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Qualities of a Fair State Tax Administration Part 1 – Independent Appeals

This is the first in a series of posts about the qualities of a fair state tax administration.  These measurements were used by the Council on State Taxation (COST) to analyze each state’s fairness in administering its taxes.  Their fifth annual report is found here.

The first quality, and perhaps the most telling, is the presence or absence of an independent appeals tribunal.  States who can recognize that there is a potential for error or bias in their tax department determinations and who therefore provide an independent means of review are leagues ahead of their counterparts in terms of fairness.  
The key question is this: Is the appeals system fair, efficient, and independent?  The measurement for this is the presence of independent tribunals, judges with the proper training and experience, and no prepayment of tax required by taxpayers who dispute a ruling.

Independent Tribunals
Is the tax court or tribunal located within the department of revenue or does it report to, directly or indirectly, said department?  The perception of dependence, whether it exists or not, detracts from the work product and the personnel employed in that function, and to a taxpayer fighting a case, that perception can be enough to cause them to think twice about making any significant future investment in that state.  Taxpayers should be granted the ability to discuss their appeals with personnel who are not solely focused on revenue collection or offending their boss who happened to be the one who issued the initial decision.  Independent tribunals are important to your business to give you a fair appeal.  States without such independent means (a little less than half of all states at this point) may not be worth significant additional investment from a tax planning perspective.

Trained and Experienced Judges
There is much frustration to a taxpayer who has to explain a complicated tax issue to a judge who is not familiar with tax law.  Judges who are not tax attorneys and/or lack state tax experience may lean toward the revenue impact of a complex case as opposed to the appropriate tax statute or precedent.  States who hire and adequately train their tax tribunal judges show they are committed to establishing a fair and competitive business environment.

“Pay to Play” States
Since Massachusetts and Hawaii no longer require full payment of the disputed tax in order to contest an assessment, there are fortunately no longer any states that have a full “pay to play” requirement.  However, some states still require partial payment, whether in the form of posting a bond or paying the tax after a first level hearing does not go in their favor.  In the event that the initial hearing is before a body that is not independent of the department of revenue, the perception of unfairness still exists.  This should be a factor in your tax planning process with regards to additional investment in states with unfair tax administrations.


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