Tax Analysts®Tax Analysts®

My Subscriptions:

Featured News

June 4, 2012
Transparency in State Taxation, Part 2: Legislative Process and Letter Rulings

Full Text Published by Tax Analysts®

by Cara Griffith, Amy Hamilton, and Jennifer Carr

Cara Griffith and Jennifer Carr are legal editors and Amy Hamilton is a reporter with State Tax Notes.

* * * * *

In part one of this series on transparency in state taxation, we looked at how states use discretionary authority and how, in circumstances in which they are able to use that authority, they provide guidance to taxpayers.1 We concluded that state revenue officials have been increasingly willing in the past few years to use their discretionary authority to adjust taxpayers' incomes. Although that practice is potentially troublesome for taxpayers, when revenue officials provide adequate guidance on their use of that authority, taxpayers will be reassured because they can anticipate the consequences of a specific transaction or position.

In part two of this series, we begin by examining transparency in the state legislative process. Having an open forum for debate on tax legislation is vital to a transparent system. The trend in several states to push through legislation that was negotiated and debated by a select few state officials is troubling. We then turn to states' use and publication of private letter rulings. Although many states attempt to both issue and publicly release letter rulings, some do not. Also, some states are unable to issue letter rulings in a timely fashion. Delay diminishes the usefulness of letter rulings.

Legislative Process

When discussing taxation, we often think of transparency in terms of whether taxing officials make public their procedures or other documents, such as letter rulings. But transparency in state taxation should begin in state legislatures. Jeff Saviano, a partner with Ernst & Young LLP and leader of the firm's Americas Indirect and state and local tax practice, told Tax Analysts that it is important to think of transparency not only in a controversy context but also in a legislative context. Making tax proposals available to the public and opening up a dialogue with the affected taxpayers can be eye-opening for those writing the legislation. "Business and trade associations, such as local chambers of commerce, can be vital in this process," said Saviano, "because they know state legislators, they understand the specific business tax legislation that may be proposed, and can facilitate an open dialogue between taxpayers and legislators. There are times when it is difficult for states to understand the impact that specific tax legislation has on businesses, but with collaboration and input from the business community, the result can be a better, more relevant piece of legislation that requires less revision and less interpretive regulations."

Michael Semes, a principal with Ernst & Young LLP and leader of the firm's state and local tax controversy and risk management services practice, drew on experience from his time in state government to illustrate that point. He recalled being informed that legislation was to be put forth the following week deregulating the electric industry and then being asked, "Are there any tax issues?" Because there were, of course, numerous tax issues involved, trade and industry groups were brought in with tax professionals to discuss the impact of the legislation. The end result, while not perfect, was about as good as it could be, said Semes, because the process was transparent and everyone went in with eyes open.

It doesn't always happen this way. There are times when legislation may be created quickly and in quasi-secrecy with legislators, their aides, and revenue officials being asked for their opinions, but they lack adequate information about the effect of specific legislation or time to analyze related issues. For example, last December, from out of left field, New York Gov. Andrew Cuomo (D) posted on his website an op-ed in which he proposed multiple individual income tax brackets and rates that would be increased on a graduated basis and indexed to inflation.2 One day later Senate Majority Leader Dean Skelos (R) and Assembly Speaker Sheldon Silver (D) joined him to announce they had reached a three-way deal on a plan to restructure the state's personal income tax. The State Legislature opened a special session on the tax reform plan on December 7, and by December 8 lawmakers had given it their final approval.

New Yorkers have started calling this the "Three Men in a Room" process, in which Cuomo, Skelos, Silver, and their staffs negotiate major budget and tax deals in private, release details only after they've got an agreement, and then rush massive packages through the legislative process. Lawmakers have complained that not only do they lack time to look at and debate the provisions, they wonder why New Yorkers vote for representatives when three men in a room are making the important tax and budget decisions.

In another recent example, Georgia Gov. Nathan Deal (R) and his staff spent months in behind-the-scenes negotiations with Republican lawmakers on an omnibus tax package (HB 386). Democrats were not part of those talks. The package was introduced on March 19 and within three days -- by March 22 -- the General Assembly had given its final approval to the omnibus tax bill, which featured click-through nexus language and provisions to phase out the sales tax on energy used in manufacturing.3 The speed with which the bill moved through the General Assembly generated some discussion among legislators, the press, and the public.

