Here is an article that was written about a bill I pre-filed this year. It came to my attention that one of my constituents accrued tens of thousands of dollars of legal fees due to DOR not following state statutes. He ultimately won in court, but there was no process to reimburse his accrued legal fees. This bill hopes to remedy this in the future.
 
Article published in Law360 (January 22, 2021, 3:40 PM EST) – and printed here with author’s permission.
 
Challenging The Norms In SC And Kan.: SALT In Review
By David Brunori
 
— From a bold idea in South Carolina to a different way of thinking in Kansas, here are my thoughts on noteworthy state and local tax news.
 
This Will Shake Things Up
David Brunori is a senior director at RSM US LLP in Washington, D.C., a research professor at The George Washington University and a regular contributor to Law360 Tax Authority.
 
Every once in a while there is a proposal that, if successful, will rock the state and local tax world. A measure in South Carolina is one such proposal. The measure, S.B. 154, would allow taxpayers who prevail in a tax dispute with the state to recover attorney fees and costs associated with the case. The bill was introduced by state Sen. Shane Martin, a Republican member of the Finance Committee.
 
No other state has such a law, although some states allow for an award of attorney fees upon a showing of reckless government behavior. This law would provide that a taxpayer who prevails “in an action or proceeding instituted by the department or the attorney general to recover a tax or penalty imposed by this chapter is entitled to reasonable attorneys’ fees and costs associated with defending the action or proceeding.” All you have to do is win.
 
Don’t underestimate the profound effect this law would have. It would be a tremendous check on the Department of Revenue’s authority and, if widely adopted, would have a significant effect on state tax administration. As everyone reading this knows, state tax controversy often involves significant costs. Revenue departments know that very well. Indeed, and pardon my cynicism, some revenue departments assert tax deficiencies with the knowledge that the taxpayer will not spend the money to fight. This is especially true with respect to small and medium businesses and of course individuals.
 
This South Carolina measure will even that playing field. If the taxpayer’s position is correct, the taxpayer will be reimbursed for the costs incurred. Taxpayers who engage in drawn-out appeals and litigation spend a lot in the process. If they win, they are still out of pocket for those expenses. There is justice in making the taxpayer whole. The law will also likely make taxpayers less timid. Taxpayers who believe their cause is just will be less reluctant to spend the money to defend themselves. In that regard, this is a good idea.
 
Departments of revenue will not like such a law. I do not know if the South Carolina department has weighed in. But it removes from the department’s enforcement policy a powerful weapon – taxpayer concerns over litigation costs. Like many taxpayers, some departments of revenue routinely take aggressive and unfair positions, although I would not put South Carolina in that category. Those positions should be challenged. Reimbursing victorious taxpayers will help accomplish that.
 
Yes, such a law could have a chilling effect on tax administration. Departments may be reluctant to pursue taxpayers in some instances. But maybe that is not so bad. The departments may be more discerning in whom they pursue. That would be good. In my experience, the best revenue directors — and I have worked with many of the very best — try to enforce the law. Former directors such as Connie Beard, Courtney Kay-Decker and Adam Krupp would not have been deterred from doing what is right by such a law. I suspect it will affect those who believe that all taxpayers are tax cheats. That would be good.
 
There are some unknowns with the South Carolina proposal. It is not clear where the money to reimburse the taxpayers will come from. There is an argument, one my friends at the Federation of Tax Administrators will frown upon, that to make this really effective, the money should come from the department’s budget. That is how some legal reimbursement programs work at the federal level. Of course, the response to that is that department budgets are already stretched thin.
 
Furthermore, it is not clear whether there are any limits to how much a taxpayer may be reimbursed. If I think I am in the right, I am apt to hire lawyer Jeff Friedman or Carley Roberts or, if I am feeling particularly flush, Jordan Goodman. They are not cheap. If I run up a $2 million legal bill and prevail, will South Carolina pay? If the state does pay, will unsavory lawyers and accountants encourage taxpayers to challenge state actions when they really shouldn’t? I am not worried about that.
 
In any event, this proposal provides a check on government power. Free societies need checks on government power.
 
In Kansas, Some Good Tax Policy
 
Not to sound condescending, but people in Kansas exude that Midwestern niceness. You can’t help liking them. Seriously, who doesn’t like Shirley Sicilian or Richard Cram? Of course, my friends in Missouri say it’s all an act. In any event, Kansas has a long history of not doing state tax policy very well. The state taxed stuff that should have been exempt and exempted stuff that should have been taxed.
 
