Unconstitutional State Taxes: In Search of a Remedy
I wrote my thesis on this very topic several years ago. However, the issue remains alive and well today.
When a state enacts legislation that later is found to be unconstitutional, what is the appropriate remedy? Prospective relief only? Retroactive refunds for all taxpayers for all years still open under statute? Retroactive refunds for only those taxpayers that have filed protective refund claims? Or better yet, should states be allowed to change the unconstitutional legislation/statute in such a way as to make it constitutional? If yes, should states be allowed to make that change retroactive to limit the amount of refunds they will have to pay to taxpayers who paid the tax in prior years (or filed protective refund claims)?
The answers to these questions were played out in California, with the court cases that found the California LLC Fee to be unconstitutional. California changed the unconstitutional statute to make it constitutional in order to limit the amount of refunds it had to pay. However, should that be allowed?
State Budget Problems = Unconstitutional Taxes and Fees?
In regards to other states, I am concerned that as states are fighting one of their worst financial budget crises, they will enact, knowingly or unknowingly, unconstitutional state taxes or fees. At this moment when states need new revenue (without "raising taxes” or political “fall-out") certain fees or taxes will become attractive alternatives. However, will those alternatives be constitutional?
Unfortunately, if the past repeats itself, we may only recognize these statutes to be unconstitutional several years from now after the state has collected the taxes and fees. Again I ask, should this be allowed?
It seems not only unfair, but perhaps “illegal,” for states to collect taxes by enacting laws later to be found unconstitutional, and then refuse to give the money back to taxpayers. How can a state profit from collecting taxes it should not have been allowed to collect in the first place?
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.