New tax ruling could give Department of Revenue huge appeal advantage
Published: July 5,2013
A June 20 decision by the Mississippi Supreme Court in a tax dispute between Equifax Credit Information Services and the Mississippi Department of Revenue severely damages the rights of taxpayers, said an attorney who practices tax law.
The dispute arose over the company’s tax liability to the state. Using the standard apportionment method, Equifax computed its tax liability as zero. A subsequent audit by the Mississippi Department of Revenue determined that the standard apportionment method did not properly reflect the company’s business activity in the state.
Reaching that conclusion, the Department of Revenue found that an alternative apportionment method, under which Equifax’s income from services provided to customers located in Mississippi was apportioned here, should have been used. The tax assessment totaled a little more than $700,000.
Equifax, after paying the taxes in protest, appealed that decision to Hinds County Chancery Court, which ruled in favor of the Department of Revenue.
The state high court’s ruling gives the Department of Revenue a significant advantage in tax appeals, said John Fletcher, a partner in Jackson law firm Jones Walker’s tax and estates practice group.
Among the most harmful portions of the court’s ruling is the limitation it sets on the standard of review a chancery court can apply in disputes between a taxpayer and the Department of Revenue. The ruling does not allow a taxpayer on appeal to receive a de novo trial, complete with discovery rights. Instead, it requires the taxpayer to show at the chancery court level that the Department of Revenue had no facts to rely on when it reached its decision at the administrative level.
Fletcher the ruling sets up a system akin to “appealing to the cop who arrested you.”
The supreme court encountered a case similar to this one a few years ago, and ruled that a taxpayer should have the right to a full-blown trial, complete with discovery rights and a fully preserved record. Around the same time, lawmakers approved legislation that provided uniform de novo rights to disputes related to all taxes – sales taxes, income taxes, etc. – to between taxpayers and the Department of Revenue.
“It really synchronized the taxes, making everything consistent,” Fletcher said. “Everybody welcomed that. And that law specifically said it would be a de novo trial. The court would have the authority to determine exactly what the tax liability was. It’s a good system.”
The recent ruling reverses that, Fletcher said.
“And if this stands, it means you have to create a record at the administrative level, but the law specifically says they don’t create a record. You can’t take depositions, you can’t do the normal discovery stuff you would do in a court proceeding.”
“So you go through that informal process, the department makes a ruling, and then you go to court to justify it. And with the system this ruling has created, all the Department of Revenue needs is the slightest fact. That’s a huge issue.”
How that manifested itself in the Equifax decision, Fletcher said, is the company applied the law as it was written in the regulations, based on how the company’s sales were sourced. Fletcher said current regulations say that service providers determine in state and out-of-state sales based on where the cost was incurred.
“Equifax has offices outside the state, so they followed the rules and they determined that none of the sales were attributable to Mississippi,” Fletcher said. “The department’s been going to the Legislature for years trying to get the law changed to market sourcing, which bases it not on where your people are performing the service, but where your customers are located. So far the Legislature has refused to do it. What the court just did was basically give the department the market sourcing without legislative approval. And the worst part is the court assessed penalties to the taxpayer for basically following the rules. They were assessed penalties for not filing under a method they were not permitted to file under to begin with.”
The court’s ruling also said it did not have the authority to overturn that decision, which provides an example of how the standard of review limitation will harm taxpayers on appeal, Fletcher said.
“It’s going to be an insurmountable hurdle to overturn any decision. The way the law is structured about not creating a record, and the way the court is construing the chancery court’s authority, you really don’t have any appeal rights at this point. It’s going to make it exceptionally difficult on the taxpayer.”
Fletcher said a motion for rehearing will be filed within the next couple weeks, and will likely be joined by amicus briefs in support of Equifax from a lot of Mississippi business groups and trade associations.
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