Gov. Laura Kelly’s new budget proposal does not follow in that tradition. Generally her two big ideas are very good. She wants a marketplace facilitator tax collection requirement. That of course makes sense for so many reasons. And Kansas has been weirdly reluctant to do what virtually every other state has done after since the Supreme Court’s 2018 Wayfair decision . Without a marketplace facilitator law, small out-of-state retailers are at a terrible disadvantage, especially since the state thinks it can require tax collection on all sales.
 
The governor would also like to extend the sales tax to digital property and subscription services. This of course is also very good policy — the sales tax should fall on all final personal consumption. There is zero rationale for exempting such purchases. The one big problem with Kelly’s tax proposals is that there is no mechanism for exempting business purchases of digital goods and subscription services. Unlike advertising, most of these purchases will be by consumers. Businesses do buy a lot of subscriptions and digital goods, web applications etc. They should not pay sales tax on those purchases.
 
It’s About Time
 
The Council on State Taxation has filed a suit against the Nebraska Department of Revenue challenging the state’s disallowance of deductions for deemed repatriations under Internal Revenue Code Section 965 . As far as I can tell, this is the first lawsuit challenging a state’s position on provisions of the 2017 Tax Cuts and Jobs Act . In this case, the department had issued guidance saying essentially that the deemed dividends weren’t really dividends for Nebraska tax purposes.
 
Patrick Reynolds is representing COST along with heavy hitters Steve Kranz and Kathleen Quinn of McDermott Will & Emery. Their petition is quite convincing. COST says that the Nebraska law provides that dividends and deemed dividends are eligible for the deduction. The plain reading of Nebraska’s pertinent statute suggests COST is right. It would seem strange not to treat included Section 965 income as deductible as a deemed dividend.
 
Many states have tried to capture overseas income arising from the TCJA through denying dividend received deductions or directly taxing global intangible low-tax income, another TCJA provision. I believe many of those attempts are illegal under either the Constitution or, in the Nebraska case, state law. I am surprised that this is the first legal challenge. I hope it won’t be the last.
 
Tax Haven Laws Get Me Riled Up
 
As just about everyone knows, Montana has a tax haven law. The law names a list of countries. If you are filing in Montana and have an affiliate doing business in one of those countries, you must file on a combined basis with that affiliate. It’s worldwide combined, but only selective parts of the world. The list of countries was picked out of a hat by state legislators who took a break from playing checkers many years ago. Actually, I am kidding. But the list includes NATO allies, major trading partners and many beautiful islands in the Caribbean. It’s all very arbitrary. I also think it’s unconstitutional, but we are waiting for a lawsuit challenging the tax haven laws in Montana and five other states engaging in this craziness.
 
I honestly don’t know a single company that has tried to avoid state income taxes by moving operations overseas. More important, these laws put a big “we don’t like business much” sign up. And while my blood pressure is up, it is pretty arrogant to argue that you get to tax someone who chooses to do business in a place that imposes lower tax burdens.
 
A measure in Montana, S.B. 12, would get rid of the statutory list of tax havens. As in the other states, it would give the Department of Revenue the authority to identify tax havens, and it would specify the criteria. At least with the current law, you know before you do business which countries are blacklisted. Under the new law, the department can decide after you are doing business whether you are subject to combined reporting. The criteria include an absence of income taxes, so-called nominal income taxes and a lack of transparency.
 
You know what’s not transparent? How the department will decide which countries are tax havens. In any event, the Department of Revenue has long been among the most aggressive in the nation. Half the world is likely to be on the tax haven list. But the tax haven law should not be amended. It should be repealed. Oregon did. Montana should, too.
 
Dumbest Bill of the Year, So Far
 
An old tax policy principle says society should minimize the effects of taxes on the marketplace. All taxes affect economic decisions, but we should minimize those effects. Of course, many political leaders live to tell other folks how to live. What better way of doing that than by controlling the economy? The folks who want to do this either do not understand that free markets are more effective and efficient than centralized economies or do not care.
 
The latest example comes from Iowa. Yes, these ideas usually come from Oregon or California. But a proposal in Iowa, H.F. 69, would disallow deductions for compensation of chief executive officers of publicly traded companies. This would apply to the corporate income, franchise and insurance premium taxes. Basically, companies would have to add back the compensation to their taxable income. I note that there are no limits. All deductions for CEO compensation would be denied for publicly traded companies.
 
The sponsor of this bill is Democratic Rep. Dave Jacoby. Why would he propose this? Maybe he doesn’t like corporations. Maybe he is trying to stick it to the man. Maybe he is trying to address income inequality — perhaps if corporations can’t claim deductions, they will pay CEOs less. I do know that compensation is a legitimate business expense. I also know that determining appropriate compensation levels is the responsibility of a corporate board, not the state government.