the district court, thus depriving the taxpayer of the BTA option. 

The BTA is comprised of 3 members appointed by the governor, who are not paid and who historically have little legal or tax expertise.  The BTA provides hearing of record, so that subsequent review in the courts is confined to that record. Currently, a taxpayer may be represented by a CPA at the BTA hearing. 

Locally administered sales and use taxes are excluded from the BTA’s jurisdiction.  Similar only to Alabama and Colorado, Louisiana local government units have broad power to impose sales taxes.  A taxpayer must challenge an assessment before the individual locality and, if not satisfied, by paying the tax and filing suit in the district court.  Locally administered sales taxes have historically been a significant problem for business concerns operating in a number of Louisiana localities.

Ad valorem property taxes are not administered by the DOR and are currently excluded from the BTA’s jurisdiction.      

During 2003, 2009 and 2010 (HB 924) various proposals for replacing the BTA were proposed but went nowhere.  Principal issues continued to be cost—the current BTA has volunteer judges and a very small budget—and regular judges’ opposition to “losing jurisdiction” to a specialized court or tribunal.

After floating various proposals, on March 14, 2013, Governor Bobby Jindal’s (R) office released his proposal for comprehensive tax reform, including two options for creating a new Louisiana Tax Court to displace the current Board of Tax Appeals.  SB 230 would have created an executive branch tax court similar to the Model Act tribunal.  By contrast, HB 585 and HB 515 would have created a specialized court within the judicial branch, a step that would have required the public to approve a constitutional amendment and the Legislature to pass a bill setting it up.    

SB 230 would have been easier to implement, but would continue to allow the DOR to thwart taxpayer access to the BTA; would require the governor to appoint judges from persons “nominated by the Legislature;” and would allow the appointment of a lawyer licensed for at least 5 years who has “seven years tax experience” (a loose standard that would seem to permit termed-out legislators who chaired tax committees, local assessors and federal tax preparers to qualify).

          Per the BTA’s Ann Faust (5/3/13), the Legislature reacted badly to the Jindal Administration’s tax overhaul package once it became clear that its proposal for eliminating the income tax and increasing/broadening the sales tax did not “pencil out.”  In response, the Administration arranged for the Legislature to hold its entire tax package until 2014, including SB 230’s proposal for an executive branch tax court.  

          Meanwhile, BTA Judge Cade Cole informally proposed two useful changes to the existing system that went nowhere due to opposition from the relevant government units, i.e., (1) consolidating the adjudication of local tax appeals at the BTA, and (2) eliminating the DOR’s current right to sue a taxpayer on a proposed assessment in district court.           

          Per Jaye Calhoun (9/10/13), the above bills died with the end of the spring legislative session and the Administration does not appear to be considering further legislation.  Meanwhile, Judge Cole is currently working with stakeholders to develop reform legislation that would address the adjudication of local tax disputes and the cost of reform, for possible introduction in 2014.  According to Judge Cole, the cost issue could potentially be solved by morphing the current BTA into a modern tax court with more tax expertise.

          As of January 7, 2014, BTA Judge Cade Cole was developing legislation for 2014 introduction that would increase the legal and tax expertise of future BTA judges, give the BTA jurisdiction over all local sales and use tax disputes, eliminate current BTA jurisdiction over a number of non-tax matters, and allow appeal of BTA decisions directly to the appellate court.  The current draft legislation would also require the governor to appoint 3 new BTA members who meet new, enhanced tax expertise requirements by September 1; limit the terms of BTA judges; and authorize the governor to “establish the compensation” of BTA members and officers.  Property tax matters now decided by the Tax Commission would continue to be excluded from the BTA’s jurisdiction.

          Implementing legislation, HB 798 (Rep. Julie Stokes) and 863 (Rep. Mike Danahay), was introduced in late February and was endorsed by COST in late March.  As of April 30, HB 798 had passed the House and was poised to clear the Senate, while HB 863 had cleared the House but been sent back to the Senate’s Finance Committee under a rule requiring higher-cost bills to be considered twice by that committee.    

          Judge Cole (5/1/14) is currently attempting to add to HB 863 tax expertise requirements for the 3rd seat on the BTA, which presently do not exist.  The Senate Finance hearing is scheduled for Monday.  Both bills should clear the Legislature by the end of next week.  Though keeping his distance in the wake of last year’s tax reform fiasco, Gov. Jindal is reportedly supportive of the bills’ “concept.”  Positive press about the bills, after passage and before the governor acts, would be most helpful to the effort. 

          These bills were finally enacted as Act 640 of 2014 (6/12/14) and Act 198 of 2014(7/1/14) and became effective on 7/1/14.  The legislation makes the BTA more like a tax-expert state tax tribunal, requiring the governor to appoint new judges subject to the enhanced requirements by September 1, and provides taxpayers with a vehicle for contesting local taxes much more efficiently.  Unfortunately, the new laws continue the DOR’s right to deprive taxpayers of access to the BTA by suing the taxpayer on a proposed assessment in the district court.  

          Per Jaye Calhoun (1/13/15), Gov. Jindal appointed Kernon Hand, a respected New Orleans federal tax lawyer, as the 3rd member of the BTA, fulfilling the law’s new requirement that 2 of 3 members have tax expertise.  It is too early to tell how the BTA’s new local tax jurisdiction will turn out, but the DOR filed far fewer end-of-the-year lawsuits in 2014, i.e., the DOR did not use its ability to circumvent the BTA to the same extent as in prior years. Practitioners see problems with the process that need to be fixed, but are generally pleased with the reforms made so far.

NEW:  Gov. Jindal has signed another piece of reform legislation whose enactment was spearheaded by BTA Member Cade Cole, our hero of the hour.  Act 210 of 2015 (HB 338), effective July 1, 2015, removes a signal unfairness in the Louisiana system, i.e.,  the DOR’s current power to prevent a taxpayer from appealing to the BTA by preemptively suing the taxpayer on a tax liability before issuing a final assessment appealable to the BTA.

 

4.       New Mexico (Van Denzen)—

NEW: 
New Mexico has historically had a standard APA system, with a Bureau of Hearings within the Department of Tax and Revenue, whose decisions are appealable on a prepayment basis to the state trial court.  A dissatisfied taxpayer also had the option of filing a refund claim and suing in the state trial court.

In 2005 or 2006, SALT Committee member Curtis Schwartz spearheaded an effort to move the Bureau’s only hearing officer out of the DOTR.  That effort foundered over DMV’s insistence that any separate hearing agency should also hear DUI license revocation actions.

On April 7, 2015, the NM governor signed SB 356, the “Administrative Hearings Office Act” attached to the Department of Finance and Administration.  As structured, the new AHO promises to fulfill the Model Act’s and Curtis Schwartz’s goals of an independent, prepayment, tax-expert adjudication forum of record in New Mexico.    

Effective July 1, 2015, the Act creates a new independent, prepayment forum (“AHO”) staffed by a chief hearing officer (“CHO”).  For the first 6 months, the current DOTR hearing officer, Brian Van Denzen, will serve as Interim CHO.  During that period a bipartisan selection committee will propose a slate of tax expert candidates from which the Governor will appoint a new CHO.   The CHO is required to be an attorney with the precise level of state tax expertise and experience required by the Model Act.  The CHO’s term is 6 years and may be reappointed.

The AHO has jurisdiction not only over all protests of DOTR decisions under the Tax Administration Act, but also all property tax protests, driver’s license revocation and other DMV protests, as well as  disputes involving certification of a business as a “resident business or manufacturer” entitled to preference in the NM state government’s procurement process.  

The AHO’s decision in a tax matter is appealable of right directly to the state appellate court, bypassing the state trial court.   The existing refund remedy in the state trial court will continue to be available to taxpayers willing to pre-pay the tax in dispute. 

          There are concerns with the new AHO regime.  While the CHO is required to be a state tax expert attorney, the only requirements for the hearing officers working under him are “competency” and adherence to a “hearing office code of conduct” to be promulgated by the CHO.  Unless the CHO hears and decides all tax cases, the statute’s expertise requirement may not fulfill the Model Act objectives.    

Also, the initial CHO is the DOTR’s current hearings bureau chief, which does not contribute to the public perception of independence from the DOTR.  Moreover, the CHO selection committee must be a chaired by a former hearings bureau chief, a former CHO or other tax expert who is not a candidate for the CHO job. 

The new statute also allows CPAs and other nonlawyers to represent taxpayers, even though the record is made there and is appealable through the courts. 

         Similarly the new statute specifically states that the rules of evidence do not apply.  Will this threaten the legality of the new forum?

The effort to create an independent tax forum in New Mexico began 2 or 3 years ago as an attempt to improve NM’s business environment, with an eye on COST’s procedural scorecard.  The New Mexico Tax Research Institute, on whose board Curtis sat, and the Albuquerque Chamber of Commerce and Industry spearheaded the reform effort.  With the support of the DOTR and the Governor, SB 356 passed almost unanimously in both houses. 

          On paper, and hopefully in practice, the new AHO stands a good chance of achieving all of the principal goals of the Model Act in New Mexico. 

 

5.       Washington [DeLappe, Fujita]—           

          Under the current regime, a taxpayer may appeal a DOR excise tax assessment to the DOR’s internal Appeals Division (AD).   The taxpayer may appeal an adverse AD decision to the state Board of Tax Appeals (“BTA”).  

           The BTA is a 3-member body independent of the DOR whose members are appointed by the governor, but they do not always have legal or tax expertise. Most of the BTA’s docket consist of property tax cases appealed from CBOEs.  For excise tax cases, the taxpayer must pay or bond the liability in order to stay DOR collection during the BTA hearing process.

            The taxpayer may choose an “informal” BTA hearing, in which case the result is not appealable to the courts, or a “formal” hearing that is subject to judicial review. Though binding on the parties, a BTA decision is not precedential and the DOR routinely ignores pro-taxpayer cases.    

Either party may appeal an adverse formal BTA ruling to the superior court, which reviews the BTA decision on the record.  A losing taxpayer may appeal of right to the appellate court and may receive discretionary review by the state supreme court.       

Instead of seeking BTA review, the excise or property taxpayer may pay the liability and sue for refund in the superior court, with the record made there and subsequent review as in the case of a BTA decision.  A taxpayer who elects to have an “informal hearing” at the BTA can pursue a refund in the superior court without regard to the BTA hearing, i.e., de novo.  Many non-property tax practitioners currently avoid the BTA and choose to litigate in the superior court instead.                

Starting in early 2012, the Washington State Bar Association’s (WSBA’s) SALT Committee formed a Tax Dispute Resolution Subcommittee, headed by Garry Fujita, to study the need for reform of the state’s system for adjudicating excise tax disputes.  By 2013, the subcommittee determined to pursue replacement of the BTA with an independent tax tribunal or court.  By WSBA Tax Section Resolution, dated November 18, 2013, the Tax Section formally recommended that the state create an independent tribunal and offered “attributes” that any such tribunal should have, e.g., no pay-to-play, tax expertise for judges, informal non-record proceeding at which CPAs could represent taxpayers, direct appellate court appeal and published decisions.             

