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December 5, 2012
Measuring Transparency in State Tax Administration

Full Text Published by Tax Analysts®

by Cara Griffith and Jennifer Carr

Cara Griffith and Jennifer Carr are legal editors of State Tax Notes.

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In 2012 State Tax Notes began a transparency project, which has primarily involved looking at areas in which states can do better in providing information to taxpayers and practitioners. Many of the articles focused on state practices regarding publication of private letter rulings or comparable documents. In addition to highlighting various state practices on publication of guidance, these articles often highlighted the adversarial relationship (whether perceived or actual) that sometimes exists between state tax practitioners and state tax system administrators. It can feel as if it is "them" against "us." That is unfortunate because both practitioners and state officials stand to benefit from a more transparent tax system.

This article examines the foundations of a transparent tax system and looks at how transparency can be measured. Also, while acknowledging the challenges states face in implementing transparent practices, we explore how states benefit from improving the transparency of their tax systems. The goal is to open a dialogue on how to best identify and measure transparency in state tax administration. When transparency can be identified and measured, it becomes easier to encourage transparent practices in all states.

Laying the Groundwork for Success

In 2003 the American Institute of Certified Public Accountants issued a report entitled "Guiding Principles for Tax Law Transparency."1 In it, the AICPA explains that transparency is "the basic notion that taxpayers should know . . . (1) that a tax exists; and, (2) how and when the tax is imposed on them and others." The report explains the importance of transparency for taxpayers, tax system administrators, and lawmakers. For tax system administrators, a transparent tax system enables the issuance of timely, comprehensive guidance, and improves enforcement and collection efforts.

The AICPA study sets forth the following six principles to guide states in transparency efforts:

  • Make the promulgation of a good tax system a priority;
  • Implement transparent approaches;
  • Eliminate and avoid phaseouts;
  • Eliminate and avoid interactive provisions;
  • Adopt uniform definitions of terms for all statutory purposes; and
  • Avoid multiple effective dates and sunset dates.

Although those are all principles of good tax policy and would improve transparency to the extent they would make the tax system easier to understand, they are arguably not objective enough to be accurate and predictable measures of a transparent tax system. For example, under the topic of implementing transparent approaches, the study suggests that "lawmakers should thoroughly review tax statutes to identify and eliminate features that systematically obscure the tax base and tax rate." Doing so would have a positive effect on a tax system, and would theoretically lead to a more transparent tax system, but it is difficult (particularly from the outside) to determine where obscurities are in a state's tax system, whether lawmakers are eliminating true obscurities, and whether eliminating those obscurities had a positive effect. Although the AICPA's principles are good guidelines for better tax policy, it is difficult to objectively measure transparency on the basis of them.

But as noted at the outset, objective criteria are needed to further encourage transparency. Also, organizations like the Council On State Taxation have expressed an interest in ranking states on the transparency of their state tax systems, but without an accurate measurement, that is difficult to do. COST puts out scorecards each year that rank state tax administration on topics like filing dates, appeal periods, and statutes of limitations. Doug Lindholm, COST's president and executive director, said the scorecards "measure objective criteria" regarding the administration of various state taxes. The goal of using objective criteria is twofold: They are easily measured so states can be ranked on the basis of the criteria, and they provide state legislatures with things they can change. Transparency could, and arguably should, become a factor on which COST ranks states, but Lindholm noted that it is difficult to develop objective criteria for measuring transparency.

But at least some factors are representative of a transparent tax system and can be measured objectively. After discussions with Lindholm and others, we determined there are at least four criteria on which transparency can be measured. First, transparency can, as Tax Analysts reported, be identified and measured by learning which states make private letter rulings (or similar guidance) publicly available. Jeff Saviano, a partner with Ernst & Young LLP and leader of the firm's Americas Indirect and state and local tax practice, explained the importance of making letter rulings publicly available. "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.

For example, speaking about his practice in Mississippi (a state that does not publish letter rulings), Paul Varner, leader of the tax practice group at Butler, Snow, O'Mara, Stevens and Cannada PLLC, said, "There may be private letter rulings addressing an issue that may be relevant to many taxpayers, but unless you are the taxpayer who requested and received that private letter ruling, you don't know what the department's position is on that issue. It's just not available."2

In Kentucky, another state that does not publish letter rulings, Erica L. Horn, counsel to Stoll Keenon Ogden PLLC, noted that professionals with large tax practices can gain a substantial advantage by acquiring a library of private letter rulings. Although the letter rulings are not binding for other taxpayers, that "treasure trove" is another way a lack of transparency can hurt firms without connections.3

Another measure of transparency, Lindholm said, is whether rulings from an administrative adjudicatory body that regularly hears tax cases are publicly released. Practitioners have expressed particular concern when rulings from those administrative level bodies are not publicly released. For example, the Washington Department of Revenue's Appeals Division is the administrative adjudicatory body that issues opinions on a variety of tax issues. Matters before the Appeals Division are considered by an administrative law judge, who meets with taxpayers and department representatives to develop the case. A non-adversarial hearing is often held. The result is an opinion that has the feel of a court opinion in that it sets forth the facts, lays out the applicable law, and applies the law to the facts. But despite requests from practitioners, department officials have been hesitant to publish more than a handful of those opinions.

