By Valerie H. Sasaki
Miller Nash LLP,
Oregon and Washington Law Firm
One of the hallmarks of good tax policy is predictability in administration. Practically speaking, a taxpayer should be able to rely on the laws in effect when it files its tax return. The Internal Revenue Code adopts this approach in IRC § 7805(b), which prohibits any “temporary, proposed, or final regulation relating to the internal revenue laws [from applying] to a taxable period ending before the earliest of the following dates: (A) the date on which such regulation is filed with the Federal Register. (B) In the case of any final regulation, the date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register. (C) The date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.” There are exceptions for situations in which the IRS is attempting to “prevent abuse” or “retroactively correct a procedural defect in the issuance of any prior regulation.”
Many states have statutes that limit the retroactive application of tax laws to situations in which the legislature has made an informed decision to apply a change in law to prior tax years. Arizona, for example, has a Taxpayer’s Bill of Rights that provides: “Unless expressly authorized by law, the [D]epartment [of Revenue] shall not apply any newly enacted law retroactively or in a manner that will penalize a taxpayer for complying with prior law.” Ariz Rev Stat § 42-2078(A).
Unlike Arizona, Oregon does not have a taxpayer bill of rights. Oregon Administrative Rule (“OAR”) 150-305.100-(B) states: “Administrative rules adopted by the department, unless specified otherwise by statute or by rule, shall be applicable for all periods open to examination.” The Oregon Department of Revenue has repeatedly applied new interpretations of existing laws retroactively to all open years. We saw this most recently in a policy statement on economic nexus that the Department issued in relation to its Tax Amnesty program.
On May 1, 2008, the Oregon Department of Revenue adopted its economic nexus rule (OAR 150-317.010). This rule mirrors one of the new trends that we have seen in other jurisdictions and in several recent cases holding that a state does not violate the U.S. Commerce Clause if it seeks to tax an out-of-state corporation with no physical presence in the state, provided that the company has “substantial nexus” with the taxing state.
Oregon’s tax amnesty program is applicable to all tax years beginning before January 1, 2008. On October 15, 2009, the Oregon Department of Revenue issued a statement that it would be applying the May 2008 economic nexus provisions to years that are open under the amnesty program.
To see how this can create a problematical result, consider the hypothetical of a taxpayer ABC, Inc., that did not file a return in 1992 (the year of Quill Corp. v. North Dakota, 504 US 298) under the theory that it has no physical presence in Oregon. Since it had not filed a tax return, the statute of limitations would remain open for the entire return. The Department could assert that ABC, Inc., should have done so under an economic nexus theory and assess the tax liability, 17 years of interest, substantial understatement penalties, and (after November 19) a 25 percent penalty for failure to participate in the amnesty program.
During the 2009 session, the Oregon legislature passed Senate Bill 498 at the initial request of the Oregon Bankers Association, the Oregon Business Association, and other business groups. As passed, this legislation stated that: “The Department of Revenue may not apply an administrative rule in a manner that requires a change in the treatment of an item of income or expense, a deduction, exclusion, credit or other particular on a report or return filed by a taxpayer if: (1) The taxpayer filed the report or return by the date it was due; and (2) The treatment of the item on the report or return was consistent with an administrative rule adopted and in effect at the time that the report or return was filed.”
Senate Bill 498 represented a significant advancement from the prior law. It is still limited, however, in that it applies only to characterization of items on a tax return. It does not apply to the question whether a taxpayer should file a return or not. So situations in which an auditor is asserting forced combination or substantial nexus are outside he scope of this bill. It also applies only to “administrative rules adopted or amended by the Department of Revenue on or after the effective date of” Senate Bill 498. So our hypothetical ABC, Inc., is still at risk of significant assessment.
The Legislative Subcommittee of the Oregon State Bar’s Taxation Section is working with the Oregon Department of Revenue on an administrative rule (or rules) that will help taxpayers understand how the Department interprets its authority in the post-Senate Bill 498 era. To the extent that Oregon voters consider a taxpayer bill of rights in the future, it may include an expanded version of the parameters we saw in Senate Bill 498.