During 2013, Sen. John Braun, an influential legislator and chair of the Senate Trade & Economic Development Committee, became interested in sponsoring Model Act legislation.  As of January 13, 2014, Sen. Braun’s draft legislation (S-6176) would replace the current BTA with an independent tribunal and would generally follow the Model Act. Senator Braun has also proposed an alternate bill that would introduce a few changes to the current BTA.  The Association of Washington Business is supporting Sen. Braun’s effort. 

On November 22, 2013, I testified at the Committee’s “work session” at the invitation of Michelle DeLappe, WSBA SALT Committee chair, and subsequently provided comments on draft S-6176.                

According to Garry Fujita (4/24/14), Sen. Braun introduced his bill as S.3193 in early 2014, but “loose estimates of the cost seem to have helped the key legislators agree to sit on it.”

According to Michelle DeLappe and Garry (4/25/14), key members of WSBA’s Subcommittee and representatives of some large Washington companies met on April 25 to determine next steps.  According to Garry, most of that group favored using the Model Act as the starting point for a new bill, “ideally” to create a judicial tax court.  The companies, with the help of COST and TEI, intend to propose legislation to the DOR by late summer, with the objective of getting the DOR to request such legislation for introduction in the Budget Session in January, 2015.

As of 9/15/14, Sen. Braun introduced legislation for the 2015 session based on 2014’s SB 6175 and SB 6176, which would, respectively, make modest changes to the current BTA and established a real Model Act tribunal.   Braun asked the Association of Washington Business to submit comments by 9/19 on these bills, as well as on the concept of establishing a judicial tax court similar to Oregon’s. 

According to Garry Fujita and Michelle DeLappe (1/21/15), exploration of the possibility of creating a judicial tax court led practitioner Bill Severson to conclude that the state constitution would allow the legislature to establish a tax court within the Court of Appeals.  Bill then worked with Sen. Braun’s staff to develop a bill that Sen. Braun introduced on 1/20/15 as SB5449.

SB5449 would establish a “tax division” within the state Court of Appeals, with jurisdiction over most state and local tax matters, including property tax valuation issues.  Unlike the present situation at the BTA, the tax division would be required to stay collection of a tax in dispute except in frivolous or jeopardy cases. 

The current BTA staff and facilities (but not its members) would be transferred to the new tax division on 7/1/17.  The tax division would be composed of a “main department” (MD) and a “commissioner department” (CD).  The 3 MD judges would have at least 5 years’ SALT practice experience, be a resident of one of 3 regions of the state, have to run for election every 6 years and be paid the same as other appellate court judges.

An unknown number of CD commissioners, with at least 3 years’ tax experience, would be appointed by the governor.  The MD would decide, presumably pursuant to rule, which cases would initially be decided by an individual MD judge or by the 3 MD judges sitting en banc.  All other cases would be heard and decided by a single commissioner of the CD.

A CD decision would be neither published nor precedential, but could be appealed to the MD by either party.  Every MD hearing, whether initial or an “appeal” from a CD decision, would be de novo and its decisions would be published and constitute appellate court precedent.  Appeal from an MD decision would be to the Washington Supreme Court, which would have to take en banc decisions but would have discretion to appeals of single judge MD decisions.

SB 5449’s creative approach would give Washington taxpayers a new, completely independent, pre-payment, fairly tax-expert, forum for the hearing of record and would therefore potentially achieve the Model Act’s main goals.  Since it would be a judicial branch court, the MD could decide constitutional issues, a significant plus.

At the same time, requiring each MD judge to be resident of a specific part of the state and run for election every 6 years, with an initial term as short as 2 years, could make it difficult to find qualified judges.  And SB 5449’s CD does not really constitute a small claims division, since any size case could land there.  Because appeal therefrom is de novo, the DOR would not have a strong incentive to appeal an adverse CD decision in a close case and risk making the decision apply to other taxpayers. At the same time, the DOR could potentially pressure CD-victorious small taxpayer with limited resources to give up and pay the disputed tax, simply by filing an appeal to the MD.

The Association of Washington Business supports the bill, the state bar’s Tax Section is expected to support, and the DOR is “neutral.”  BTA staff are opposed and the appellate judges have raised issues in an apparent effort to derail the bill, but have not come out against it.

          NEW:  SB 5449 failed passage in 2015, largely due to constitutional and other issues raised by appellate judge Marlin Appelwick, former House Democrat Leader, in a memorandum to legislators.   Supporters have drafted a rebutting memorandum, with input from our Committee on what other states are doing. Supporters hope to persuade legislators that Judge Appelwick’s contentions are not well founded and to pursue SB 5449 in 2016.





January 26, 2015

See items below marked "NEW" for most recent developments:  


1.         Alabama [Ely, Long]—

            Proposed by the Business Council of Alabama, the Alabama Retail Association and the Birmingham Regional Chamber of Commerce Business and subsequently endorsed by the state bar and CPA society, COST and numerous business organizations, the Alabama Taxpayers’ Bill of Rights Act (TBOR II) would have created a new Alabama Tax Appeals Commission.  While patterned on the Model Act, the ATAC would not be the hearing of record, as the losing party would continue to have the right to obtain de novo review in the circuit court after paying/bonding the tax in issue (but the record before ATAC would be admitted in circuit court and the ALJ’s decision deemed prima facie correct).  Chief opponents of this effort have been the DOR and the Alabama Education Association.        

            The TBOR II bills (HB 105 and SB 549) passed both houses in May, 2012, but were pocket-vetoed by Governor Robert Bentley (R) on May 24, 2012, because they failed to include the procedure for selecting judges that he and supporters had previously agreed to.  The governor did, however, reiterate his support of TBOR II’s ATAC and other provisions.

            By letter dated February 15, 2013, COST again endorsed the TBOR II bill.  By letter dated February 20, 2013, TEI endorsed the TBOR II bill, consistent with its February 14 endorsement of the ABA Model Act.    The AICPA also endorsed the TBOR II bill—its first endorsement ever of a state-specific bill, which also followed its endorsement of the Model Act.

            In February, 2013, Rep. DeMarco reintroduced the revised TBOR II bill as HB 264.  On April 4, the House passed the bill by a 96-2 vote and April 18 the Senate’s committee on Fiscal Responsibility and Accountability favorably discharged the bill.  As of May 6, with three legislative days remaining, the bill was caught up in a Democrat-Republican standoff under which the Democrats insisted that all bills be read on the Senate floor before a vote.  As a result, the bill was not called for a Senate vote before the regular session adjourned on May 20. 

            Rep. DeMarco, lead sponsor, prefiled House Bill 105 on January 6 and the House passed the bill on January 16.   Senators Bryan Taylor (R-Prattville) and Phil Williams (R-Gadsden) will again be lead sponsors in the Senate.   HB 105 makes two material changes from last year’s bill: (1) it deletes the surprisingly controversial expedited revenue ruling provision (and its $3,000 filing fee), and (2) prohibits the hiring of a second judge until after October 1, 2015, to keep the bill’s fiscal note revenue neutral. 
            According to Bruce Ely and Jimmy Long (3/12/14), HB 105 was approved by the Legislature in the week of March 3 and signed by Gov. Robert Bentley (R) on March 11.  The new statute establishes the Alabama Tax Tribunal, effective October 1, 2014, by eliminating the DOR’s Administrative Law Division and transferring its excellent judge—William Thompson—and other personnel and equipment to the new tribunal. 

            The new tribunal is substantially similar to the Model Act tribunal except that a tribunal decision is reviewed de novo by the state trial court, rather than appealed on the tribunal record to the appellate court.  The statute also gives the Tax Tribunal automatic jurisdiction to resolve disputes re sales and use taxes imposed by “self-administered” cities and countries, unless the local government opts out—thus making it possible for taxpayers to resolve such disputes more efficiently and with greater expertise and consistency. 

            Kudos to Rep. DeMarco and to our own, estimable Bruce Ely!  Bruce, Jimmy and their talented colleagues labored many years to achieve this excellent result for Alabama’s taxpayers.  Doug Lindholm and COST provided unflagging support.

As of 9/15/14, the governor had appointed DOR Chief ALJ William Thompson as first Chief Judge of the new ATT, and Thompson had proposed rules governing practice, which Bruce Ely and Jimmy Long contributed to in earlier drafts and of which they approve.  

NEW:  The new ATT started operation on October 1, 2014.  On December 16, COST issued a press release announcing that, as a result of passage of the ATT bill, Alabama’s grade in COST’s “Best and Worst of State Tax Administration” Scorecard on Tax Appeals & Procedural Requirements went from a “D” to a “B.” The January, 2015 edition of BusinessAlabama.Com featured a story, “Long Road to Tax Fairness,” on the ATT bill and its sponsors, Rep. DeMarco and Sen. Paul Sanford (R).

 

5.       Texas [Larsen, TTARA]—

            Since 2008, the State Bar of Texas’ Committee on State and Local Taxes has
considered reform of the state’s tax appeals system.  Former chair Matt Larsen of Baker Botts has agreed to lead the reform effort in the state.

            Historically, a taxpayer could obtain a non-record administrative hearing without prepayment within the Office of the Comptroller (CO).  In January, 2007, new Comptroller Susan Combs fulfilled a campaign pledge by transferring the CO’s administrative law judges to the State Office of Administrative Hearings (SOAH), a move subsequently ratified by SB 242.  The statute requires tax ALJs to have tax expertise but keeps salaries the same as before.  The ALJ’s decision remains a “proposed decision” and there have been at least 13 instances in which the OC has overruled a pro-taxpayer ALJ decision.  ALJ decisions are not published.  A dissatisfied taxpayer must pay the disputed tax and initiate a recovery lawsuit in the District Court (DC).  The DC hearing is de novo and constitutes the hearing of record for court appeal.

            Dale Craymer heads the state’s most influential business tax lobby, the Texas Taxpayers and Research Association (TTARA).  On December 12, 2012, Dale and Matt reported that, despite substantial business and practitioner interest in reform, passing legislation before the end of the Comptroller’s term will be almost impossible.  As the main source of legislative “fiscal notes,” the CO has attached a high price tag to past attempts to abolish pay-to-play and is likely to do the same with the projected costs of creating an independent tribunal.  Accordingly, for the next two years Dale and Matt plan to identify and seek support from potential comptroller candidates, with the objective of pursuing legislation in the next legislature in 2015.  

             On March 5, 2013, Rep. Van Taylor (R) introduced HB 2488, reportedly at the behest of Ryan & Co, several of whose clients have been victims of the CO’s reversal of ALJ decisions.  The bill is patterned on the Model Act but changes key concepts.  On the positive side, the CO would lose the power to reverse a SOAH decision.  

            But the Ryan bill contained lots of negatives:   The governor could have unfettered power to appoint judges without consulting with the Senate.  The judge qualifications were inadequate, i.e., the appointee neither had to be a lawyer nor have “substantial experience making the record in a tax case suitable for judicial review.”  The tribunal hearing would not be the hearing of record, i.e., a taxpayer would continue to have the right to “appeal” an adverse tribunal decision to the state district court for a hearing de novo and would continue to be required to “pay-to-play” to obtain the hearing of record at the district court.   Despite elimination of the CO’s power to rewrite ALJ decisions, only the taxpayer, not the State, could appeal from an adverse tax tribunal decision. 

