Reaching Back into the Past, Part 1

by Tom Yamachika, President Tax Foundation Hawaii

Imagine that you are a business in this scenario.

It’s the mid-1990’s. You would like to begin operations in the State of Washington. You research the rules and you find that Washington has a tax on business (which is called the Business and Occupations Tax, and is very similar to the Hawaii General Excise Tax). However, there is an exemption from the tax if your business in the state is exclusively through a local agent. The exemption has been on the books since 1983. You ask the Washington Department of Revenue for a ruling on whether this exemption would apply to you if you did this, and they say in 1996 that it does.

At the turn of the century, the Department of Revenue hands out a notice to you and those in your industry. It says that the Department is changing its mind about how the exemption works. Consequently, the ruling that you have is no longer worth the paper it’s printed on. A couple of years later, you get audited. The Department denies the exemption. You decide that you aren’t going to simply roll over and take this punishment, so you file suit.

In 2009, the Supreme Court of Washington rules that the exemption you were relying on is clear, and that you qualified for it. (There is some question as to how clear the statute actually is. The trial court ruled for the Department on this issue, the Washington Court of Appeals came to the same decision, and the Washington Supreme Court’s decision was the result of a 5-4 vote.) The years involved in the litigation are tax years 2000 to 2006.

The Department of Revenue, however, doesn’t stop there. It goes to the Washington Legislature and asks them to declare that the dumb old court was wrong, and that the statute means now, and always has meant, what the Department has concluded. In other words, the Department asked the Legislature to pass a bill to change the exemption law, retroactive to the date the exemption was originally passed. Again, this is now 2010, and the bill is retroactive to 1983. (Only one of the 147 current legislators was also a legislator in 1983.) The Department argues that unless the bill is passed, the Supreme Court’s horrid decision will saddle the State with large and devastating revenue losses. The bill is passed, and signed into law.

You now get audited for years 2007 to present, and the Department is adamant that the revised law applies. You scream bloody murder, and are back in the courts. In 2016, the Washington Supreme Court upholds the law, ruling that the Legislature needs a good reason to enact retroactive laws, but the prospect of debilitating revenue losses was a good reason. “If that’s a good reason,” you argue, “will there ever be a tax case without a good reason?” You go to the U.S. Supreme Court, thinking that one good definition of “Due Process violation” is your case.

The ending to this story has not yet been written. It’s now in the queue for consideration. Dot Foods, Inc. v. Washington Department of Revenue, No. 16-308.

If Dot Foods loses, none of us is safe. We all make decisions about how to conduct our affairs based on the rules that the government lays out before us. If we properly rely on those rules, should our government be able to upend them years later with a shout of, “You believed us when we told you it was okay? What a dummy!”

And what does this say about the role of the courts? Does the court decision mean anything when the losing agency can just go to the legislature to have a do-over no matter how much time has elapsed in the meantime?

Our constitutions need to be there to stop outrages like this from ever happening. Let’s see if the case will play out that way.

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