An Uneven Playing Field: Judicial Deference to State Tax Administrator Interpretations

Many states commonly give judicial deference to state tax agencies’ interpretation of tax law. Under this practice, in administrative and judicial review of tax determinations, the state department of revenue routinely argues that interpretative guidance—such as notices, bulletins, rulings and other guidance that has not been subjected to the state’s administrative procedure act (APA)—is entitled to the same deference as rules and regulations that have received the benefit of the state’s notice, comment, public hearing or similar process. This practice of arguing that the department’s view of the law is entitled to more weight than the taxpayer’s view puts taxpayers at a tremendous disadvantage in both judicial review proceedings in state courts and non-judicial review of tax disputes, such as before an administrative law judge or tax appeals tribunal. In essence, the department gets to bring a gun to the proceedings while the taxpayer is limited to a knife.

Tax administrators, and the courts that bless the concept of judicial deference to agency interpretation, typically justify the concept on the ground that the agency is charged with the responsibility for administering provisions of the law and thus has special expertise in its particular area of administration. The tax bar should take umbrage at the notion that a state tax department’s view of the actual statutory law should be given preference over any other interpretation when the agency’s view has not gone through a rigorous APA adoption process. Without such a process, there is no justice to giving the agency view added weight.

Like the US Constitution, state constitutions vest judicial power in the courts. This generally has been understood as giving the courts the last say on the interpretation of federal and state law. See Marbury v. Madison, 5 US 137 (1803) (“It is emphatically the province and duty of the Judicial Department to say what the law is.”) The idea that a court must give deference to the tax agency’s interpretation of the law effectively abdicates the court’s duty to interpret the law and constitutes a transfer of the judicial power to the executive branch. In cases where the revenue department makes deference claims without legislative authority, the executive branch usurps both the state legislature’s lawmaking prerogative and the court’s interpretative power. In cases where the legislative branch has, by statute, mandated deference to revenue department interpretations, it has transferred to the executive branch of government not only a quantum of its lawmaking power, but also the court’s judicial power. The separation of power issues implicated by judicial deference to revenue department interpretations are manifest and manifold.

The general rule of appellate judicial review is that findings of fact will not be set aside unless clearly erroneous (i.e., insufficient evidence in the record to support the finding) while decisions based on the law are subject to de novo review (i.e., considered anew). Under de novo review, no deference is given to the reading of the law by a lower court. Giving deference to an administrative agency’s interpretation of the law completely undermines the view that conclusions of law should be reviewed de novo.

Many states claim to follow the canon of construing tax statutes strictly against the tax administrator and liberally in favor of the taxpayer, such that doubts and/or ambiguities regarding the meaning of a statute should be resolved in favor of the taxpayer. This is especially the case where resolving the doubt or ambiguity in favor of the tax authority would result in taxation, while giving the taxpayer the benefit of the doubt or ambiguity would relieve the taxpayer of the tax imposition. Giving informal tax agency interpretations deference conflicts with these well-settled canons of interpreting tax statutes. In a tax regime where voluntary compliance hinges on trusting the government to do right by taxpayers, laws should be designed to give the benefit of the doubt to taxpayers where such ambiguity exists. That benefit should not be removed without properly following APA.

Tax litigators spend inordinate amounts of time and client resources defending against these deference claims, which typically require needless additional discovery, legal research and presentation of evidence when disputes arise. Preventing tax administrators from making the claims in the first place will reduce the cost of litigating tax disputes.

Is the Pendulum Swinging? 

In Florida’s 2018 midterm election, voters passed an amendment to the state’s constitution (Amendment 6) in a referendum, providing:

In interpreting a state statute or rule, a state court or an officer hearing an administrative action pursuant to general law may not defer to an administrative agency’s interpretation of such statute or rule, and must instead interpret such statute or rule de novo.

The US Treasury Department and the Internal Revenue Service (IRS) also recently issued a policy statement (dated March 5, 2019), which included the following position:

In litigation before the US Tax Court, as a matter of policy, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997) or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance.

Coalition Focus

At the federal level and across the United States, taxpayers have for decades been subject to a game of “gotcha” where administrators defined the rules to create a win without following the typical APA process. Taxpayers should push back in courts and in legislatures. A coalition of companies and trade associations will present a united front in seeking to educate lawmakers and support state legislation that curbs administrative interpretations that abuse formal APA requirements.

Lawmakers should consider an approach that blends the Florida constitutional amendment with the IRS’s new policy into a model statute that limits deference given to subregulatory guidance interpreting tax statutes. Such a statute should require de novo review of tax statutes in administrative disputes before an administrative law judge, tax tribunal or tax court, or the civil courts of the state reviewing a tax administrator’s action. Tax administrators and taxpayers should be on equal footing in such disputes, and policymakers should seek to remove the tax administrator’s disproportionate influence, thus leveling the playing field for all.