A New York State Administrative Law Judge ruled that the retroactive application of amendments to the state’s Empire Zones statute—disqualifying a taxpayer from the tax reduction credits—did not violate the taxpayer’s constitutional due process rights. Acknowledging that the stated public purposes of curtailing perceived abuses and raising revenue were better accomplished in prospective legislation, the Division nevertheless found that the application of statutory amendments to the tax year in which the amendments were enacted was an “extremely short period of retroactivity” that outweighs the lack of a public purpose. (In the Matter of the Petition of NRG Energy, Inc., Dkt. No. 826921 (N.Y. Div. Tax App. 11/08/2018)).
Following an unfavorable court decision, state legislatures have been able to effectively reverse a decision by retroactively changing the law. Several taxpayers have challenged the validity of retroactive state tax changes by arguing that the retroactive laws violate the US Constitution’s Due Process Clause, which requires that no state may “deprive any person of life, liberty, or property without due process of law.”
The US Supreme Court last addressed the constitutionality of retroactive tax legislation in 1994 in United States v. Carlton, 512 U.S. 26 (1994). In Carlton, the Court upheld retroactive tax legislation because it was enacted for a “legitimate legislative purpose furthered by rational means” and the legislature “acted promptly and established only a modest period of retroactivity.” Carlton involved a one-year retroactive effective date. The standard provided in Carlton, however, does not give clear guidance on a constitutionally acceptable length of time for retroactive tax changes and what is considered a “modest period of retroactivity.” On May 22, 2017, the US Supreme Court declined two opportunities to clarify what is an acceptable length of time: (1) Dot Foods Inc. v. Wash. Dep’t of Revenue, 372 P.3d 747 (Wash. 2016), where the taxpayer challenged Washington’s retroactive application of tax law changes going back 27 years; and (2) six cases, including Gillette Comm. Ops. N. Am. v. Mich. Dep’t of Revenue, 878 N.W.2d 891 (Mich. Ct. App. 2015), denying appeal, 880 N.W.2d 230 (Mich. 2016), challenging Michigan’s retroactive repeal of an alternative apportionment method going back six years. Both cases involve decisions upholding a statutory amendment applied retroactively after the statute had been reviewed by the states’ supreme courts in favor of the taxpayers. In the absence of additional guidance by the US Supreme Court, victorious taxpayers may find their hard-fought successful litigation undone by a retroactively applied tax law.
A mere 28 days after oral argument, a three-judge panel of the Michigan Court of Appeals unanimously upheld a Court of Claims decision that sanctioned the Michigan Legislature’s retroactive withdrawal from the Multistate Tax Compact in 2014 PA 282, by ruling for the Michigan Department of Treasury in the consolidated appeal. The court held that the retroactive repeal of the Compact and the three-factor election within did not violate the Contract Clauses of the state or federal constitutions, reasoning that the Compact did not contractually bind Michigan from exercising its full legislative power. Accordingly, the Compact was subject to Michigan law concerning the interpretation of statutes. The court held that the retroactive repeal satisfied the Due Process Clauses of the state and federal constitutions because: (1) taxpayers generally do not have a vested right in the continuing validity of taxing statutes; (2) because the Legislature had a legitimate purpose for giving retroactive treatment to 2014 PA 282; and (3) because the six-and-one-half year retroactive period was sufficiently modest. The court also struck down the taxpayers’ separation-of-powers argument, asserting that the Legislature has the authority and obligation to amend a statute it believes has been misconstrued by the judiciary and that 2014 PA 282 did not reverse a decision or repeal a final judgment. Finally, the Court held that the retroactive repeal does not discriminate against interstate commerce, violate taxpayers’ First Amendment rights to petition the government, or defy any other Michigan constitutional provision. The court noted that the application of 2014 PA 282 to IBM’s appeal of its 2008 tax year decided by the Michigan Supreme Court was not at issue here. Sutherland will provide additional analysis as this case moves through the appellate process. Gillette Comm Operations N Am & Subsidiaries v. Department of Treasury, No. 325258 (Mich. Ct. App. 2015) (consolidated with 49 other appeals).
The Oklahoma Court of Appeals held that retroactive relief applied to a facially unconstitutional capital gains deduction. The court previously held that the capital gains deduction set forth in 68 O.S. §238(d) discriminated on its face against interstate commerce because the holding period for out-of-state companies was longer than the required holding period for Oklahoma companies. On rehearing, the Oklahoma Tax Commission (OTC) argued that the court’s decision should only apply prospectively. However, pursuant to long-standing Oklahoma precedent, the court recognized that “retroactivity is generally applied to constitutional opinions.” Holding that retroactivity applied to the taxpayer, the court also stated that a constitutional pronouncement must be “given full retroactive effect” and went on to apply the “pipeline rule.” Under the “pipeline rule,” a decision applies to all cases still open on direct review and to all events that are not time-barred. The purpose of the rule is to secure equality for all pending claims, or those capable of being litigated, when a new rule is announced. The OTC will likely appeal the decision to the Oklahoma Supreme Court. CDR Sys. Corp. v. Oklahoma Tax Comm’n, Okla. Ct. of App., Case No. 109,886 (filed June 12, 2013).