A third measure of transparency is the presence of an independent tax tribunal. That is directly related to the above concern about the publication (or lack thereof) of rulings from administrative-level bodies. The reason an independent tax tribunal is important from a transparency standpoint is that decisions by a judicial branch tax court or an independent tax tribunal are not confidential and therefore are, like any other court opinion, readily published.

States are increasingly turning to independent tax tribunals. On August 28 Illinois Gov. Pat Quinn (D) signed into law an act establishing an independent tax tribunal. A majority of states now have either a judicial branch tax court or an administrative-level tax tribunal that is independent of the state's taxing authority. Taxpayers and practitioners have pressed states for those independent decision-making bodies for several reasons, including that the judges or ALJs who write decisions are impartial and knowledgeable in tax issues and that the opinions should more consistently and transparently apply the tax law because they will be published.

A letter to the editor by Washington DOR Commissioner Brad Flaherty in response to the article addressing transparency concerns in his state addresses this matter.4 The letter compares Alabama's independent ALJ system with Washington's in-house ALJ system. Flaherty says:

    The Alabama system uses an independent administrative law judge system in which all decisions are public and either party may appeal to the circuit court. This system is comparable to Washington's Board of Tax Appeals, an independent state agency that publishes all its decisions because they are not confidential. By contrast, most internal department appeals are informal and non-adversarial in nature (only limited revocation proceedings are conducted in a formal process). Full taxpayer confidentiality protections apply to these proceedings. Decisions in these informal appeals are generally appealable to the Board of Tax Appeals or the superior court.

Although Flaherty's letter was written in defense of the Washington system, which houses its administrative-level appeal tribunal within department, the letter highlights why an internal system should be disfavored.

A final gauge by which transparency can be measured is whether a state has an open process for developing rules and regulations. Lindholm said that states should strive for an "open, collaborative regulatory process," in which there are "no surprises" for taxpayers when regulations are adopted. Jamie Yesnowitz, a principal with Grant Thornton LLP, said on November 6 at the fall meeting of the AICPA Tax Division that states should advertise and hold public hearings on proposed new regulations.

California's interested party process is a good example of how states can accomplish that task. In California the Bagley-Keene Open Meeting Act permits all interested persons to attend public meetings of the Franchise Tax Board and comment on regulatory items on the meeting agenda. Steve Wlodychak, a partner with Ernst & Young LLP, spoke favorably about the way in which California enacted Reg. 25136-2, which provides guidance on the application of market-based sourcing. Wlodychak said the FTB actively engaged interested parties, took comments, listened to suggestions, and then produced comprehensive regulations.

Each of those criteria can be measured objectively. A state either does or does not publish letter rulings or administrative-level ALJ rulings. A state either has or does not have an independent tax tribunal. Finally, a state either has or does not have a means by which taxpayers are involved in the rulemaking process. Although there are likely other criteria, states could be ranked on the basis of those measures.

Benefiting From Success

It is easy when talking about transparency to simply assume that states, like taxpayers, will benefit from transparency in the administration of state taxes. However, many state officials do not make that assumption. State officials often seem reluctant to accept that transparency will improve their state's ability to enforce and collect its taxes.

Verenda Smith, assistant director and senior manager - administration & policy at the Federation of Tax Administrators, said states have nothing to fear. "It's all about voluntary compliance," Smith said, and "the foundation of voluntary compliance is information." Smith added that it's in a state's best interest to make as much easily accessible information as possible available to taxpayers because it cuts down the number of pre- and post-filing contacts the taxpayer needs to make with the taxing authority, which greatly improves efficiency.

Also, states are constantly in competition with one another. They want their tax system to be fairer and more efficient than neighboring states' in the hope that taxpayers will be enticed to use their tax system over a neighboring state's tax system. That is an underlying reason state legislatures cite for needing an independent tax tribunal. The Georgia Chamber of Commerce, in support of HB 100, which established an independent tax tribunal in Georgia, cited increased public confidence in the tax system, which would make Georgia more competitive with other states.5

Tax transparency is also an important component of connecting taxpayers with the government. Smith noted that what states were asking taxpayers to do is hard -- they are being asked to turn over to the state what is often a considerable amount of money. Not only do states have an obligation to have a fair system, but they also make compliance a little less difficult if taxpayers believe they are being treated similarly to all other taxpayers. Organizations in developing countries routinely stress tax transparency as an important factor in advancing economic development and civic participation.6 Obviously states do not have the same sorts of transparency and fairness problems as those plaguing many developing countries, but the basic principle remains the same -- it is easier to get people to buy into the system when they understand how it works and believe they are being treated fairly.

