Tax Analysts Blog

Are We Beating a Dead Horse?

Posted on May 15, 2013

I’ve had the opportunity on several occasions to speak publicly about transparency in state taxation. Most recently, on May 10 at the American Bar Association Section of Taxation Meeting in Washington DC, I spoke on a panel that addressed transparency and states’ use of alternative apportionment methods. As I often do, I noted a case out of North Carolina as a particularly egregious example of when a state taxing agency goes to great lengths to hide the ball. The case is Delhaize America, Inc. vs. Hinton, Secretary of Revenue of the State of North Carolina. In the case, the North Carolina Department of Revenue was alleged to have applied unpublished guidance to force the combination of affiliated corporations.

The case revealed the department’s desire for a non-transparent tax system. It has almost become a classic in that discovery during litigation revealed some disturbing (albeit juicy) emails. Things like one Department of Revenue official saying to another that revealing guidance on when combined reporting would be required is like “handing a gun to the guy who is about to rob you.” It’s a case that almost has to be mentioned because it represents exactly what we are trying to prevent – taxing agencies withholding needed guidance from taxpayers -- but I fear the case has lost its punch.

Peter Faber of McDermott Will & Emery LLP rightly noted at the ABA conference that Delhaize dealt with a situation where a state had an established process for how and when it was going to force affiliated corporations to file on a combined basis and still declined to provide guidance. Faber questioned whether most states are in a different position. That is, they may decline to provide guidance, but it isn’t because they have the guidance and don’t want to provide it, it’s because they simply don’t have the guidance to provide.

On a similar note, Utah State Tax Commission Chair Bruce Johnson said that small states, such as his, may not deal with alternative apportionment on a regular basis and therefore auditors may be forced to address issues for the first time during the audit process.

Both gentlemen make valid points and present situations that are different from and arguably more common than the fact pattern in Dehlaize. Still, while the specific fact pattern in Delhaize may be uncommon, I believe the culture that led to the litigation is still present in many states. It really doesn’t matter whether there are reams of guidance or no guidance at all. There are still state taxing agencies that view taxpayers and their representatives as thieves, who will do anything they can to cheat the state out of revenue. It is precisely that culture that needs to change.

Such an attitude (whether real or perceived) has a negative effect on the efficiency of a state’s tax collection and enforcement activities. Because the state has the upper hand in terms of being able to set and enforce the rules, it is imperative that guidance be provided. And that guidance need not be formally promulgated rules; it could be in the form of letter rulings, administrative rulings, audit handbooks, or other types of guidance.

So perhaps continuing to discuss Delhaize is like beating the dead horse. It may be time to move on (and perhaps find another case), but transparency in state tax administration remains an important issue in the administration of state taxes.

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