This blog was last updated on August 5, 2024
Considering the Impact of the Loper decision.
A few days prior to announcing the much-publicized decision in Trump v. United States, the Supreme Court overturned 40 years of precedent through their holding in Loper Bright Enterprises v. Raimondo. This decision substantially changes the relative power balance between federal administrative agencies and courts of law. Although the facts are squarely limited to federal statutes and federal agencies, the decision is likely to have significant implications at the state level. In this article, we will discuss what the Loper decision means and how it could ultimately impact sales and use tax compliance on both a big-picture and micro-determination level within the world of sales tax.
A Short Primer on Separation of Powers and Administrative Law
To fully understand the impact of Loper in the world of sales tax, we need to spend a moment reviewing a basic principal of the US Government that we all learned in middle school or Schoolhouse Rock, known as “separation of powers.” By way of a refresher, our legislative branch of government (e.g., Congress) is responsible for creating/drafting the law, while the executive branch (e.g., the President) is responsible for enforcing the law, and the judiciary (e.g. Federal Courts) interprets the law. This same separation applies in every state of the union with the Governor, state Legislatures, and State Courts, respectively.
As the world grew in complexity, the Executive branch empowered administrative agencies to enforce specific sets of laws. The first agency, the Interstate Commerce Commission was created in 1887 but starting with the New Deal and continuing to present day, the government has empowered scores of federal agencies including the EPA, the FDA, and everyone’s favorite, the IRS. These agencies are tasked with enforcing the law, a job consistent with the executive branch. Since administrative agencies are created through Congress via legislation, they are also often authorized to adopt regulations that have the same force as statutory law. Further, since administrative agencies sit apart from elected political officials, they can develop and retain subject matter expertise within their defined set of responsibilities, theoretically enabling them to draft more thoughtful rules and requirements.
Administrative Agencies and Statutory Interpretation
From a practical perspective, agencies interpret statutes all the time in performing their enforcement and rulemaking function. Anybody who reads the law for a living knows that statutes are sometimes vague, ambiguous, and do not address every contingency. After reading a statute, even the most experienced lawyer may not be able to discern the clear intent of the legislature, and that’s a problem. Those who favor an expanded role for administrative agencies argue that they, unlike judges, have the technical expertise to determine how the law is best applied. As such, their interpretation should be afforded substantial deference even though the job of legal interpretation rests with the judiciary under our separation of powers doctrine.
The Supreme Court articulated exactly how much deference should be afforded in the landmark case of Chevron USA v. NRDC. Decided in 1984, the Court established a 2-part test in determining how federal courts should treat agency interpretations of law.
- Did Congress directly speak to this precise question in the statute? If Congressional intent on the matter is clear, then there is no room for a contrary agency interpretation.
- If the statute is silent or ambiguous, the court must defer to the agency’s interpretation so long as it’s based on a permissible construction of the statute.
Stated another way, if an administrative agency makes a “reasonable” interpretation of a statute, the court must give that interpretation deference, even if the court would, if acting on their own, interpret the language differently. This standard has come to be known as “Chevron Deference” and it’s been the law of the land since 1984.
What did the Court do in Loper?
The Court said that the holding in the Chevron case was both unconstitutional and in violation of the Administrative Procedure Act of 1946. As to constitutionality, the Court harkened back to Article III of the Constitution which assigns to the Federal Judiciary the power to adjudicate “cases” and “controversies.” Further, in the Federalist Papers, founders Madison and Hamilton stated that no matter how well laws may be crafted, their interpretation and meaning would sometimes need to be settled by the judiciary, whose judgment would be exercised free of the influence of the political branches. This doctrine was articulated with absolute clarity in the seminal case of Marbury v. Madison in which Chief Justice Marshall declared “it is emphatically the province and duty of the judicial department to say what the law is.”
According to the Court, judicial authority to interpret the law was memorialized in the Administrative Procedure Act which specifies, in Section 706 that “to the extent necessary…the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” It further requires that courts “hold unlawful and set aside agency action, findings, and conclusions found to be……not in accordance with the law.”
Instead of deferring to any reasonable legal interpretation by an administrative agency, federal courts are now instructed to exercise their independent judgement in deciding whether an agency has acted within its statutory authority. These courts need not ignore agency interpretations. Rather, they should give them due respect, especially when the interpretation is issued contemporaneously with the enactment of the statute and when the interpretation remained consistent over time. Respect, however, is different from deference. A court can “respect” something an administrative agency has said and done, but then choose to disregard it completely.
What Does this Mean for State Law?