            Moreover, the taxpayer’s burden of proof would be “clear and convincing evidence,” rather than “preponderance of the evidence,” whenever a taxpayer claims that “a transaction is exempt from taxation.”  Hearings would be “confidential” and closed to the public.  While decisions would be written and published, they would be redacted to eliminate information that “could possibly” identify the taxpayer.  The bill leaves out a small claims procedure (which would be more important if this were the hearing of record) as well as the Model Act’s requirement that the revenue department maintain a robust system for settling the vast majority of cases on the basis of hazards of litigation.

            For the political timing reasons described above and the shortcomings of HB 2488 led Dale and Matt to believe that they should wait until the next legislature in 2015 to move a bill that would create a truly tax-expert court of record.

            At a 4/29/13 hearing before the House Ways & Means Committee, the CO attached an $894 million price tag to HB 2488, mostly attributable to the bill's failure to allow the CO to appeal.  TTARA testified re some of the bill's defects.  As a result, HB 2488 failed to make it out of committee and therefore died.  Also failing to progress was HB 3571, controlled by House W&M chair Rep. Harvey Hildebrand, which contained a provision that would have eliminated the Comptroller’s power to reverse ALJ decisions and thereby given the SOAH tax ALJs real independence from the tax collector.         
            On 11/13/13 I participated in a panel on the tribunal concept with Dale Craymer and practitioners Renn Neilson (Matt Larsen's senior partner) and David Gilliland at TTARA’s 2013 Annual Meeting November 13-14 in Austin, Texas.  I received no real feedback at the meeting or afterward.

            On 2/4/14 TTARA invited interested members to join a “working group” to consider what reforms TTARA should support.  Eleanor Kim, former assistant general counsel and ALJ at the Comptroller’s Office, former ALJ at SOAH and now with Ducharme McMillen, agreed to chair the working group.  At that meeting, task force members were split on whether TTARA should push for a new tax tribunal or merely reform the current SOAH process. 

Jaye Calhoun, Doug Lindholm and Kendrick Smith appeared on a June 27 panel on the Model Act at the 2014 Annual Meeting of the Texas State Bar.  According to Jaye, the panelists received no feedback from the audience, pro or con.

NEW:  According to John Kennedy (1/15/15), TTARA provided comments to the Sunset Commission (8/28/14), which under Texas law must recommend whether the SOAH regime should continue past the5-year period applicable to most legislation.  TTARA suggested that the Comptroller’s current statutory authority to overrule SOAH proposed decisions be restricted, to give taxpayers an opportunity to contest the proposed change before the SOAH judge and hopefully to restrict instances in which overrides occur. 

In its November report, the Sunset Commission staff ignored these suggestions and instead recommended that the current SOAH regime be continued but that tax expertise requirements of SOAH tax judges be reduced, that the CO not be allowed to evaluate the SOAH tax judges and that SOAH’s administrator be allowed to assign tax judges to other cases as needed.  After a 1/14/15 hearing, the Sunset Commission endorsed the current SOAH tax adjudication scheme with the changes suggested by staff.    

According to John (1/21/15), since reform will not be possible without the CO’s support, TTARA has briefed former state senator and newly elected Comptroller Glenn Hegar on the problems with the current administrative review process. They promised a careful look, but made no promises.

Sen. Van Taylor, the former House member who sponsored the flawed HB 2488, described above, plans to reintroduce that bill in 2015.   The bill’s main virtue is that it would eliminate the CO’s right to override SOAH decisions.  In a concession to reality, Sen. Taylor has stated that he will be open to modifications.   

Despite my hopes, John Kennedy also reports that TTARA’s Working Group and Board have decided that they do not want Model Act reform, but instead want to retain the current adjudication system under which a taxpayer who appeals from a SOAH/Comptroller decision gets a de novo hearing at the state district court.   And, instead of eliminating the CO’s right to overturn a SOAH decision entirely, TTARA will only attempt to reduce the circumstances under which the CO can reverse a SOAH decision, particularly in cases in which the Comptroller has changed policy after the time period involved in a taxpayer’s SOAH case.   In such cases, TTARA believes that the new Comptroller will largely be willing to make policy changes prospective only, so that taxpayers operating under a former policy can win at the SOAH hearing. 

According to John, there is evidence the CO is already taking a new approach at SOAH.  In his first 2 weeks in office, Comptroller Hegar has replaced the deputy general counsel (DGC) in charge of CO administrative hearings and appointed a special counsel “hearings.”  He has also replaced the DGC in charge of defending administrative decisions at SOAH and the courts.  Reports from the SOAH judges suggest that the CO’s lawyers are evincing a more respectful attitude toward SOAH and its decisions.

Even if the current regime is reformed as TTARA envisions, the result will not clearly advance the Model Act’s core objectives.  Because the CO would retain the right to overrule SOAH decisions in some circumstances, SOAH will not be truly independent.  Because the state district court and not SOAH would be the hearing of record for subsequent court appeal, the taxpayer will not have a hearing of record before a tax expert judge.  While eliminating the CO’s power to overrule a SOAH tax decision would be a big improvement, TTARA will not lobby for that against the CO’s wishes, but is now prepared to settle for merely tightening current restrictions on the CO’s discretion.  While Sen. Taylor’s bill would eliminate that authority, John thinks it unlikely that the legislature would pass that bill. 

May 5, 2014

See items, below, marked "NEW" for latest developments:

7.         Tennessee [NFIB]— 

            Tennessee’s current tax appeals procedure is that a taxpayer who receives an assessment may request an “informal hearing” within the DOR.  If unsuccessful there, the taxpayer may pay and sue to recover the disputed tax liabilities in a hearing of record (de novo) in the Chancery division of the state district court, with appeal to the appellate court.

            At the behest of the National Federation of Independent Businesses (NFIB) and its Tennessee Regional Director, Jim Brown, in early February, 2013, Sen. Jon Lundgren (R) and Rep. Bo Watson (R) introduced Model Act bills (SB 734 and HB 961) that would replace the Chancery court with a full-time 3-judge tax tribunal in the executive branch, whose decisions could be appealed directly to the state appellate court.  The bills would retain the current rule that, if a party appeals to the appellate court, the court shall award the prevailing party its “reasonable attorneys’ fees” plus “expenses of litigation up to twenty percent (20%) of the amount assessed.”   

            After the bills ran into opposition from some practitioners and the DOR, on April 2, 2013, the House Government Operations Committee declined to advance the bills, holding them instead for action in 2014, the second year of the current legislature.  At that time Jim Brown reported that SB 734 and HB 961 were still alive, that key Senate leaders were committed and that the majority House Republican Caucus had already voted to support the bill when it comes back in 2014.             

             According to Jim Brown (8/26/13), the NFIB revised SB 734, on the advice of local attorneys, to inter alia preclude non-attorneys from representing taxpayers before the tribunal.   At that point, the state CPA society signaled its opposition to the revised bill.  In addition to restoring the CPAs’ right to represent taxpayers before the tribunal and allowing taxpayers their current alternative of seeking review of a DOR decision in the chancery court, the NFIB is reaching out for feedback from other groups and plans to pursue a revised bill in the 2014 legislative session.  In other words, the NFIB now seems prepared to turn the tribunal into a settlement forum, rather than a hearing of record.

            According to Jim Brown (January 14, 2014), the NFIB decided not to pursue an independent tribunal in 2014.  Instead, the NFIB and the state’s CPA society negotiated agreed legislation with the DOR to “put more fairness, transparency and consistency into” the DOR’s current informal hearing process and make it easier to settle cases without litigation. 

            NEW:  Per Jim Brown (4/25/14) the Legislature passed Senate Bill 1635/House Bill 1431 before session ended a few weeks ago. The Governor is expected to sign it.  

            The bills mandate that (1) informal conference decisions shall not be considered as precedent; (2) no ex parte communications between hearing and audit staff shall occur, unless ministerial; (3) tax assessments shall be issued in a proposed status, which will allow taxpayers to contest any adjustments made before their assessment becomes final; (4) the DOR shall have express authority to compromise tax liabilities; (5) the Comptroller and Attorney General may authorize the Department to compromise small assessments without additional approvals; (6) interest on tax deficiencies shall be tolled after the conference is held until the final assessment is issued, so that the taxpayer is not penalized for delay in the issuance of the assessment; and (7) sets out a process for the DOR to issue public guidance regarding conference decisions.       

            All of these are positive changes, but the bill would not eliminate pay-to-play or guarantee tax expertise at the initial hearing and would not streamline the current dispute process.  According to Jim, if these changes do not materially improve the process in a couple of years, the NFIB will revisit comprehensive reform. 

 

Colorado—2014


           
Under Colorado’s existing system, the DOR conducts internal hearings for both state taxes and Colorado’s extensive system of locally administered sales taxes, with “appeal” to the district court on a de novo basis.  On January 18, 2013, a pro-business legislator, House Minority Leader Rep. Amy Stephens (R), introduced HB 13-1140, basically the Model Act, except that the hearing would not be the hearing of record, i.e., a losing taxpayer could obtain de novo “review” in the state trial court.  In early February, after incorporating suggestions from the DOR and AG’s office, Rep. Stephens floated a proposed amendment to HB13-1140 that would have created a judicial branch tax appeals court and authorized the state’s chief justice to “designate” one or more district court judges “with substantial knowledge of the tax law” to staff that court. 
      
            
According to Neil Pomerantz and Mark Medina, the business community and practitioners opposed the amended bill.  On March 6, 2013, Rep. Stephens arranged for the House Finance Committee to table the bill indefinitely.              
            
The bill and the proposed amendment failed for several reasons, according to Neil and Mark.  Most importantly, Rep. Stevens failed to consult the business community or practitioners before introducing her bill and in mid-February gave them just days to react to her amendment, which would have radically changed the existing regime and more than 20 existing statutes.              
            
In addition, at the DOR’s suggestion the amendment would have eliminated DOR internal hearings for both state and local taxes.  This upset practitioners, who use the DOR internal hearing to rationalize local tax assessments and to gain knowledge of the DOR’s tax positions useful in the de novo hearing in district court.  Legal practitioners also feared that the new appointed tax-expert judges might not be as fair or competent as the district court judges, especially in Denver.   Accountants reportedly lobbied the DOR against elimination of the internal hearings, at which they currently practice.
  

           According to Neil Pomerantz (4/30/14), there was no legislative attempt to revive adjudication reform or, contrary to a rumor heard by COST's Greg Turner, to repeal pay-to-play in the Spring Session just ended.  

            It is not clear that practitioners will support true Model Act reform in Colorado.  We need leadership from the business community there.

 Oklahoma—2013

            Under Oklahoma’s current regime, a taxpayer who receives a final assessment or other adverse determination from the Oklahoma Tax Commission (OTC) may obtain an internal hearing before an administrative law judge (ALJ), whose decision may be accepted or rejected by the OTC.  The taxpayer may appeal an unfavorable OTC decision directly to the Oklahoma Supreme Court, which reviews the OTC’s decision on the record made before the OTC.Since 1999, when a bi-partisan Citizens’ Task Force on Taxation recommended it, Mike Miers and the Oklahoma Bar Association (OBA) Tax Section have promoted the establishment of a tax tribunal independent of the OTC.  Main obstacles are the OTC members and the Senate majority legislators who control appointments to the OTC, as well as the purported cost of setting up the new tribunal.             
            On February 6, 2012, Sen. Brian Crain (R) introduced the OBA bill as SB 1297.   Mike recruited the Oklahoma State Chamber as an important new ally and has also solicited assistance from COST.                    
            