Roadblocks for States

Although transparency is helpful to state taxing authorities and is a goal states should strive toward, creating a transparent system may present states with challenges. As noted above, transparency benefits states. But proof supporting that concept is difficult to come by. The first problem is that changes in transparency are often incremental. States tend not to dramatically move from an insular approach to wide open information access. Also, it's not just a matter of increasing the amount of information that is made publicly available; the information has to be accurate and organized, which takes time. As a result, the change is likely to be incremental and the benefits barely perceptible.

States may hesitate to make the initial investment in a transparent system if the efficiency payoff is difficult to measure. Ideally, there would be identifiable situations in which a state changed its transparency approach and the corresponding result was an increase in revenue with decreased collection costs. Unfortunately, those tidy situations are unlikely to exist. And a transparent tax system (particularly if it requires significant changes to a state's current system) can be an expensive proposition. Smith noted that those changes require a great many "sophisticated resources." Even though it will likely pay off in the long term, the initial investment for states to make additional information and guidance publicly available can require revenue states rarely have available.

Ensuring taxpayer confidentiality is often cited by states as a roadblock to making information publicly available. Most states have statutes that require taxpayer information to be kept confidential. In order to publicly release documents that contain taxpayer information, states must redact the information. Although that task seems fairly easy because of software redaction tools, it may not always be that simple. Smith noted that there are times when state tax officials may withhold documents, such as revenue rulings, on the grounds that it is impossible to mask the taxpayer's identity or the situation is so unique as to be potentially inapplicable to other taxpayers.

Finally, Smith noted that even collecting anecdotal evidence about the benefits of more transparent practices is difficult because taxpayers and practitioners are less likely to speak up if they find the information they need easily and efficiently or when the process runs smoothly. That is what individuals and companies expect. Lindholm expressed a similar sentiment from the taxpayers' and practitioners' perspective. He said transparency is difficult to measure and it is easier to know when a state does not have a transparent tax system than when it does. Taxpayers don't call when things are going well; however, the opposite is not true. "You know when you make a mistake," Smith said, "because you get a lot of calls."


Transparency in state tax administration is beneficial for taxpayers and states. The largest benefit for taxpayers is increased certainty. For states, the more informed taxpayers are on how a state will respond to a specific position, the fewer questions they will get regarding that position and the fewer audits they will have to do to enforce the position. Transparency puts taxpayers in a better position to voluntarily comply with the law. Yet despite those benefits, many states are still hesitant to increase the transparency of their tax systems.

Perhaps the problem is the budgetary pressure that is placed on state auditors or a history of distrusting taxpayers. Taxpayers' sense that there is a culture of nontransparent practices is a driving force behind the desire to measure the transparency of state tax systems. If transparency can be measured, states can be ranked against one another. Once they are ranked, the natural sense of competition among the states can be used to encourage those states that do not have transparent tax systems to increase the level of openness.

Still, it is difficult to measure the transparency of a state's tax system. Improving transparency may involve changes that are behind the scenes or are not widely publicized. But to be most effective for purposes of ranking, measures of transparency must be objective. That is, the measures must be easily identified through research and they must be attainable by all states. This article identifies four measures: publication of letter rulings, publication of administrative-level opinions, presence of an independent tax tribunal, and an informed process for developing rules. We hope this article will open a dialogue to discuss those measures and identify others.


1 The report is available at

2 For more on transparency in Mississippi, see Amy Hamilton, "Mississippi Transparency: Advisers Seek Body of Published Private Letter Rulings," State Tax Notes, Oct. 8, 2012, p. 83, Doc 2012-20075, or 2012 STT 195-25.

3 For more on transparency in Kentucky, see Jennifer Carr, "Informal and Invisible Guidance in Kentucky Creates Transparency Issues," State Tax Notes, July 30, 2012, p. 303, Doc 2012-15044, or 2012 STT 146-1.

4 For the letter, see Doc 2012-13690 or 2012 STT 127-10.

5 See, e.g.,

6 Council of Europe, Parlimentary Assembly. "Promoting an Appropriate Policy on Tax Havens, Draft Report" (Apr. 5, 2012). "Sound tax systems are the cornerstone of public finances: they underpin democratic governance, State authority, macroeconomic stability and social cohesion."


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