This document originially appeared in the June 18, 2012 edition of State Tax Notes.
By insisting on keeping the contents of its letter rulings and most written determinations a secret known only to tax administrators, the Washington Department of Revenue is leaving taxpayers with no way to navigate the state's tax laws, practitioners said.
Washington has already been identified as one of only a handful of states that refuse to release their private letter rulings to the public. (For coverage, see State Tax Notes, Apr. 30, 2012, p. 331, Doc 2012-8583, or 2012 STT 83-3 .) But the department's refusal to release the vast majority of its written determinations may be an even more troubling transparency concern, creating a sense that tax policy is being administered behind a closed curtain and leaving the public unable to discern whether similarly situated taxpayers are being treated as such.
The DOR's Appeals Division is an administrative adjudicatory body that issues opinions on a variety of tax issues, including appeals of assessments for the state's sales and use tax and its business and occupation tax. Appeals Division matters are considered by an administrative law judge, who meets separately with the taxpayer and the department to develop the case's facts and legal arguments. A hearing is typically held, although representatives for the department generally are not present.
The Appeals Division is not a court of law, but "there is a degree of advocacy," said Gregg Barton, a partner with Perkins Coie LLP, Seattle, and chair-elect of the American Bar Association Section of Taxation's State and Local Tax Committee.
The judge's determination -- known as a Washington Tax Decision (WTD) -- has the feel of a court opinion, setting forth the facts, laying out the applicable law, and then applying the law to the facts.
Despite the quasi-judicial nature of the proceeding and requests from taxpayers and practitioners, DOR officials have been hesitant to publish most determinations.
Discretion to Publish Determinations
State law requires the DOR to establish a rule setting criteria for which determinations will be considered precedential and to disclose any determinations that meet those criteria or that are used to support an assessment of tax, interest, or penalty.
The DOR has never adopted such a rule, but it does say on its website that the only determinations that will be published are those that have well-reasoned applications of the law to a specific set of facts and that address only the law and facts necessary to resolve that case.
Further, determinations will be released only if publication is required to:
- provide guidance on a previously unaddressed area of the law and to articulate the department's current policy;
- apply the law to a significantly different set of facts;
- overrule a published determination; or
- provide a better or more current articulation on how the law should be interpreted.
DOR Communications Director Mike Gowrylow said the department selects determinations for publication "based on their value to provide answers and an analytical framework for all taxpayers."
But practitioners questioned whether the department's criteria are being applied evenly. Michelle DeLappe, an associate at Garvey Schubert Barer LLP, Seattle, and chair of the Washington State Bar Association's State and Local Tax Committee, noted that "many published determinations reflect identical interpretations, without any modification or clarification of the law."
If only a handful of determinations will be published, the DOR might be expected to choose those that cover the widest range of possible issues, rather than determinations with identical interpretations of the law. And if two determinations reflect an identical interpretation of the law, both determinations would not be "needed" under the department's criteria.
So it would seem that the DOR would want to release determinations that provide a "well-reasoned application of the law" as a matter of course, as they would provide valuable guidance to taxpayers and practitioners. Two determinations may apply the same law, but the fact patterns will be different -- if only slightly -- and those differences can be meaningful when taxpayers are seeking guidance on a specific type of transaction.
Even in the rare instance that a determination is chosen for publication, the public shouldn't expect to see it until well after it has been issued. Publication occurs only after a final order is issued, which can take six months to a year for typical cases. And if the determination happens to be chosen for publication, it can take just as long for the DOR to evaluate the nomination and "sanitize" it by removing confidential taxpayer information. In the 15 to 20 percent of cases in which taxpayers file for reconsideration, the process is pushed back even further, by an average of six months.
By contrast, Alabama's three-person Administrative Law Division moves much more quickly. Chief Administrative Law Judge Bill Thompson handles "a large number of appeals each year, of all shapes and sizes, but he usually issues substantive rulings within three to five months," said Bruce Ely, a partner at Bradley Arant Boult Cummings LLP, Birmingham. From there, all decisions are distributed to news services at the end of each month and are "a matter of public record unless the judge has issued a protective order," Ely added.
Thompson's executive assistant said she can recall only one such protective order in the last 15 years. Even in that case, she said, the decision was still published after being redacted.
Gowrylow said the Washington DOR doesn't know what percentage of decisions it publishes, though it tracks how many of the decisions that have been nominated for publication are actually released to the public.
Publication rates vary from year to year based on the criteria above, workload volumes, and budgetary constraints, he said. In 2009, 55 WTDs were nominated for publication, but only 19 were published. In 2010, 15 were published out of 92 nominated. And in 2011, 106 were nominated, but only 15 were published, according to Gowrylow.