At a Senate Finance Committee hearing in late February, chair Sen. Mike Mazzei embraced the OTC’s claim that SB 1297 would cost an additional $400,000 per year to operate and stated that as a result he could not support the bill.  Despite this, the bill passed out of the committee unanimously except for the chair’s vote.  
            Shortly thereafter, unbeknownst to the OBA, the State Chamber surfaced a so-called “Committee Substitute” proposal that would have changed the existing system in ways that would not have advanced the Model Act’s objectives, a reality the Chamber now appreciates.  As a result, though the OTC and Sen. Mazzei were prepared to move ahead on the Committee Substitute, on or about March 6 the OBA, the State Chamber and Sen. Crain determined that they should oppose that effort and start over next year.  
            In an email Mike stated: “Your support and comments were very important and helpful in getting the State Chamber better informed on the key element of the Model Act, and how the substitute bill was just not a good choice or alternative.   I hope you will be able and willing to keep working (plowing) with us to somehow, someday, get this passed in Oklahoma.”The OBA did not reintroduce Model Act legislation in the 2013 session because of widespread concerns among the majority Republicans about cost and the perception of “growing government” that a new tax tribunal would create.  
            
On February 4, without consulting the supporters of Model Act reform, the Senate Republican leadership introduced SB 864, which basically layered in a district court trial option between the OTC decision and Supreme Court review.  Under that bill, the taxpayer (as well as the OTC!) may appeal an adverse OTC decision to the district court for a trial de novo, after which the losing party may appeal of right to the Oklahoma Supreme Court.          
            
After clearing the Senate unanimously on March 12, on April 23 the House amended the SB 864 before passing it.  The amendment, which appears to have the DOR’s blessing, makes the bill effective for tax periods beginning on or after 1/1/14; eliminates statutory language requiring (or permitting the DOR to request) prepayment/ bonding to obtain hearing in the district court or to appeal to the supreme court; and changes the rate of post-petition refund interest to the higher rate imposed on deficiencies.      
        
            NEW: 
Following Senate concurrence, the governor signed the bill into law on May 14, 2013.  Though it establishes independent, prepayment adjudication in Oklahoma, SB 864 fails to deliver a hearing of record before a tax expert judge and the other benefits of the Model Act.     

Pennsylvania—2013             

            
Pennsylvania’s current tax appeal system requires two levels of administrative appeal to be exhausted before an assessment can be appealed to a court.  The first level of appeal must be filed with the Board of Appeals (BA), which is within the Pennsylvania DOR.  A taxpayer who loses at the BA may obtain de novo review of the BA’s final decision by the Board of Finance and Revenue (BFR), a body of 6 state officials including the DOR secretary and the Attorney General.  The DOR Secretary is generally represented by a deputy chief counsel and the Attorney General is generally represented by one of the Deputy Attorney General’s from the Tax Litigation Section.                         
            
Once these administrative remedies are exhausted, the taxpayer can initiate a record proceeding before the Commonwealth Court (CC).  While the CC is generally an intermediate appellate court for state tax cases, it has been given original jurisdiction.  The CC proceeding is de novo but limited to issues already raised.   Historically, the taxpayer had to bond the disputed tax to avoid DOR collection activity pending litigation, but the legislature in 2011 made the bonding requirement discretionary with the DOR.  The losing party may appeal the CC’s decision of right to the state supreme court.
            In 2004 the governor’s Business Tax Reform Commission recommended placing the BFR’s tax adjudication function in an independent tribunal patterned upon the Model Act, but 2005 reform legislation supported by the governor failed passage, mainly because of opposition from tax practitioners in Harrisburg, who have excellent legislative contacts and also dominate the State Bar, and from the Pennsylvania Institute of CPAs, which was concerned about the ability of its members to continue to represent clients during the appeal process.                                     
            
In February, 2012, COST reported that the DOR was preparing legislation to address the business community’s concerns with the tax appeal process, which had garnered the fifth lowest score on COST’s 2010 tax administration scorecard partly because of its appeals system.               
            
As of January 14, 2013, Stewart Weintraub reported significant, confidential, behind-the-scenes tax reform conversations ongoing with the Governor’s office, including changes to the appeals process. While the Governor was expected to announce his proposed changes during this February 5th budget message, he did not.              
            
NEW:  According to Stewart Weintraub (9/9/13), Act 2013-52 (
(H.B. 465), signed July 9, 2013, changes the BFR appeal process effective 4/1/14.  The State treasurer will chair a new 3-member BFR.  The other 2 members will be appointed by the governor with the advice and consent of the senate and each must be a resident of PA and either a lawyer or CPA with 10 years’ SALT experience.  The DOR and the taxpayer may be represented before the BFR.  No ex parte communication will be permitted between the BFR and either party.
  
            
Prior to the enactment of Act 52, a BFR hearing was conducted like an appellate argument.  While the statute provides for the BFR to receive evidence and conduct hearings, the details of the new BFR proceeding have yet to be determined.  Whether the hearings will be adversarial has not yet been determined.  All decisions of the BFR, after redaction to remove confidential information, will be published.            
            
While Act 52’s changes improve the current system, they still fail to create a Model Act-like tax expert, independent hearing of record tribunal for Pennsylvania taxpayers.

Vermont —2012 

            Per Roger Prescott, co-chair of the Vermont Bar Association Tax Section, in 2011 the Tax Section submitted a version of the Model Act to the House Ways & Means Committee, which promptly held hearings.  On January 17, 2012, at the Committee’s request, Department of Tax Commissioner Mary Peterson issued a report justifying the current internal hearing system and critiquing the Tax Section proposal.    

            On January 26, 2012, Rep. Carolyn Whitney Branagan (R) introduced H. 606, “An act relating to the creation of an independent office of taxpayer appeals,” a revised version of the Tax Section’s proposal, which was referred to the House Ways & Means Committee.  According to Paul Hanlon (4/30/12), reform supporters testified in favor of H. 606 at one committee hearing at which they received a polite but unenthusiastic response. In any event, that hearing occurred too late to pass a bill in the 2012 session. 

            As of January 14, 2013, Paul and Roger, who are leading our Model Act effort, believe that it would be pointless to introduce the bill again at this time.  Meanwhile, they continue to seek support.

12.       NCSL Task Force to Address Independent Tribunals—
           NEW:  At our request, the NCSL has had Model Act materials on its website for the use of its members since 2009.  Despite that, to date the NCSL has not studied or made recommendations on the Model Act or other tax appeal system reform proposals. That may change.
           
On February 18, 2013, the National Conference of State Legislatures (NCSL) reported that it had expanded the duties of its long-standing Executive Committee Task Force on State and Local Taxation of Communications and Electronic Commerce to tackle all “significant tax policy issues facing the states,” including independent tax tribunals.              

             

13.       Tax Executives Institute (TEI) Endorsement — TEI provided a letter in support of the Alabama effort in June, 2012.  TEI was also prepared to do so in Georgia and Illinois, but legislation in those states advanced before TEI could act.

            NEW:  In a February 14, 2013, letter, Carita Twinem, International President, expressed TEI’s endorsement of the Model Act, saying it provides a sound framework for an independent tribunal that ensures due process and fundamental fairness for taxpayers.  At our request, SALT head Dan DeJong shepherded the endorsement through TEI’s approval process.   

 

NCSL Task Force to Address Independent Tribunals
March 8, 2013
 

           On March 7, 2013, the law firm of McDermott Will & Emery reported on its website (mcdermott.com) that the National Conference of State Legislatures (NCSL) has expanded the duties of a long-standing task force to tackle all of the “significant tax policy issues facing the states.”  Among those issues, says McDermott, is the current push to create independent tax tribunals.
           The task force was created in 1999 to promote solutions to tax issues in the communications and electronic commerce areas, but more recently has been a forum for developing tax policy responses to “digital taxation and cloud computing.” 

            By letter to industry representatives dated February 18, 2013, the NCSL’s Executive Committee Task Force on State and Local Taxation of Communications and Electronic Commerce announced the extension of its mandate and the dropping of “of Communications and Electronic Commerce” from its name.  The letter explained that the task force had already met with a number of private groups to help it identify topics that would benefit from the task force’s attention.

           While the NCSL has already placed the Model Act and related materials on its website for the use of its members, up to this point the NCSL has not studied or endorsed the Model Act or similar tax appeal system reforms. 
           

Letter to State Tax Notes re article on Model Act
March 4, 2013 Edition, p. 699

To the Editor:

Jennifer Carr's article ("Alabama Tax Tribunal Bill May Pass This Year," State Tax Notes, Feb. 18, 2013, p. 503) does a fine job describing the 2012 adoption of independent tax tribunals in Georgia and Illinois and how the pending Alabama bill compares with them and the American Bar Association's Model State Administrative Tax Tribunal Act. Thank you for acknowledging the Model Act's crucial role in helping these reforms come about.

As chair of the ABA State and Local Tax Committee task force responsible for promoting the adoption of the Model Act and similar reforms, I would like to expand on a few points that the article missed.

The Model Act is a "model" and not a "uniform" act. The ABA's primary concern is to give every state taxpayer the right to a prepayment hearing of record (the record that will be reviewed by the appellate courts if an appeal is taken) before a judge who is a tax expert and who is truly independent of the state's department of revenue. Although the Model Act provides a comprehensive template for achieving those goals, it is far less important that every state adopt all of the Model Act's specific provisions.

The Georgia and Illinois statutes and the bill pending in Alabama, as well as bills proposed or pending in Oklahoma, Colorado, and Tennessee, all promise to achieve the Model Act's objectives, albeit in ways that are somewhat different from the Model Act and from each other.

Good as it is, Carr's article did not adequately describe three of the Model Act's most important provisions:

·         As to judicial review, Model Act section 15 expressly allows the losing party to appeal a tax tribunal decision directly to the state's appellate court, just like a state trial court decision. Indeed, the act generally provides the tribunal with the powers of the state's trial court in regard to tax cases, with the sole exception of facial challenges to the constitutionality of a tax statute. The Georgia and Illinois statutes provide for direct appeal, but the pending Alabama bill does not.

·        Model Act section 8 mandates that an adopting state's department of revenue must create or maintain a robust procedure for settling the vast majority of cases. Your article missed the Model Act's requirement that such settlements must be based on the "hazards of litigation." This is the crucial element missing from many departmental appeals and settlement systems. As a result, taxpayers and states waste far too much money and time on formal litigation.

·         Finally, the article did not mention the Model Act section 15's requirement that the independent tax tribunal render a written decision in each case and section 17's that such decisions be published, in print or electronic form. Currently, many states either heavily redact or do not publish departmental hearing decisions, and in most states regular trial court decisions are not required to be written or published.
      Publishing the independent tax tribunal's decisions is very important. The litigants deserve written decisions and the appellate courts should have them available when conducting review. Published decisions create transparency and basic fairness for other taxpayers, who might otherwise be unaware of relevant decisions in other taxpayers' cases that are settled or not appealed to the regular courts. And written, published decisions allow the state to develop a coherent body of state tax law over time.

Thank you again for bringing attention to these important developments.

Garland Allen
Law Office of Garland Allen
Santa Monica, Calif.

