Qualities of a Fair State Tax Administration Part 2 – Even-Handed Statute of Limitations and Interes

This is the second 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. 

The qualities discussed in this article are even-handed statutes of limitation for refunds and assessments as well as equal interest rates on refunds and assessments.  States who establish different expiration dates for refunds versus assessments or different interest rates for them are showing an unfair bias against businesses – possibly a consideration when looking to invest in capital expenditures in these states going forward.   It is important to understand these factors when performing a location analysis for tax planning.

Statutes of Limitations
Most states allow for a 3 or 4 year statute or look back period when applying for refunds.  This lets your business address an issue and carry that issue back for refund over the last 3 to 4 years of returns filed based on filing date.  Some states unfairly allow a longer look back period when they are seeking assessments.  In addition, some states have yet a separate statute for reporting federal adjustments.  Lastly, some states also shorten the statute considerably when refund claims involve constitutional challenges rather than merely erroneous reporting.  Michigan is one example of taking unfair advantage with statutes of limitations.  It allows a 4 year statute for refunds, but only 90 days if the refund is based on constitutional challenges.

Interest Rates
Because interest rates are intended to compensate for the lost time-value of money, the rates should apply equally to both the taxpayer and the taxing jurisdiction.  In addition, the date the clock starts ticking is important.  States levy interest from the due date of the return.  Taxpayers should likewise receive interest from the date of the overpayment of tax on an original return and not the date the refund claim was filed.  Another move toward fairness would be for the states to offset refunds and liabilities for the same taxpayer first before calculating interest and penalties due.  If a taxpayer has had a long-standing refund claim pending, then they should not be charged interest on a liability discovered at audit if an equal or greater amount of overpayments have been sitting in the state’s coffers for that same time frame.
Currently, roughly 40% of the states have some difference in interest rates, with the higher interest rate being charged on assessments as opposed to being paid out on refund claims.  Some rates differ by 5% or more, and some states do not issue any interest on sales and use tax refunds.

 
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