In 2011, he said, the DOR suspended publication and diverted resources to an amnesty program, but it has since resumed publication with six determinations released on May 31 and plans to publish more in June.
Gowrylow's figures show that even as more decisions are being nominated for disclosure, the department is keeping more of them secret.
The percentage of nominated cases that are actually published is low, but the number of cases published compared to overall decisions issued is even lower. WTDs were likely issued on at least 358 appeals in 2011, so with only 15 published, the publication rate is close to 4 percent.1
DOR Arguments Against Publication
While Gowrylow offered no specific reason for not publishing all determinations, practitioners said that the DOR has previously cited several rationales, including concerns about the quality of their determinations, saying that ALJs would be forced to write their determinations with more precision to ensure clarity and consistency.
DeLappe noted that she has heard from practitioners that "determinations that are not slated for publication show little or only superficial analysis and fail to acknowledge the taxpayers' facts and legal arguments."
DOR officials have also suggested that publishing all the determinations could overwhelm taxpayers with too much information, and that only specific types of determinations would be useful to practitioners. Many cases heard by the Appeals Division deal with penalty abatements, for example, and the department has apparently made the assumption that those opinions would be of no use to practitioners or taxpayers.
But Barton argued that it could be useful to know the situations in which the department will award penalty abatements. It could also be useful for taxpayers to know the types of challenges being brought by other taxpayers.
"If, in 2011, the 15 determinations that were published were the only determinations that met the stated criteria, what were all the other taxpayers arguing about?" Barton asked.
Practitioners also said the DOR is worried that it can't undo its mistakes if it realizes its legal conclusions are wrong. This would be of particular concern if the department published a determination favorable to the taxpayer and then saw other taxpayers rely on it to obtain similar outcomes.
Though it's likely the Appeals Division will occasionally take a position on behalf of the DOR that is later found to be wrong, the department could simply prepare for that eventuality and make plans to correct itself.
And though it may be unsettling for taxpayers, a thorough treatment of their tax questions may demand resources that the state does not have.
Gowrylow said that the department "has always made it a priority to assist taxpayers in understanding and voluntarily complying" but that recent budget constraints have limited its resources. As a result, the DOR has prioritized communications "that reach the largest audience of taxpayers and are most helpful to the recipients."
But more openness might actually be the cure for those problems.
When taxpayers know that their position is already undermined by years of case law, they're less likely to clog up the system with cases that are inevitably going to be thrown out, said Dana Raybon, executive assistant to Alabama's chief administrative law judge.
Although Alabama law does not allow a "reasonable cause" exception to the two-year limit on refund requests, for instance, the division used to take in 20 to 30 requests for such exceptions to be granted every month.
"I think it was attorneys who were filing because they felt bad for their clients," who may have missed the deadline due to illness or a death in the family, Raybon said. Still, the court had to reject all of them.
But since the division began publishing more cases solidifying that precedent, "it's scaled back dramatically," freeing up the office to work on larger issues, she said. "And I really think it's because the information is out there better than it used to be."
Secrecy Yields Inconsistent Application of the Law
Because so few determinations are published in Washington, practitioners are concerned that the department may be obscuring its inconsistencies in applying the law. Barton said that some practitioners suspect that the DOR publishes only determinations that it believes are in its best interest.
DeLappe confirmed that perception, saying those concerns are "inevitable when the curtain is drawn so taxpayers cannot see how the department is treating similarly situated taxpayers." Often, the only way for practitioners to get a larger picture of how tax law is applied is to talk to other practitioners.
One case, Tesoro Refining and Marketing Co. v. Dep't of Revenue, illustrates the confusion that results from that secrecy.
Tesoro was a Texas-based oil company with an oil refinery in Washington. The company didn't know its competitors were taking deductions for tax amounts derived from the sales of bunker fuel sold to vessels in interstate commerce. So when it learned from other taxpayers that it was being treated differently from its competitors, Tesoro filed a refund claim for more than $6.6 million.
Then, despite having permitted similar deductions for other taxpayers, the department denied Tesoro's refund claim.
The decision was appealed to the Washington Court of Appeals, which found that the department's contention that the taxpayer was not entitled to the deduction "conflicts with its own previous determinations that it could not deny a manufacturer the deduction by artificially limiting the statute's applicability." (For the Court of Appeals decision, see Doc 2010-27305 or 2010 STT 247-16 .)
Although the Washington Supreme Court eventually denied the deduction to Tesoro on other grounds, the court noted the existence of "contrary agency interpretations" that had been set forth only in unpublished rulings and determinations. (For the supreme court decision, see Doc 2012-696 or 2012 STT 9-26 .)