8/29/2012
 
Illinois Governor Signs Independent Tax Tribunal Bill

On August 28, Gov. Pat Quinn (D) signed HB 5192.  The new law, PA 97-1129, creates a new Illinois Independent Tax Tribunal that will begin operation on July 1, 2013. 
 
In so doing, Gov. Quinn took an historic step toward fairer enforcement of Illinois taxes and an improved regulatory environment for Illinois businesses.  By appointing qualified judges whose reputation for fairness is beyond reproach, the governor now has the opportunity to show Illinois taxpayers, as well as other states considering such a measure,how well an independent tax tribunal can work. 

Before reaching the governor’s desk, HB 5192 was approved by both houses of the General Assembly with unprecedented bipartisan support.  HB 5192’s chief sponsors in the House, where the bill passed unanimously on May 26, were Reps. Michael Zalewski (D), David Harris (R), John Bradley (D) and Barbara Flynn Currie (D).  The bill was also approved unanimously by a June 1 vote of the Senate, where Senate Revenue Committee Chair Toi Hutchinson (D) was the measure's chief sponsor and SRC Minority Spokesman Sen. Chris Lauzen (R) strongly urged passage on the Senate floor.
 
Illinois is now the second state to adopt legislation patterned on the American Bar Association’s Model State Administrative Tax Tribunal Act.  Georgia was first, when Gov. Nathan Deal on April 19 inked legislation that had garnered unanimous votes in both legislative bodies. 
 
The 2006 ABA Model Act is designed to insure that every taxpayer who receives a state tax assessment can challenge that assessment, before paying the disputed tax, in a hearing forum that is totally independent of the revenue collecting agency and that is staffed by judges who are state tax experts.  More than 20 states do not presently have a formally independent forum of any type, including AL, CA, FL, NM, OK, TN, TX and VT.  Taxpayers in those states generally perceive the existing system—typically, a choice between a pre-payment hearing before a DOR employee or a post-payment, refund lawsuit before a state trial court judge who is not a tax expert—as unfair and burdensome.

PA 97-636, enacted December, 2011, committed Illinois to creating an independent tax tribunal to replace the Illinois Department of Revenue’s internal hearing division by July 1, 2013.  Since January of this year, the Illinois State Chamber and Commerce and Taxpayers’ Federation of Illinois, two of Illinois’ most effective lobbying organizations, have led the effort to craft a bill that would make the promise of PA 97-636 a reality.  The Committee on State Taxation (COST) has provided consistent and crucial support.
 
While modeled on the ABA Model Act, negotiations between reform supporters and the Governor’s Office, the DOR and key legislative leaders resulted in some provisions that differ from the ABA proposal.  The most concerning denies taxpayers with $15,000 or less in issue the right have their disputes decided by the new tribunal.  A smaller taxpayer who wants a record hearing without prepaying the disputed assessment continues to have the sole option of trying her case before a hearing officer employed by the DOR.   
 
The author was a co-draftsman of the Model Act and leads the ABA State and Local Tax Committee task force responsible for promoting adoption of the Model Act and similar reforms.  As an Illinois state and local tax litigator and specialist, he is also immensely proud of his home state!

August 15, 2012

AICPA Supports State Tax Tribunal Model Legislation 
Published by the AICPA on August 15, 2012 

The American Institute of CPAs supports model legislation that state CPA societies can use if their legislatures are considering creating or modifying an independent state tax tribunal.  A tax tribunal is an administrative appeals forum designed to resolve state tax appeal controversies prior to litigation, but in a forum outside the dominion and control of the state tax authority. 

Thirty-two states have adopted independent state tax tribunals and other states may consider such legislation in 2013.  Georgia and Illinois, the most recent states to adopt state tax tribunals, enacted the legislation in their 2012 legislative sessions.

The position on the model legislation was approved by the AICPA Tax Executive Committee and is based on the 2006 American Bar Association (ABA) Model State Administrative Tax Tribunal Act.  The model legislation is part of an AICPA position paper includes an explanation of the potential value of such a tribunal to taxpayers and provides special commentary on how to protect CPA mobility when state tax tribunal legislation is under consideration.

Mat Young, AICPA vice president for state regulatory and legislative affairs, explained that it is important to ensure that CPAs authorized to practice in a state are able to represent taxpayers before the state’s tax tribunal.  Therefore, in order to protect CPA mobility, the AICPA developed proposed language to one section of the ABA Model Bill.  The revised language would allow a CPA to represent a client before a tax tribunal so long as the CPA meets the state’s requirements to obtain a practice privilege under the state’s accountancy law.

If you have any questions about this issue or want to discuss a unique situation related to tax tribunal laws or case law in your state, please contact Mat Young,
myoung@aicpa.org, or Eileen Sherr, senior technical manager on the AICPA Tax Team, esherr@aicpa.org.

Note:  The AICPA's Position Paper may be found at http://www.aicpa.org/interestareas/tax/resources/
stateandlocal/
advocacy/downloadabledocuments/
aicpataxtripaper072012.pdf


June 1, 2012

Illinois Passes Tax Tribunal Bill At Last Minute

The Illinois State Senate adjourned its regular 2012 session in the wee hours this morning (June 1), but not before passing the Illinois Independent Tax Tribunal Act of 2012 by a vote of 56-0 at 1225 am.  HB 5192 now goes to Governor Pat Quinn (D), who has previously indicated that he will sign it. 

HB 5192’s chief sponsors in the House, where the bill passed unanimously on May 26, were Reps. Michael Zalewski (D), David Harris (R) and Barbara Flynn Currie (D).  Senate Revenue Committee Chair Toi Hutchinson (D) was the measure's chief sponsor in the Senate, and SRC Minority Spokesman Sen. Chris Lauzen (R) strongly urged passage on the Senate floor.

Like the Georgia Tax Tribunal legislation enacted April 19, HB 5192 is based on the American Bar Association’s Model State Administrative Tax Tribunal Act.   Despite some departures from the ABA model, HB 5192 should greatly improve Illinois’ current system and will achieve the main objectives of the Model Act, according to the Illinois Chamber and Taxpayers’ Federation. 

The 2006 ABA Model Act is designed to insure that every taxpayer who receives a state tax assessment can challenge that assessment, before paying the disputed tax, in a hearing forum that is totally independent of the revenue collecting agency and that is staffed by judges who are state tax experts.  More than 20 states do not presently have a formally independent forum of any type, including AL, CA, IL, FL, NM, OK, TX and VT.  Taxpayers in those states generally perceive the existing system—typically, a choice between a pre-payment hearing before a DOR employee or a post-payment, refund lawsuit before a state trial court judge who is not a tax expert—as unfair and burdensome.

PA 97-636, enacted December, 2011, committed Illinois to creating an independent tax tribunal to replace the Illinois Department of Revenue’s internal hearing division by July 1, 2013. 

Since January of this year, the Illinois State Chamber and Commerce and Taxpayers’ Federation of Illinois, two of Illinois’ most effective lobbying organizations, have led the effort to craft a bill that would make the promise of PA 97-636 a reality.  COST has provided consistent and crucial support. 

Even after passage of PA 97-636, the DOR continued to assert that its internal hearing system had no problems that would justify creation of a new forum outside the control of the DOR, and that the new tax tribunal would not yield as much revenue as the department’s own hearing operation.   Eventually, however, when the legislature’s intent to move the legislation became clear, the DOR and the Governor’s Office participated in negotiations with the legislation’s sponsors and supporters that led to agreement on HB 5192. 

The principal differences from the Model Act are the following:

While HB 5192 allows a taxpayer to challenge her assessment in the Tax Tribunal without paying the amount in dispute first, the DOR will be able to request a 25% bond in cases with more than $25,000 in dispute.  The Tribunal judge can impose such a bond if it is persuaded that the taxpayer is intentionally delaying proceedings or attempting to dissipate assets. 

Hearings will be open to the public as the Model Act requires, but tax return information that is part of the record will remain confidential unless and until the taxpayer or DOR appeals the Tribunal's decision.  Taxpayers’ current right to use the Protest Monies Act procedure will also continue, i.e., the circuit court will also have jurisdiction over tax disputes if the taxpayer chooses that option by paying the assessment beforehand.

At the DOR's insistence, the bill will allow internal DOR hearings to remain the only prepayment opportunity for contest in cases involving $15,000 or less.  In final negotiations, the Chamber and Taxpayers’ Federation committed to giving this regime a fair opportunity to work.  If it doesn’t, they plan to ask the legislature to extend Tax Tribunal access to the state’s smallest taxpayers. 

HB 5192 does not include Model Act Section 8, which requires the state to maintain a robust system of settlement on the basis of hazards of litigation for all cases and sets forth detailed standards for a fair and efficient settlement process.  The ABA’s objective is to make sure that the overwhelming majority of disputed assessments, e.g., 95% or more, are settled without litigation. 

Even though DOR regulations currently require it to take litigation hazards into account, the Informal Conference Board (ICB) has failed to give meaningful consideration to this factor, say many Illinois tax practitioners.  Moreover, the rarely used statutory “informal administrative review” procedure does not currently allow settlement on the basis of hazards of litigation.  Despite this record, HB 5192 contains only a modest amendment to the informal administrative review statute, giving the reviewer permission to take “hazards of litigation” into account in resolving disputes.

Other potentially troublesome variations from the Model Act include reducing the terms of Tax Tribunal judges from 10 years to 5 years for the chief judge and staggered terms not to exceed 4 years for the other 3 judges and pegging the judges’ salaries to that of the DOR director rather than to the higher salaries of circuit court judges.  HB 5192 also shortens deadlines for filing initial petitions and pleadings, shortens the time for judges to issue decisions after hearing from 6-9 months to 3-4 months, leaves out the express mandate for the Tax Tribunal to follows its own decisions in subsequent cases, and may restrict (it’s not clear) the Tax Tribunal’s ability to make “interlocutory” decisions. 

On the other hand, HB 5192 may make it somewhat easier than the Model Act for a taxpayer to challenge the constitutionality of a state tax statute.  The Model Act requires the taxpayer to present to the Tax Tribunal all “as applied” challenges to a statute and all constitutional challenges to a regulation, but gives the taxpayer 3 options for pursing a claim that a state statute is void “on its face.” 

As a result, under the Model Act, a taxpayer must generally make the sometimes difficult determination as to the precise nature of its constitutional challenge to the statute before filing its petition in the Tax Tribunal. 
By contrast, SB 5192 appears to allow the taxpayer to pursue a constitutional challenge to a state statute or regulation, whether or not ruled on by the Tax Tribunal and regardless of whether it is “facial” or “as applied,” for the first time as part of the taxpayer’s appeal of the Tax Tribunal’s adverse decision.

The author of this article is a draftsman of the ABA Model Act and now leads the ABA State and Local Tax Committee task force responsible for promoting adoption of the Model Act and similar reforms.


May 24, 2012


Alabama Governor Pocket Vetoes, Promises Support

Bills patterned on the Model Act and drafted by Bruce Ely and others have been introduced in the Alabama legislature since 2008.              

On April 21, 2011, HB 427 (Rep. Paul DeMarco (R)) passed the House on an 88-0 vote.   Supported by the Business Council of Alabama, the Alabama Retail Association and the Birmingham Regional Chamber of Commerce Business, HB 427 would create a new Alabama Tax Appeals Commission patterned on the Model Act as part of a procedural reform bill (“Alabama TBOR II”).  Despite favorable aspects, the bill was not brought up for a vote and died at midnight on June 9, the last day of the session, when senators ran out the clock on a filibuster over unrelated legislation.            

