Supreme Court Asked to Undo Washington Retroactive Ruling

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Paul Shukovsky

Sept. 22 — Dot Foods Inc. has petitioned the U.S. Supreme Court to review a March decision that the retroactive application of a Washington statutory amendment narrowing Dot’s business and occupation tax exemption wasn’t a due process violation ( Dot Foods, Inc. v. Wash. Dep't of Revenue, U.S., No. 16-308, cert. petition filed 9/9/16 ).

The Sept. 9 certiorari petition contends that by upholding the state Department of Revenue’s retroactive revocation of a direct-seller exemption, the Washington Supreme Court has offered the U.S. Supreme Court an opportunity to bring order to decades of confusion over due process limits on retroactive tax laws (2016 Weekly State Tax Report 26, 3/25/16).

Washington lawmakers responded in 2010 to an earlier Dot victory before the state supreme court by retroactively narrowing the scope of the B&O exemption and prospectively repealing it. When the revenue department then denied Dot a refund for four years outside those covered in Dot’s first successful court case, the company—in the instant case—unsuccessfully challenged the denial on grounds including Fourteenth Amendment due process rights.

“This Court, however, has never held that the Constitution permits a legislature to upend business planning and expectations of repose in this manner,” according to the certiorari petition. “The Due Process Clause allows legislatures to make tax laws retroactive by matters of months, in order to correct mistakes in drafting and to ensure uniform rules over a tax year.”

Asked to handicap the chances of the U.S. Supreme Court granting certiorai, counsel of record Dirk Giseburt told Bloomberg BNA Sept. 22 that “it is opaque what the Supreme Court is interested in at any given time.”

“I think the feeling in the bar is that the Court is going to take one of these cases some day when it seems appropriate in the context of their agenda,” he added. “And everyone thinks that these cases ought to be brought to their attention because they are problematic.”

A Chance to ‘Clarify Carlton.’

According to the petition, “this Court has never approved a retroactivity period of more than a year or two, and Justice O’Connor opined last time the Court confronted the subject that ‘(a) period of retroactivity longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions.' ”

Giseburt said that “courts have been quite confused about where you really address the taxpayer’s legitimate interest in repose and reliance,” in the wake of the Supreme Court’s opinion in United States v. Carlton, 512 U.S. 26 (1994).

“The Carlton decision changed the doctrine in one respect,” he added. “They said the rational basis test applies to tax retroactivity in the same way it applies to other economic and regulatory activity. But the Carlton decision then didn’t articulate how the legitimate interest of the state weighs against the interests of the taxpayers.”

“The case is an opportunity to clarify that the state’s interest is measured against the taxpayer's interest in repose, which contains the element of the period of retroactivity in determining whether the entire package has a legitimate state interest,” Giseburt said.

The petition says, “courts are sharply split over the due process limits on retroactive tax laws” with respect to how long a Legislature may reach back before it violates due process. The four-year retroactivity period in play in Dot is longer than periods that have been held unlawful by high courts in New York and South Carolina.

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

Text of Dot Foods' petition for certiorari is at http://src.bna.com/iON.

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