Although the bill's sponsor, Sen. Bill Heath (R), dismissed the controversy over how fast the measure had moved through the General Assembly after its introduction, Senate Minority Leader Steve Henson (D) said the process was rushed. "It's not true that the whole plan was presented a long time ago," Henson said. He added that while individual provisions have been introduced and debated in the past, lawmakers had only a few days to digest a complex, comprehensive plan -- a process that Henson said does "a disservice to our constituents."

Sen. Steve Thompson -- a Democrat -- took the floor to address public controversy over how fast the omnibus tax bill was moving, and empathized with Republicans who initiated the process. Thompson said he understands why lawmakers didn't want the provisions made public too far in advance of a vote: The General Assembly failed to pass reform in 2011 after introducing a package early on and having nearly every aspect of it heavily lobbied against by opponents.

Still, the desire to enact legislation must be tempered with the need for an open legislative process. When tax legislation is enacted, those who wrote the legislation, those who will enforce the legislation, and those who will be affected by the legislation should all understand what the legislation was designed to do. When that happens, revenue officials will benefit because fewer interpretive regulations will have to be issued and fewer rulings will be requested; taxpayers will benefit from increased certainty. A transparent legislative process improves a revenue department's efficiency in administering the tax system, increases taxpayer and tax practitioner certainty, and reduces the likelihood that questions will turn into full-fledged controversies.

Letter Rulings

There are two transparency questions regarding letter rulings: The first is whether a state will issue them and the second is whether a state will make them publicly available. In general, Semes said, "state departments of revenue are willing to work with taxpayers and will issue letter rulings." However, because of budget cuts and attrition, revenue department employees often feel overworked. That leads to the situation in which they want to issue letter rulings and understand that letter rulings are beneficial to taxpayers, but they simply are unable to respond to the volume of letter ruling requests in a timely fashion.

Saviano concurred, saying that many state revenue departments have lost some of their more experienced auditors and are left with younger agents who have less institutional knowledge and thus are unable to issue rulings quickly. Time is typically of the essence when a taxpayer requests a letter ruling, because the taxpayer is often in the middle of a transaction and needs guidance from the state on a particular issue. But "taxpayers should be able to ask state officials a question" regarding the state's position on a specific issue, said Saviano. "This furthers the mutual goal of creating more certainty" in the tax system, said Semes.

Verenda Smith, assistant director of the Federation of Tax Administrators, said states know there is a big push for more guidance from taxpayers and their advisers. Generally, she said, tax administrators believe that if staff have done the research and prepared guidance, it makes sense to publish it. She agreed that if there's a holdup, these days it often comes down to a matter of resources as states face tight budgets. It takes time to redact a letter ruling properly, she said. Staff assigned to research and prepare guidance might be pulled from other work that still must be done.

Because taxpayers frequently need quick guidance on a particular legal issue, Mike Petrik, a partner with Alston & Bird LLP and chair of the firm's state and local tax group, suggested that states consider offering two levels of rulings subject to different standards. For example, Petrik said, in addition to conventional binding rulings, "a state revenue department could offer to issue nonbinding rulings to anonymous taxpayers within a short time frame, perhaps even a few weeks." Petrik said that binding rulings, in contrast, should require greater disclosure and take significantly longer given the need for more thorough review. "In many cases, taxpayers would likely accept a nonbinding letter ruling if they could get it in a timely fashion," said Petrik, who also noted that agency guidance is not rendered useless just because it is not binding.

Smith said that some states already are giving taxpayers the opportunity to request a nonbinding version of a letter ruling.

The second problem is when states issue private letter rulings but the rulings are not made available to the public. That problem, though of concern to taxpayers, is not especially widespread. Approximately 45 states and the District of Columbia offer private letter rulings, and of those about 35 make them available for the public, typically by publishing a redacted version on the department of revenue's website. According to the FTA, many of those states have at least some years of archived letter rulings posted -- and if not, they'll at least list the ones they have issued, which can then be requested. At least one state, Arkansas, makes the rulings available only by Freedom of Information Act request by topic. The district, Georgia, Maine, Mississippi, Nevada, North Carolina, Washington, and Wyoming do not make letter rulings publicly available.