In January, 2012, Rep. DeMarco re-filed the TBOR II bill as HB105. The bill was endorsed by nearly 2 dozen business-affiliated organizations, including the three original sponsors, the Alabama Bankers Association and COST, as well as the state bar association, the state CPA society and the Eagle Forum (a Christian women’s group). The House Speaker made the bill his “Number 2 priority” for the session.  The DOR commissioner continued to oppose the bill, however, and the Alabama Education Association (teachers union) requested a public hearing.  

After the Alabama Education Association withdrew its initial opposition, on April 5 the House passed HB 105 by a vote of 89-0.  COST provided crucial support.  AICPA offered to help, but in the end could not obtain leadership permission to endorse HB 105 or the Model Act.             

In the Senate, on May 2 supporters agreed to amendments requested by Sen. Sanford, chair of the Job Creation Committee, among other things, to reduce the experience required of a nominee from 10 to 5 years, require ATAC judges to undergo retention elections every 6 years, and, in a pro-taxpayer move that will probably be reversed, shift the burden of proof to the DOR on all assessments and appeals.  On May 3, the Senate passed the bill as so amended (SB 549) 29-0.  


A conference committee report reconciling the bills was passed by the Senate 33-0 and by the House 95-1 on May 16 and sent to the governor.  Governor Robert Bentley (R) announced May 24 that he would pocket veto the bill, citing the Legislative Reference Service's failure to include in it agreed amendments preserving the governor's final authority over judge appointments, reducing the length of judge terms, and requiring auditor-proposed installment payment plans to be approved by affected local governments.   

The Governor did, however, express firm support for TBOR II’s ATAC and other provisions and promised to include the bill in his call for a special session in the Fall, 2012, or, if no special session is called, to support the bill in the Spring 2013 regular session.


April 30, 2012 

Vermont Supporters Will Try Next Session

Per Roger Prescott, co-chair of the Vermont Bar Association Tax Section, in 2011 the Tax Section submitted a version of the Model Act to the House Ways & Means Committee, which promptly held hearings.  Roger and Paul Hanlon are leading the Vermont effort.            

On January 17, 2012, at the Committee’s request, Department of Tax Commissioner Mary Peterson issued a report justifying the current internal hearing system and critiquing the Tax Section proposal.                

On January 26, 2012, Rep. Carolyn Whitney Branagan (R) introduced H. 606, “An act relating to the creation of an independent office of taxpayer appeals,” a revised version of the Tax Section’s proposal, which was referred to the House Ways & Means Committee.           

According to Paul Hanlon (4/30/12), reform supporters testified in favor of H. 606 with a favorable response from members of the key House and Senate committees, buy too late to pass a bill this year.  Paul and Roger hope to revive the legislation in the second half of the legislative biennium.
                    

April 19, 2012

Georgia Enacts First Model Act Tax Tribunal Legislation in Country
 
 
Since 2007, the Georgia Bar Tax Section's Tax Court Task Force, chaired by Johnn Allan, has attempted to get a Model Act-type tax court or tribunal enacted in Georgia.  Its initial proposal was to establish a judicial branch "pilot project" tax courtmodeled largely on the Model Act, an idea supported by the Department of Revenue. The Task Force made several efforts to get the state's Judicial Council to support the effort, to no avail.

In August, 2011, without consulting the Task Force, the bar or the judiciary, Reps. Allen Peake (R) and Rep. Stacey Abrams (D) introduced HB 100, which would establish a judicial-branch Georgia Tax Court as a pilot project until July 1, 2021.   On August 24, a House Judiciary Committee subcommittee held a hearing at which a representative of the Council of Superior Court Judges voiced objections.              Per John Allan (12/16/11) constitutional issues with the creation of a judicial branch court led the Task Force, with the agreement of Rep. Peake, to propose an executive branch “Georgia Tax Tribunal.”  The House speaker and majority leader, the DOR, the AG’s office, the state CPA society, the executive committee of the Council of Superior Court Judges, and the state chamber of commerce support this approach and the Task Force redrafted HB 100 accordingly.             

At a January 25 House Judiciary Subcommittee meeting, the DOR, Chamber, COST, and the Georgia Society of CPA's expressed support for revised HB 100.  At the request of Judiciary Committee chair, Wendell Willard, the drafters reworked the bill to make it a division of the existing Office of State Administrative Hearings (OSAH) while still insuring that the tribunal retains maximum independence from the OSAH.            

On March 27 the Senate passed HB 100 45-0 and on March 29 the House followed with another unanimous vote.  Governor Deal signed the package on April 19, making Georgia the first state in the country to adopt the ABA Model Act as a whole.  Thanks go to many, including the bill’s volunteer sponsor, Rep. Peake, but a major part of the credit goes to our John Allan of Jones, Day, Atlanta, who shepherded this project through many ups and downs to a successful and surprisingly quick conclusion. 

March 10, 2012 

Oklahoma Bar Association Withdraws Model Act Bill Until 2013

Since 1999, when a bi-partisan Citizens’ Task Force on Taxation recommended it, the Oklahoma Bar Association (OBA) Tax Section has consistently promoted the establishment of a tax tribunal independent of the Oklahoma Tax Commission (OTC). Main obstacles are the OTC members and the Senate majority legislators who control appointments to the OTC, as well as the purported cost of setting up the new tribunal.  During this entire period, the effort to enact an independent adjudicatory boy has been spearheaded by Shepard (“Mike”) Miers.             

Sen. Brian Crain (R) introduced the most recent OBA bill on February 6, 2012, as SB 1297.   Mike recruited the Oklahoma State Chamber as an important new ally and has also received assistance from COST.       

At a Senate Finance Committee hearing in late February, chair Sen. Mike Mazzei embraced the OTC’s assertion SB 1297 would cost an additional $400,000 per year and stated that this cost made it impossible for him to support the bill.  Nonetheless, the bill passed his committee unanimously except for the chair’s vote. 

Shortly thereafter, unbeknownst to the OBA, the State Chamber promoted a so-called “Committee Substitute” proposal that would have changed the existing system in ways that would not have advanced the Model Act’s objectives, a reality the Chamber now appreciates. 

As a result, though the OTC and Sen. Mazzei were prepared to move ahead on the Committee Substitute, on or about March 6, 2012, the OBA, the State Chamber and Sen. Crain determined that they should oppose that effort and start over next year.  In an email Mike stated: “Your support and comments were very important and helpful in getting the State Chamber better informed on the key element of the Model Act, and how the substitute bill was just not a good choice or alternative.   I hope you will be able and willing to keep working (plowing) with us to somehow, someday, get this passed in Oklahoma.”

 

MODEL ACT DEVELOPMENTS IN ILLINOIS, ALABAMA, GEORGIA, MAINE, OKLAHOMA, PENNSYLVANIA & VERMONT

February 15, 2012


Alabama 
                Bills patterned on the Model Act and drafted by Bruce Ely and others have been introduced in the Alabama legislature since 2008. 
                On April 21, 2011, HB 427 (Rep. Paul DeMarco (R)) passed the House on an 88-0 vote.   Supported by the Business Council of Alabama, the Alabama Retail Association and the Birmingham Regional Chamber of Commerce Business, HB 427 would create a new Alabama Tax Appeals Commission patterned on the Model Act as part of a procedural reform bill (“Alabama TBOR II”).  Despite favorable aspects, the bill was not brought up for a vote and died at midnight on June 9, the last day of the session, when senators ran out the clock on a filibuster over unrelated legislation.             
                NEW:  Per Bruce Ely (1/31/12), Rep. DeMarco pre-filed the TBOR II bill (HB 105), which must again pass the House as well as the Senate.  The bill has been endorsed by nearly 2 dozen business-affiliated organizations, including the three original sponsors, the Alabama Bankers Association and COST, as well as the state bar association, the state CPA society and the Eagle Forum (a Christian women’s group).  The House Speaker has made the bill his “Number 2 priority” for the session.  The DOR commissioner continues to oppose the bill and the Alabama Education Association (teachers union) has requested a public hearing.  The bill has been assigned to the House Judiciary Committee and a hearing could be held as early as Wednesday, February 15.

Georgia 
 
                In 2007, the Georgia Bar Tax Section’s Tax Court Task Force, chaired by John Allan, proposed an independent court based on the Model Act to the OBA, which refused to endorse it and insisted on a judicial branch option.  
            In 2008, the Task Force, with the endorsement of the Department of Revenue, proposed a Model Act-like judicial branch court pilot project to the State’s Judicial Council.  Numerous interest groups raised concerns, with the result that the Judicial Council never acted on the proposal.  
                In September, 2010, COST’s Joe Crosby testified in favor of an independent tax tribunal before the General Assembly’s Special Council on Tax Reform and Fairness for Georgians.  The Council’s “Recommendations,” issued January 7, 2011, advised Georgia to “[e]stablish a tax court, independent of the Department of Revenue, to hear tax appeals and provide tax dispute resolution that is fair, equitable, simple and transparent.” See
http://fiscalresearch.gsu.edu/taxcouncil/downloads/FINAL_REPORT_ Jan_7_2011.pdf.  The statute setting up the Special Council, OCGA 28-12-2 (HB1405), contemplated that its recommendations would be submitted to the Georgia Assembly for an up-or-down vote without amendments.
                In August, 2011, without consulting the Task Force, the bar or the judiciary, Reps. Allen Peake (R) and Stacey Abrams (D) introduced HB 100, which would establish a judicial-branch Georgia Tax Court as a pilot project until July 1, 2021.   On August 24, a House Judiciary Committee subcommittee held a hearing at which a representative of the Council of Superior Court Judges voiced objections.  
                On September 23, 2011, the State Bar Tax Section decided to take no position on HB 100 until the Task Force, the AG’s office, the DOR—all of whom are in favor of the concept—and the representatives of the judiciary work out a bill they can all support.                 
                NEW:  Per John Allan (12/16/11) constitutional issues with the creation of a judicial branch court led the Task Force, with the agreement of Rep. Peake, to propose an executive branch “Georgia Tax Tribunal.”  The House speaker and majority leader, the DOR, the AG’s office, the state CPA society, the executive committee of the Council of Superior Court Judges, and the state chamber of commerce support this approach and the Task Force has redrafted HB 100 accordingly.  
                Current plans are that, once agreement on the bill is reached, the State Bar’s formal endorsement will be sought and Rep. Peake will introduce the bill, presumably in February or March, 2012.  On January 19, the executive committee of the Council of Superior Court Judges officially removed its prior objection to HB 100.  At a January 25 House Judiciary Subcommittee meeting, the DOR, Chamber, COST, and the Georgia Society of CPA's expressed support for revised HB 100.  
                At the request of Judiciary Committee chair, Wendell Willard, the drafters have reworked the bill to make it a division of the existing Office of State Administrative Hearings (OSAH) while still insuring that the tribunal retains maximum independence from the OSAH.