Tesoro and similar cases have left practitioners with a general sense that the DOR is inconsistent in its application of the law and that refusing to publish determinations may be an effort to mask those inconsistencies.
That's a dangerous image to project, according to Heather Maloy, commissioner of the IRS's Large Business and International Division.
Speaking at the American Bar Association Section of Taxation's meeting in May 2012, she said that consistency is at the heart of a fair and equitable tax system and that the public perception of inequitable treatment leads to a decline in voluntary compliance.
The key to compliance is developing tax officials with perspective and an understanding of their role in applying tax law. Maloy said consistency in tax administration requires an exercise of judgment "not with a focus on the outcome in any one particular case in one particular time."
Adoption of the ABA's Model State Administrative Tax Tribunal Act could also encourage compliance. Besides attempting to foster the perception of fairness by separating administrative law judges from the departments whose assessments they are expected to impartially consider, the model act would also require that tribunals publish their decisions and make them "permanently available" for public convenience.
The other major transparency issue in Washington is that the state, in practice, does not publish letter rulings.
The DOR will provide a binding letter ruling if a taxpayer has a complex tax question specific to its business, and the department issues approximately 5,700 annually.
In general, all public records in Washington must be disclosed unless they fall within a specific exemption or prohibition, such as the secrecy clause, RCW 82.32.330, which prohibits the release of some pieces of tax information, such as the taxpayer's identity or any data received for determining the taxpayer's liability for taxes.
The department used to be able to release letter rulings issued to anonymous taxpayers, but it now requires taxpayers requesting a ruling to identify themselves. Now, Gowrylow said, those confidentiality rules prevent the release of letter rulings "unless the taxpayer or a court grants permission."
So although the taxpayer's consent appears to provide a mechanism for the public to access a tax ruling, Barton said it would be a very rare circumstance in which a practitioner could identify the single taxpayer whose previous ruling would be applicable. In most cases, practitioners would want to request all rulings related to a particular issue, and it seems unlikely that the DOR would be willing or able to obtain consent for such a release from a large number of taxpayers in a timely fashion.
A 2003 American Institute of Certified Public Accountants report -- "Guiding Principles for Tax Law Transparency" -- explains the importance of transparency in tax law and outlines the harm that can be caused by obscurity.
The report says transparency in tax law "should be measured by how easily taxpayers can determine whether and how any particular tax provision -- and the tax statute as a whole -- affects their tax burden."
When a tax system is not transparent, the report argues, several problems can arise -- including the impairment of the government's ability to administer the tax system, frustration among taxpayers attempting to plan transactions within the constraints of the law, and the imposition of significant costs on taxpayers, advisers, and the government as they work through the inefficiencies created by an obscure system.
Publishing determinations and letter rulings could improve the efficiency of Washington's tax system and overall compliance.
Barton noted, for instance, that the DOR has already recognized the importance of using specific examples to help taxpayers understand how to apply the law in the rulemaking process. If examples play such an important role, the department could provide even more by publishing its determinations and letter rulings -- actual fact patterns that would help taxpayers better understand and comply with the law.
Gowrylow argued that letter rulings and WTDs are only two weapons in the DOR's arsenal for providing guidance. He said the department lacks the resources to sanitize all of them, so it has to prioritize -- evaluating each one based on "trends, stakeholder input, changes in legislation, and trends in litigation."
Nonetheless, practitioners are not confident that similarly situated taxpayers will receive similar treatment. The department has already done the hard part in issuing the guidance; redacting taxpayer information, they said, should not prevent it from publishing guidance that will demonstrate fairness, promote consistency, and encourage compliance.
And by publishing everything, the DOR could reduce its workload in the long term by discouraging re-litigation of issues that have secretly been resolved for years.
Instead, Washington has kept its guidance hidden, fostering a culture of secrecy and inefficiency. The department may be better served by embracing transparency and providing taxpayers with the certainty they crave.
The bottom line is the more information the better, said Amber Carter, government affairs director of tax and fiscal policy for the Association of Washington Business. Carter said transparency provides the DOR an opportunity to focus on laws that are unclear, provides consistent advice and guidelines for auditors, ensures that all state auditors have the same information, and fosters understanding of how taxpayers are being treated in similar circumstances.
The author thanks State Tax Notes legal editor Jennifer Carr for her help with this story.
1 The approximate number of determinations is based on file names. The first published file name in 2011 was DT No. 10-00058 and the last published file name in 2011 was DT No. 10-00358. Assuming that the first file name for the year was DT No. 10-00001 and the last published was DT No. 10-00358, there were at least 358 determinations. As of June 13, published determinations were available at http://dor.wa.gov/Content/FindALawOrRule/WTD/WTDs_05_2012.aspx.
END OF FOOTNOTE
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