Are State Tax Authorities Hiding The Ball?

Feb 3 2014, 9:13am CST | by

I’ve noticed an emerging trend in some state departments of revenue – a move toward secret law. In a time when transparency has become a buzzword, some revenue departments are doing what they can to avoid transparency. In fact, some seem to be offering less guidance than ever before.
Almost two years ago, Tax Analysts undertook a project to examine transparency in state tax administration. The project primarily involved looking at areas in which states can do better at providing information to taxpayers and practitioners. Particular focus was paid to state practices regarding the publication of private letter rulings or comparable documents.

Initially, Tax Analysts found that 45 states and the District of Columbia offer private letter rulings, and of those, about 35 make them available to the public, typically by publishing a redacted version on the DOR’s website. Tax Analysts examined the states that did not provide letter rulings and reported on how the lack of guidance affected taxpayers and practitioners.

But those states may not have been the worst offenders. I recently began examining transparency in Connecticut and found a more insidious problem. Connecticut can offer guidance similar to a letter ruling, and, according to internal policy, it will publish that guidance. However, the Department of Revenue Services chooses not to issue those rulings. Taxpayers are left with no guidance.

In Louisiana, the Department of Revenue prefers giving informal advice. It says that is the “easiest way to get answers to questions,” even though it “does not have the force and effect of law and is not binding on [the department], the public, or the person who asked for the advice.”

The DOR issues private letter rulings, but only when “there is no other guidance that addresses the correct application of the legal principles to the taxpayer’s particular situation.” Redacted letter rulings are published on the DOR’s website and, while binding only on the taxpayer that requested the ruling, the information is a valuable guide for how the department will respond in a particular situation.

However, the last private letter ruling published online dates back to October 2010. Louisiana practitioners have also complained that audit manuals are not readily available. And although they are aware of existing policy and procedure memoranda and other internal guidance, they can obtain them only occasionally.

Louisiana also ranked at the bottom of the Council On State Taxation’s recent Scorecard on State Tax Appeals and Procedural Requirements, so perhaps none of this is a surprise. But Maine ranked at the top, and yet an opinionwas recently issued by the Maine Supreme Judicial Court that caused me to question the state’s commitment to a transparent tax system.

The case stemmed from a Freedom of Access Act request for documents containing methods, formulas, and calculations related to the apportionment of Maine-source income for nonresident partners of professional services partnerships. The court denied the request on the grounds that the information sought consists “entirely of information deemed confidential.”

Admittedly, the opinion probably wasn’t wrong given that Maine has a particularly broad taxpayer confidentialitystatute. The problem seems to be that Maine Revenue Services won’t provide any guidance on alternative apportionment, despite having worked out deals with numerous taxpayers. And rather than provide guidance in this instance, it chose to litigate.

What this tells me is that identifying good and bad transparent practices may be exceedingly difficult at the state level (though that won’t deter Tax Analysts from trying). State DORs may have procedures in place that would provide for transparent administration of the state’s tax system, but if it is the culture of the department not to provide guidance, the procedures will fall far short of success.

Practitioners have told me their federal counterparts are shocked when they realize the vacuum that state tax practitioners must work in. And yet that’s the reality for many practitioners, and it’s only getting worse.

Tax Analysts CEO Chris Bergin gave a terrific speech several years ago addressing the company’s success in fighting for transparency at the IRS. He said that although the IRS may have feared allowing the public to see how it operated, after it was required to release letter rulings and technical advice memoranda “nothing bad happened.”

“Making letter rulings and TAMs public was a good thing,” he said. “The practice and administration of tax law are better when the law is available to everyone.”

The same concept applies to the states. Nothing bad will happen if states provide guidance to taxpayers. Hiding the ball has no place in state tax administration.

Source: Forbes Business

 
 

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