Illinois 
                In mid-2011, the Illinois State Chamber of Commerce (ISCC) and the Taxpayers’ Federation of Illinois (TFI) agreed to lead the effort to enact the Model Act in Illinois.  On August 23, 2011, Tom Johnson, TFI president and former DOR director and former leader of Grant Thornton’s and KPMG’s SALT practices, testified in favor at a joint hearing of the House and Senate Revenue Committees, which has been tasked by Speaker Mike Madigan (D) and Senate President Pro-Tem John Cullerton (D) to suggest changes to Illinois’ business tax structure.   ISCC general counsel Constance Beard and chief lobbyist Todd Maisch also testified in favor of reform as well as substantive tax changes.  On September 29, Beard convened an ISCC/TFI drafting committee of prominent Illinois practitioners and corporate tax counsel who support reform, with the objective of introducing a bill in January, 2012.                 
                NEW:   On December 16, 2011, the General Assembly passed and December 16 the Governor signed an omnibus tax bill, SB 397 (Public Act 97-0636).  Art. 5, “The Independent Tax Tribunal Act,” strips the DOR of power to hear or decide cases involving “protests of notices of tax liability or deficiencies” and gives jurisdiction over such disputes to a new executive branch tax tribunal, all effective as of July 1, 2013.  
                The drafting committee met again January 12 and February 7 to craft legislation based on the Model Act that would implement PA 97-0636’s mandate.  The practitioners voiced concern about the Model Act’s provision for selecting judges and requirement of public hearings and unredacted decisions.  Vehicle bills have been introduced in both House and Senate.  The DOR has begun to lobby against the concept of the new law, claiming that problems with the existing internal hearings can be fixed.  

Maine

                NEW: On July 6, 2011, Governor LePage signed into law
LD 1371 (P.L. Ch. 439), An Act to Promote Fair and Efficient Resolutions in Tax Disputes, effective July 1, 2012.  Drafted by Pierce Atwood’s Sarah Beard and Jon Block and supported by the Maine Society of CPAs and State Chamber of Commerce, LD 1371 will eliminate Maine Revenue Services’ (“MRS’”) existing appeals office and replace it with an Independent Appeals Office subject to the authority of the same cabinet officer responsible for MRS.  Unlike the Model Act Section 8 appeals function, which it resembles, the IAO will be located outside MRS and its decisions will not be reviewed by MRS.  Also, unlike the Model Act tribunal, the new IAO’s process will be informal and non-public. Court review of an IAO decision adverse to the taxpayer is de novo
                According to Sarah Beard (2/14/12) the Attorney General’s Office’s current policy is to permit transfer of taxpayer appeals from MRS decisions to the superior court’s Business and Consumer Division, which has developed a reputation for efficiency and growing tax expertise.

Oklahoma 
                Since 1999, when a bi-partisan Citizens’ Task Force on Taxation recommended it, the Oklahoma Bar Association (OBA) Tax Section has promoted the establishment of a tax tribunal independent of the Oklahoma Tax Commission (OTC). Main obstacles have been the OTC members and the Senate majority legislators who control appointments to the OTC, as well as the purported cost of setting up the new tribunal.  
                In 2008, the Chair of the OBA Tax Section, Ken Hunt, appointed a six-person committee—including the OTC’s current chair, Tom Kemp—to study the issue and determine what, if any, legislative package would be acceptable to the OTC.  For a report of activities, see
http://www.okbar.org/members/sections/taxation08.htm
                In November, 2008, the OBA House of Delegates overwhelmingly voted to include legislation modeled on the Model Act in the OBA 2009 Legislative Program over the objection of the OTC’s chairman.  Mike Miers and other OBA representatives met on December 19 with the President Pro Tem of the Oklahoma Senate, and on December 22 with the Speaker of the Oklahoma House of Representatives, both of whom expressed support, but cautioned that there could still be political difficulty depending upon the position the Governor takes.  The OBA’s bill was introduced in both houses in 2009.  The OTC countered with an alternative delivered so close to the end of session that neither the OBA Tax Section nor the Legislature had time to address it.    
                In January, 2010, Mike Miers reported that state budget problems and the forces described above continue to be obstacles. 
                On January 12, 2011 Mike Miers reported that, while there were 3 bills proposed to enact the Model Act or a variation of that had drawn support, there would likely be no action in 2011.  The new governor and Republican legislators who support the Model Act were hesitant to seek enactment because of the optics of expanding the reach or cost of state government in the midst of a fiscal crisis. 
                In August, 2011, Mike Miers said the OBA planned to submit the Model Act bill to a new Task Force on Comprehensive Tax Reform that has been appointed.  Unfortunately, the chair of the Task Force on Comprehensive Tax Reform subsequently took the position that adjudication reform was not in the scope of its authority and refused to entertain the OBA recommendation.     
                NEW:  Per Mike Miers (2/10/12), on February 9 Sen. Crain (R) introduced the OBA bill as SB 1297 in the Senate, which referred it to the Finance Committee.   The Oklahoma State Chamber supports it and Mike has solicited assistance from COST.  
                On February 14, the Senate Finance Committee held hearings on the bill and returned it to the floor with a 15-1 vote in favor.  Unfortunately, the dissenting vote was that of SFC chair, Sen. Mazzei (R), who claimed that creating a new State Office of Administrative Hearings would amount to irresponsibly “growing government” and, contrary to supporters’ claims, would cost an extra $400,000/year, primarily because the DOR would have to retain ALJs within the DOR to process license revocations.  
                In response to Sen. Mazzei’s concerns, the OBA is pursuing a fallback amendment, under which the OTC would be reorganized, with new Model Act-qualified ALJs appointed by the Governor, with Senate approval, rather than by the Commission, and the OTC’s current right to overrule the ALJ decisions eliminated.  It is not clear how the budget for the new ALJs would be handled.  Like the OTC’s current adjudications, the new ALJs’ decisions would be appealable directly to the Oklahoma Supreme Court.                 

Pennsylvania
                In 2004, the
Pennsylvania Business Reform Tax Commission Report recommended a number of reforms to the Board of Finance and Review patterned on the draft Model Act.  In 2005 legislation patterned on the draft Model Act and supported by the governor failed passage, largely because of opposition from capitol practitioners with good legislative contacts.  
                 NEW:  Per COST (2/14/12) Pennsylvania Department of Revenue officials are preparing legislation intended to address the business community’s concerns with the state’s tax appeal process. The exact form the legislation will take is unclear. Pennsylvania had the fifth lowest score on COST’s 2010 tax administration scorecard partly because of this system.  Stewart Weintraub (2/14/12) says he recently spoke to the DOR deputy secretary about the Model Act as a way to simultaneously address practitioner concerns and enable the state to gain revenue by processing disputes more efficiently. 

Vermont 
                NEW:  Per Roger Prescott, co-chair of the Vermont Bar Association Tax Section, in 2011 the Tax Section submitted a version of the Model Act to the House Ways & Means Committee, which promptly held hearings.  Roger and Paul Hanlon are leading the Vermont effort. 
                On January 17, 2012, at the Committee’s request, Department of Tax Commissioner Mary Peterson issued a report justifying the current internal hearing system and critiquing the Tax Section proposal.     
                On January 26, 2012, Rep. Carolyn Whitney Branagan (R) introduced H. 606, “An act relating to the creation of an independent office of taxpayer appeals,” a revised version of the Tax Section’s proposal, which was referred to the House Ways & Means Committee. 

From State Tax Notes magazine

June 1, 2011

Illinois’ Local Sales Tax Sourcing Rules Under Attack

Uniform opposition from the state’s largest business taxpayer groups has beat back an attempt by the Illinois Department of Revenue to change its local sales tax sourcing rules to allow a totality-of-the-circumstances test that a trial court rejected in January.

In keeping with decades of DOR regulations, ruling positions and court decisions, local governments receive a share of state sales taxes  and their own local taxes when retailers accept the orders within the taxing unit’s jurisdiction and deliver the related tangible personal property to some destination within Illinois.

For example, the DOR regulation governing a municipality’s right to tax says that “enough of the selling activity must occur within the municipality to justify concluding that the seller is engaged in business within the municipality with respect to that sale.” Ill. Admin. Code Tit. 86 section 693.115.

The regulation goes on to say that “it is the Department’s opinion, in general, that the seller’s acceptance of the purchase order or other contracting action in the making of the sales contract is the most important single factor in the occupation of selling.”

In reliance on these rules, a small percentage of retailers have taken steps to make sure that some or all of their sales -- typically, sales not delivered to the customer over the counter but by delivery from a central warehouse -- are sourced in a taxing jurisdiction in which the retailer has set up a sales office to accept orders. The sales office may be a substantial operation, especially if the retailer has no store or warehouse in the state. But such a sales office sometimes operates with part-time help and is deliberately located in a jurisdiction other than that in which the retailer’s warehouse is located.

A retailer would typically set up such an office either to reduce its local tax burden -- often the case  because with low-margin businesses trying to remain competitive -- or to obtain a share of local tax revenues by locating the office in a municipality that has agreed to share its new-found sales tax revenue with the retailer.

Successful use of these arrangements obviously depends on the DOR’s continued adherence to sourcing rules that focus primarily on the place of order acceptance.

But DOR auditors have recently taken the position that a retail sale is
properly sourced to a local tax jurisdiction based on a totality-of-the-circumstances test, under which the place of acceptance of the buyer’s purchase order is of almost no importance. The court ruled that this approach was inconsistent with the department’s regulations and past rulings, and the department has appealed. Hartney Fuel Oil Co. v. Department of Revenue, Tenth Circuit Court of Illinois, Nos. 08-MR-11, 08-MR-13, 08-MR-15 (January 26, 2011).


In response to the DOR’s initiative, a group of retailers organized to defeat the DOR’s new tack in the General Assembly. SB 2194, introduced by Sen. Toi Hutchinson (D), would not only put the long-standing place-of-order-acceptance rules into the statute,  but would also, as result of DOR comments, tighten up current ambiguities in the law that the DOR felt could be abused by taxpayers.

When it passed the Senate on April 15, SB 2194 was still a retailer-supported bill to codify those rules, but when it reached the House, the Chicago-area Regional Transportation Authority, the City of Chicago and the DOR marshaled the support of Speaker Michael Madigan (D) and other prominent legislators behind an amendment that would have replaced the bill with the new totality-of-the- circumstances test.

To the astonishment of retailers and most knowledgeable tax practitioners, the DOR is taking the public position that its amendment would not change the historical sourcing rules at all, but merely codify the position it has always taken.

Under the DOR proposal, the location of a retail sale for local tax purposes would generally not be sourced to the taxing jurisdiction of the order-acceptance office unless at least one employee of the retailer, or an employee of an authorized representative who acts solely on behalf of the retailer, performs at least three of five sales-related functions at that office:

o       determining the appropriate price;

o       determining whether sufficient inventory exists to fill the order;

o       determining whether the retailer can comply with the purchaser’s shipping instructions;

o       determining the buyer’s creditworthiness; and

o       processing the order.

A coalition of statewide business groups, including the Illinois State Chamber of Commerce, the Taxpayers’ Federation of Illinois, and the Illinois Retail Merchants Association, joined forces to oppose any attempt to engraft the proposal onto SB 2194.

Speaking for the retailers who proposed SB 2194, attorney Stan Kaminski said, “It would be foolhardy for Illinois to abandon the bright-line, point-of-sale test used for five decades and instead adopt an untested, subjective, multi-factor test that would be unique to Illinois and force retailers to guess at the tax rate applicable to their sales.”