Every case and citation above relate entirely to the US Constitution and Federal law. States, however, have identical branches of government and state executive branches have likewise empowered administrative agencies to enforce the laws and make the rules. Those of us who work in the sales tax space routinely review regulations, rulings, and other publications issued by state Departments of Revenue as a means of gleaning greater insight and understanding as to the meaning of vague and confusing statutory language.
This topic has not been discussed expansively, but commentators believe that the holding in Loper will impact how state courts review the interpretations of state and local tax authorities. Many states adopted language similar to the federal Administrative Procedure Act cited by the Supreme Court have also cited to the Chevron ruling in holding that state courts must defer to administrative interpretations of law.
Even though it’s only been a short while since the Loper decision, Law360 already found an state court case where the taxpayer noted the downfall of Chevron deference in arguing that a regulation is inconsistent with state statute. We can fully expect to see more such arguments in the weeks, months, and years ahead.
In the longer term, its possible that legislators will feel compelled to be more precise and comprehensive in their legislative drafting, knowing that unnecessarily vague laws are even more likely to clog the legal system with unnecessary litigation. Don’t expect state legislators to become deep subject matters overnight. More likely is that they will coordinate more closely with state administrative agencies during the bill writing process.
What does this all mean for Taxpayers in the World of Sales Tax?
Without question, some taxpayers will see great benefit in an expanded opportunity to challenge adverse administrative rulings and decisions. It’s tough for a taxpayer to argue that a ruling or regulation represents an unreasonable interpretation of the law, and much easier to suggest that an interpretation is inconsistent with what the drafters intended. The proponents of Loper would further argue that judges are far more skilled and experienced in interpreting statutory language and are best equipped to discern the true meaning of the words written by the legislature.
This does not necessarily mean that taxpayers who feel aggrieved by earlier state court decisions decided based on Chevron-like deference can immediately re-file their cases. The Supreme Court, in their decision, was careful to say that this holding does not “call into question prior cases that relied on the Chevron framework.” Rather, the holdings in those cases that specific agency actions were lawful remain good law based on the principle of “statutory stare decisis,” a legal term that would require its own article to explain in full.
There are commentors who believe that that an agencies like Departments of Revenue, knowing that they no longer have an effective stranglehold on statutory interpretation, may be more inclined to accept a taxpayers’ favorable interpretation of a statute in an audit, even if it differs from their published guidance. At the very least, the agency may be more inclined towards a negotiated audit settlement. They may also be a little less expansive and more judicious in their legal interpretations and more closely hold to the strict “letter of the law.”
For sure, the downstream impact of Loper to state law represents a minor boon to individuals in the business of arguing the fine-line legal points of tax law in audits, administrative hearings, or before judges.
From a practical perspective, those of us in the world of sales tax value the certainty of a clear and well-articulated DOR regulation. It often does not even matter what the rule is. What matters more is that the those impacted understand the rule, and they can apply it consistently, such that it is easily supported through automated compliance solutions. A company comfortable in the knowledge that they are applying tax correctly can minimize the finical reserves set aside for future liability and focus their energies on growing their business or expanding into new markets. In a post Chevron world, where taxpayers have expanded their abilities to challenge DOR interpretations of law, a little certainty is lost. While sales tax compliance experts already monitor state court cases as part of standard practice, they must now pay even more attention to the judicial process.
There may also be reason to be concerned about expanded Qui Tam actions. In some states, individual parties are empowered to bring actions under state False Claims Act statues, empowering them to sue businesses for “knowingly” or “recklessly” making a false claim to a state entity. The theory is that individuals can serve as a “private attorney general” and in so doing, aid the state in ensuring compliance. In the sales tax space, for example, several years ago, a team of lawyers sued several retailers, alleging they had failed to properly apply sales tax to shipping and delivery charges. They even sued a handful of sellers that had recently been audited by the DOR, where the DOR had no problem with their decision to not tax freight. Admittedly, it be challenging for a false claim litigant to demonstrate knowing or reckless misconduct when a taxpayer relies on an interpretation of law published in the form of a written rule or regulation but given the possibility of a judicial award that includes a trebling of actual damages, people could surely try.
Concluding Thoughts
Vagaries in the world of sales tax are nothing new and in a post-Chevron world, taxpayers and practitioners will likely be giving up some of their existing clarity and exchanging it for greater opportunity to challenge an administrative authority whether in the courts or across the table during an audit. Whether this represents a substantial shift, or a minor blip remains to be seen. One thing is for certain, the path to sales tax compliance is a challenging one.
