States: Tax Lawsuits in Other States Threaten Enforcement

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By Laura Mahoney

Forty-five states and the Multistate Tax Commission are asking the U.S. Supreme Court to end the ability of taxpayers to sue one state in another state’s court because such lawsuits threaten state tax enforcement.

The states and the MTC want the high court to overturn its own 1979 ruling on the subject in Nevada v. Hall, and they filed friend-of-the-court briefs to that effect April 13. They are supporting the California Franchise Tax Board’s March 12 request for high court review. If the court overturns Hall, it would effectively end microchip inventor Gilbert P. Hyatt’s case against the FTB in Nevada tied to his 25-year residency dispute with the California tax agency.

Hall opens a path for plaintiffs to use out-of-state forums to collaterally attack tax enforcement efforts, alleging various claims and circumventing the specialized administrative processes established in every state to ensure that taxes are properly and timely collected, and that disputes are fairly resolved,” the MTC said in its brief.

Reciprocal Agreements

The only solution offered by supporters of Hall—comity between states through comprehensive reciprocal agreements—is impractical because it would require state legislative action and painstaking effort, the MTC said.

The states’ brief offered Hyatt’s litigation and other recent tax cases brought against one state in another state’s court to illustrate their points. In Hyatt’s case, when he sued the FTB in Nevada in 1998 for alleged violation of privacy and abuse of authority, he skipped California’s administrative appeal process. The State Board of Equalization didn’t hear his underlying tax appeal until 2017.

In Nevada and California, their own rules prohibit taxpayers from bypassing administrative review and immediately seeking judicial review of an audit, or the tactics used during an audit, the states said.

Tax Injunction Act

The MTC and states also argued that just as the federal Tax Injunction Act prevents federal courts from interfering in state tax collection, one state shouldn’t be allowed to interfere in another’s tax collection.

Hall undermines these administrative processes and the federal Tax Injunction Act by providing an end-run for plaintiffs around the state’s tax enforcement system without requiring plaintiffs to abide by the carefully crafted administrative procedures established by the taxing State,” the states said in their brief.

In Hyatt’s Nevada case, a 2008 trial court awarded $490 million against the FTB for fraud, invasion of privacy, emotional distress, and punitive damages. The award was thrown out in various stages. Most recently, in December 2017, the Nevada Supreme Court capped Hyatt’s damages at $50,000 after the U.S. Supreme Court in 2016 set aside punitive damages exceeding the state’s own cap of the same amount.

Court Split

California is asking the U.S. Supreme Court to revisit its 4-4 split in April 2016 on the question of whether Nevada has jurisdiction over lawsuits brought in its courts against other states. Because the Supreme Court justices split on the issue, a lower court ruling allowing such lawsuits stood.

Now that the Supreme Court has nine justices—with Justice Neil Gorsuch joining the bench after Justice Antonin Scalia’s death in February 2016—the state tax agency is seeking a majority opinion to overturn Hall.

The states absent from the brief, aside from California, were New Hampshire, New Mexico, New York, and Pennsylvania.

The case is Cal. Franchise Tax Bd. v. Hyatt , U.S., No. 17-1299, friend-of-the-court briefs filed 4/13/18 .

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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