The House Revenue and Finance Committee on May 29 rejected the attempt to attach those changes to an unrelated bill, SB 397. Both that bill and SB 2194 were referred back to the House Rules Committee, as were the DOR-backed amendments.

The General Assembly is now adjourned until October, but the issue is still far from settled. Connie Beard, general counsel for the Illinois Chamber of Commerce, said that the business community has agreed to work with the DOR to resolve their differences over the summer.  

May 26, 2011
Senate Passes Technical Corrections Bill with Benefits for Taxpayers

by Garland Allen, Law Office of Garland Allen, Santa Monica, CA

A “technical corrections” bill negotiated by the Department of Revenue and business  representatives passed the Illinois Senate on Sunday, May 22, and returned to the House for concurrence.  In addition to purely clerical fixes, HB 2955 (Rep. Currie (D)) contains important benefits for individual taxpayers, holding companies, insurance companies, REMICs and unitary business groups.  The bill is expected to pass the House and go to the Governor for signature by the end of this week.

First introduced in 2009 as HB 3876, the bill lost momentum after an important class of intended beneficiaries—Illinois’ cooperative associations—opted to pursue separate legislation.  At that point, negotiations between business taxpayer representatives led by the Taxpayers’ Federation of Illinois all but stalled. 

Many of HB 2955’s proposed changes results from the structure of the Illinois income tax.  While it generally piggybacks the federal income tax base, Illinois law does not (1) allow individual taxpayers to deduct federal itemized deductions, (2) allow federal credits, (3) generally follow the IRC’s NOL carryover rules but instead prescribes a separate Illinois Net Loss regime, or (4) permit taxpayers required to use different apportionment methods to be included in a single unitary business group.  

Some of the bill’s important provisions are:  

Holding Company Combination.  The bill addresses problems stretching back over 20 years that the Department and taxpayers have encountered in applying the “holding company” exception to Illinois’ prohibition against including taxpayers that use different apportionment formulas in the same unitary business group.  The statute includes four such formulas:  a general formula for most taxpayers including holding companies and special one- factor formulas for insurance, financial and transportation companies.   The holding company exception, enacted in 1987, was primarily designed to insure that the holding company could offset its expenses against the income of its unitary, single-factor subsidiaries. 

While the current exception allows a “holding company of such single‑factor taxpayers” to be included in the same group with its single-factor subsidiaries, the statute neither adequately defines the term “holding company” nor on its face allows combination of a holding company with a single-factor group if the holding company also owns a second unitary group of subsidiaries that use a different formula.  In the latter situation, the DOR has sometimes allowed combination and sometimes not.

HB 2955 would more broadly permit full and partial combination of holding companies, by amending Section 1501(a)(27)’s exception to allow combination of a “holding company that would otherwise be a member of a unitary business group with taxpayers that apportion business income under any of subsections (b), (c), or (d) of Section 304.”   

Reinsurer Apportionment.  An amendment to Section 304(b) would restore the choice of 3 apportionment methods that reinsurance companies have enjoyed since enactment of the Income Tax Act in 1969.   Under that regime, a reinsurer could elect a different method—whichever reduced its income the most—on each year’s return.  Worried that reinsurers might abuse this privilege, the DOR persuaded the General Assembly to mandate a single method in 2008.  Responding to industry complaints that the mandated method is impractical, the bill would restore the original 3 methods but prohibit the reinsurer from changing the method selected on its 2011 return without DOR permission. 

Claim of Right Deduction.   HB 2955 would amend Section 203(a) (2) (P) to allow a new deduction from federal taxable income to an individual taxpayer required to pay back $3000 or more of income received in a previous year under a “claim of right,” and who elects for federal purposes in the year of pay back to receive the benefit of that payment by means of an “itemized deduction” rather than as a federal tax credit. Current Section 203(a) (2) (P) allows the taxpayer in this situation to take a deduction if he elects the federal tax credit, but not if he elects the federal itemized deduction.

Other Favorable Provisions.  HB 2955 would also:

1.         Allow a taxpayer who purchases insurance from a related insurance company to deduct insured losses as though the insurance policy did not exist.  New Sections 203(a) (2) (GG), (b) (2) (Y), (c) (2) (Y) and (d) (2) (T)
2.         Allow a railroad required to adjust the federal basis of its property because it took a federal tax credit under IRC 45G for “qualified railroad track maintenance” expenditures to obtain the benefit of its unadjusted basis for Illinois tax purposes.  Amended Sections 203(a) (2) (M), (b) (2) (I), (c) (2) (L), and (d) (2) (J)
3.         Allow an insurance company to compute its deduction for reserves without regard to the federal law that disallows part of this deduction for a taxpayer with exempt bond interest income.  Amended Sections 203(b) (2) (l) and (b) (3).
4.         Allow a taxpayer to deduct new IRC Section 965 repatriation dividends and allow a taxpayer who elects IRC Section 965(e) (2) (A) treatment to eliminate certain “phantom” income.  Amended Section 203(b) (2) (O) and new Section 203(b) (2) (Z).
5.         Allow a “common shareholder” of a real estate mortgage investment company (REMIC) to obtain the benefit of special federal loss carryover rules.  Amended Section 207.
6.         Allows a taxpayer to obtain a refund or credit of estimated or withheld taxes as long as the taxpayer has filed an original return for the related year within 3 years of the due date.  The current statute says that no refund is allowed more than 3 years from the return due date.  Amended Section 911(f).

The DOR and the Taxpayers’ Federation clearly intend most of the bill’s changes to be retroactive as well as prospective, on the theory that the bill merely implements the legislature’s original intent.  But issues will no doubt arise with taxpayers who have relied on the prior statute’s wording in filing returns and amended returns for past periods. 


May 6, 2010

Sales Tax Vampire (or Angel?) Rises Again
by Garland  Allen, Law Office of Garland Allen, Santa Monica, CA

Just when opponents thought they’d driven a stake through its heart, another push to pass a STAR (“Sales Tax And Revenue”) bond bill has sprung to life, with proponents hoping to get legislation through the Illinois General Assembly before its scheduled adjournment on May 7.  If they are successful, it will be the first time Illinois state sales taxes will have been diverted to pay the costs of a private development.   

Inspired by the public funding mechanism used for the successful “Village West” retail and entertainment complex near Kansas City, Kansas, the City of Glen Carbon (near East St. Louis) and developer Bruce Holland of Holland Construction Services of Swansea teamed up last year to promote the building of an $1 billion, 650-acre “destination” retail and entertainment development in Glen Carbon to be called “University Town Center.”   The city and developer estimated that construction and operation of the project would create more than 20,000 jobs and raise substantial tax revenues for the state and the region.   

The Center’s public infrastructure would have been financed with municipal bonds that would be paid back over 20+ years out of increases in state (5%) and local (1%) retail sales taxes generated 

Although the General Assembly passed legislation authorizing the STAR bonds (SB 1909), the Department of Revenue estimated that the bill would cost the state $15 million or more in annual sales tax revenues.  On October 29, 2009, Governor Pat Quinn amendatorily vetoed that legislation, stating that he supported the concept but proposing changes to limit the fiscal impact on the state.   After the Department refused to lower its estimate of the bill’s cost even with the amendatory veto, the legislature failed to vote to accept the Governor’s changes and the bill died. 

The developer and Glen Carbon returned to the General Assembly this year with new bill (SB 2093) designed to placate the opposition, among other things by downsizing the project and limiting the retail sources whose sales taxes would secure the bonds.  But the new bills ran into a buzz saw of opposition from mayors and chambers of commerce in southwestern Illinois, who believe that the gigantic center would annually cost them $400 million of sales taxes currently generated from retailers just outside the development area.  After the bill’s legislative sponsors tempered their support, Holland announced on April 29 that it would no longer pursue the University Town Center project.

Before state officials could sigh relief, however, Holland and another city--the City of Marion, near Carbondale in far southern Illinois—announced May 1 that they are pursuing STAR bond legislation (presumably, an amendment to a bill already introduced on a tax or bond subject) in the current session to fund infrastructure improvements for a similar destination retail/entertainment project in Marion.   It remains to be seen if similar opposition from state government and the impacted municipalities and businesses will arise to defeat this newest proposal.     

April 30, 2010
Illinois’ R&D Credit: Dead or Alive?
b
y  Garland Allen, Law Office of Garland Allen, Santa Monica, CA

The Illinois Department of Revenue has determined that the state’s research and development (“R&D”) credit against the Illinois income tax automatically expired in the middle of 2009 pursuant to the state’s “sunset” provision.   As a result, three of Illinois’ premier business representatives—the Illinois State Chamber of Commerce, the Illinois Manufacturers’ Association and the Taxpayers’ Federation of Illinois—are seeking to have the General Assembly extend the credit before its scheduled adjournment on May 7. 

The Illinois credit, which is 6.5% of R&D expenses in excess of a baseline expenditure level, is highly popular with Illinois businesses, especially the high-tech, innovative companies that the state is trying to attract.  Although it costs an estimated $300 million per year in normal times, this number is relatively small compared with the state’s current $13 billion budget shortfall.

First enacted in 1990 as Section 201(k) of the Illinois Income Tax Act (“IITA”), the R&D credit was originally scheduled to disappear with respect to R&D costs incurred after December 31, 1994.   Public Act  (“PA”) 86-988.  Subsequent legislatures, however, extended it to December 31, 2004. 

In 1994 Illinois adopted a series of “sunset” provisions designed to curb tax expenditures.   PA 88-660, effective September 16, 1994.    IITA Section 250 provides that any “exemption, credit and deduction” thereafter enacted would “automatically expire for tax years beginning on or after 5 years after the effective date” of the statute creating the benefit.   Since that time, it has been fairly common for the legislature to include an express exemption from IITA 250 whenever it intended to make a tax expenditure permanent.   By its own terms, IITA Section 250 does not apply to credits enacted prior to September 16, 1994. 

In 2003, then Gov. Rod Blagoyevich (Dem.) identified the R&D credit as a “corporate loophole” (even though it applied to business conducted in any form) and proposed its elimination.  The 93rd General Assembly (2003-2004) acquiesced, by amending the R&D statute to provide that the credit would not apply to costs incurred after 2003.  PA 93-29, effective June 20, 2003.  

In response to protests by business and economic development
groups, the 93rd legislature reversed itself in 2004, amending the existing credit statute to the provide that the credit would apply “[f]or tax years ending after July 1, 1990 and prior to December 31, 2004, and beginning again for tax years ending on or after December 31, 2004,” while at the same time prohibiting the carryover of credits earned prior to repeal to subsequent years.  PA 93-840, effective July 30, 2004.   No exemption from Section 250 was included. 

The Department recently published on its website its determination that the current credit had expired for taxable years beginning after July 30, 2009.   http://tax.illinois.gov/TaxProfessionals/whatsnew.htm       Based on legislative history and  various statutory and court-made rules of statutory construction, the ISSC, IMA and TFI protested, arguing that the 2004 R&D credit was a mere extension of the 1990 credit, whose enactment antedated the 1994 sunset provision and therefore did not fall under its edict.  

On April 29, the Department notified the business groups that it had rejected their arguments.   After trying to persuade Governor Pat Quinn (Dem.) to overrule the Department, the ISCC, IMA and TFI have returned to the General Assembly in an attempt to resurrect the credit in the waning days of the current legislative session. 

 

Website Builder