COST or (Council on State Taxation) recently urged the U.S. Supreme Court to hear a court case involving the state's ability to retroactively change legislation enacted eight years earlier (Hambleton v. State of Washington). The case involves Washington's estate tax, but has implications for other tax types (income tax and sales tax).
what are the limits?
COST's amicus brief discusses the history of the courts allowing retroactive changes to legislation and the limits imposed. According to COST, some courts have found as little as 16 months excessive and other courts have found more than ten years permissible. COST mentions that the Court has held that retroactive changes are allowed to carry out the intent of legislation enacted slightly more than one year before. The broad range and lack of uniformity among the states not only creates compliance concerns for taxpayers, but also carries the potential for violating the Due Process Clause of the U.S. Constitution.
uncertainty creates burden
Taxpayers generally take positions based on their own risk tolerance. Taxpayers who have a high risk tolerance may be willing to take positions based on their interpretation that a grey area of tax law is not constitutional or vague. These types of taxpayers run the risk of a state not only assessing additional tax, interest and penalties, but also are exposed to a state's ability to retroactively change its law in its favor.
Taxpayers with a lower risk tolerance may choose to take a conservative position and follow the grey are of tax law despite how obvious it may be that the law is unconstitutional or vague. These types of taxpayers may choose to file amended returns claiming a refund of the tax paid. In this case, the taxpayer is protected from being assessed additional taxes, interest and penalties. However, the taxpayer is still exposed to a state's ability to retroactively change its law in its favor resulting in the disallowance of the taxpayer's refund claim.
In both situations, taxpayers may incur compliance costs, consulting fees, attorney fees, court costs, etc. before the issue is resolved. Additionally, while the issue is being litigated or considered, the uncertainty creates additional exposure for current tax years.
I agree with COST, and urge the U.S. Supreme Court to consider this case not only for the reasons asserted by COST in their amicus brief, but also because states have an obligation to create a stable and reasonable compliance environment that doesn't keep taxpayers guessing.