Reaching Back into the Past, Part 3
By Tom Yamachika, President, Tax Foundation Hawaii
On May 22, 2017, the Supreme Court of the United States denied review in seven cases involving retroactive tax legislation.
In the Dot Foods case out of Washington which we have written about before, a company began business in Washington relying on a certain tax exemption, and asked the Department of Revenue to rule that the exemption applied. The DOR issued the ruling. A few years later, the DOR changed its mind, revoking the ruling and assessing the taxpayer. The taxpayer won its case in the court system, but the DOR came crying to the legislature and persuaded them to change the law retroactively for 27 years (!!) to prevent the massive and debilitating loss of revenue that it said would otherwise result.
The other six cases originated in Michigan, where the legislature went back 6-1/2 years to change legislation regarding the division of income from multistate taxpayers among the states. The Michigan decision prompting the cases is named Gillette Commercial Operations North America v. Department of Treasury.
A denial of review doesn't mean that the Court is approving the lower court decisions. The Supreme Court may just be saying, “your case is too boring” or “we're too busy.” “The Supreme Court is asked to consider 8,000 cases each year and chooses to hear between 70 and 80, so the odds are always tough. It doesn’t help that they seem to hate tax cases,” said Joseph Henchman of the national Tax Foundation. “As much as I wish retroactive tax laws went away, the states will be back,” he said. “I think Americans know these laws are unfair and wrong, and Tax Foundation is going to launch a new project to bring greater awareness to retroactive tax laws.”
“Once again, the Court has shown no interest in this affront on the ‘rule of law’ and separation of powers,” said University of Connecticut Law School professor Richard Pomp. “[The] cases cried out to be heard. The denial of [review] dashes any hope in the short term that reliance interests of taxpayers will be respected and protected.” Pomp said that one famous legal scholar “went so far as to call a retroactive statute a ‘monstrosity,’ finding it a misuse of language even to apply the word ‘law’ to retroactive statutes.”
There are cases when a retroactive fix to legislation may be justifiable. We also wrote about a retroactive fix to a 2011 amendment in our General Excise Tax Law, where the amendment took out two words that looked insignificant and were anything but. It seemed that the Department of Taxation and the taxpayer community went about their lives as if the two words were still there, so the fix didn’t seem to bother anyone. (Still, it was troublesome that the two words weren’t reinstated until four years later.)
On the other hand, someone needs to cry foul when the taxpayer wins in a dispute against the revenue agency and the agency then goes to the legislature to get a retroactive fix to win the game it previously lost. Like the Washington DOR in Dot Foods, tax agencies could easily and often raise the specter of fiscal disaster if they are asked to – gasp – abide by their own statutes.
We, as a people, pride ourselves that we follow the rule of law. Law is there to bind the government as well as the governed. If the government can change the rules after the game is over, then we don't have law, we have tyranny. Let’s not go down that path.