Saviano said that making rulings public is extremely helpful to tax practitioners. "They are an important tool for helping taxpayers understand the risk associated with a particular transaction and helping practitioners know how to guide their clients," he said. Taxpayers are trying to do the right thing, so the ability to use letter rulings as a guide is important, he added.

In states that do not make private letter rulings available to other taxpayers or the public, revenue officials most commonly said they withheld rulings because of the rulings' specificity to the requesting taxpayer. Letter rulings are typically binding only for the taxpayer that requested them, said Saviano. Also, Semes said that in some states, for example Pennsylvania, letter rulings issued regarding an ongoing question may be limited to a specific time period. That is, the letter ruling will be binding for the taxpayer that requested the ruling, but only for a set number of years.

States also cite taxpayer privacy and tax departments' lack of authority to publish rulings as rationales for not making the rulings publicly available. But those concerns could be easily remedied. Georgia, which has cited concerns about publication authority as a reason for not making letter rulings publicly available, is moving toward increasing transparency in this area. A bill, HB 846, has recently been passed by both houses of the Georgia General Assembly and has been sent to the governor.4 It would provide that the commissioner of revenue will publish redacted versions of the private letter rulings the revenue department issues. The information that must be redacted includes the name, address, and other identifying details of the person to whom the ruling was issued.

Although redaction helps with questions about taxpayer privacy, as Smith said, "Taxpayer privacy has to come first -- and you have to be careful that even with redaction that you're not identifying the taxpayer." Petrik suggested that requiring taxpayer approval of the redactions could help alleviate some of those concerns. That could create timing problems if taxpayers don't respond to requests from the state to approve the redactions or if significant changes are needed to the redactions. Petrik said states could condition the issuance of a letter ruling on the taxpayer's acceptance that a redacted version of the ruling will be made publicly available. For example, taxpayers could be given the opportunity to comment on the redactions, but requiring taxpayer approval upfront could speed up the process.

Finally, some practitioners have said that states might not issue letter rulings on a specific issue, such as nexus, and that this creates transparency concerns. Petrik said, however, that it is fair for states to be cautious when issuing rulings that are very fact specific. State tax officials may also hesitate to issue a letter ruling on issues in which the law is developing and the state's present position may be different from the state's future position. Nexus issues may fall into either of those categories. For example, assume a taxpayer is arguing that it does not have nexus in a particular state. If it is difficult for the state, with any degree of confidence, to secure all the relevant facts about the taxpayer's activity in the taxing state, the tax officials may be reluctant to issue a letter ruling, Petrik said.


Transparency covers a wide variety of situations and questions. In the first two articles in this series, we have touched on just a few of those issues. The proper use of and guidance about states' discretionary authority and the ability to access letter rulings are vital to taxpayer compliance, but transparency in the legislative process is equally important. One of the critical issues in the overall transparency debate is whether taxpayers, tax administrators, and the legislature understand what the law is, how it will affect taxpayers, and how it will be enforced. In some areas, such as letter rulings, states appear to be performing well because information is generally available both for the taxpayers requesting the ruling and for the public generally. However, in other areas, particularly when legislation is quickly enacted in quasi-secrecy, there is room for improvement. Tax administration and enforcement is an inherently adversarial process. Both taxpayers and the states benefit when there is an open dialogue and information exchange.


1 Cara Griffith, Amy Hamilton, and Jennifer Carr, "Transparency in State Taxation -- Part 1: Discretionary Authority," State Tax Notes, Apr. 16, 2012, p. 189, Doc 2012-7393, or 2012 STT 73-1.

2 For the op-ed piece, see

3 For HB 386 as approved by the General Assembly, see Doc 2012-5698. For the fiscal note, see Doc 2012-5857.

4 Available at


About Tax Analysts

Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.

For reprint permission or other information, contact