I recently had the opportunity to speak at the Chicago Bar Association regarding non-traditional defenses in state tax cases. Since preparing for that presentation, I have taken some time to reflect on how taxpayer bills of rights and procedural due process rights tie into my representation of taxpayers in state courts and before state administrative bodies. Nowhere do these issues seem more useful than in the context of alternative apportionment.
In a recent two-part article that Breen Schiller and I wrote, we discussed how recent state approaches to alternative apportionment have eroded taxpayers' due process rights and how such broad authority granted to tax administrators may even constitute an impermissible legislative delegation of power by the legislatures. We did not, however, delve into the role that taxpayer bills of rights may play in alternative apportionment cases. Taxpayer bills of rights not only provide for the ability to obtain attorney fees in some instances, they establish substantive and procedural rights which may create obstacles for tax administrators seeking to invoke alternative apportionment. Take the recent Vodafone decision, for instance.
In Vodafone, the taxpayer filed a claim for refund, contending the company's initial reporting method was incorrect. The Department denied the taxpayer's claim for refund, which the taxpayer appealed to the court system. In its answer in court, the Department denied that the taxpayer was entitled to any refund, but made no mention of alternative apportionment. Two years after the Department filed its answer in court, the "Commissioner, sua sponte, imposed a variance pursuant to" Tennessee's alternative apportionment statute. The court, to the consternation of many tax practitioners, upheld the Department's alternative treatment, concluding that the Department satisfied its burden of demonstrating that the standard apportionment method did not fairly reflect the taxpayer's business activity within the state and that the Department's alternative approach was reasonable.
Whether the Vodafone decision will withstand scrutiny on the substantive grounds on appeal remains to be seen. However, there is another issue here that the court did not discuss. The Tennessee Bill of Rights grants taxpayers at least 17 rights. Among these rights are that taxpayers "[r]eceive prompt and accurate responses to all questions and requests for tax assistance"; taxpayers are entitled to "[r]eceive tax notices that provide an explanation of the amount being billed"; taxpayers are entitled to "[r]eceive a clear set of rules and procedures to resolve tax problems that arise from the interpretation and administration of Tennessee's tax laws"; and taxpayers are entitled to "[a] speedy, informal and inexpensive appeal of any tax dispute before an impartial hearing officer from the department[.]" I would contend that each of these rights was violated when the Tennessee Department of Revenue, almost three years after initially denying the taxpayer's claim for refund, invoked alternative apportionment as a means to justify its denial of the taxpayer's claim. Surely, at the time of the Department's initial denial, the taxpayer could never have been furnished with an accurate response to its claim or an accurate explanation for the denial. The Department's initial denial had nothing to do with the alternative apportionment it would invoke three years later. Moreover, the taxpayer's procedural rights had been violated. How can a department of revenue, or a court, claim that a taxpayer received a "speedy, informal and inexpensive appeal" when the department of revenue contrived its reason for the denial of a claim three years after the claim was filed?
The applicability of the Tennessee Taxpayer Bill of Rights to the Vodafone decision is not unique. In many cases, departments of revenue invoke alternative apportionment at a later stage than taxpayer bills of rights permit. Taxpayers should be wary of such treatment, and consider whether their rights have been violated by the invocation of an alternative rationale supporting an assessment or denying a claim.
Vodafone Americas Hldgs. Inc. v. Roberts, No. M2013-00947-COA-R3-CV (Tenn. Ct. App. 2014).