Tax regulations

Ruling sparks future legal battle over tax regulations

A corporate lobby group challenging the tax relief guidelines it obtained from the state Department of Revenue (DOR) will be able to argue its case in court, the Wisconsin Supreme Court ruled Thursday.

The decision is largely technical. But that opens the door to a larger challenge: whether the revenue department’s advice on a hypothetical issue should be subject to the formal process of administrative regulation of state law.

Thursday’s decision does not answer that question; it simply focuses on where the topic will be debated. The seven justices concluded that it will be up to the court system to decide whether advice requires rulemaking, not the Tax Appeal Commission, an administrative agency of the DOR.

Lawyers inside and outside the Revenue Department will be monitoring the following. If the case continues, which is not certain, it could have significant implications for how state agencies react when asked how they might interpret the regulations.

In 2018, Wisconsin Manufacturers & Commerce (WMC) staff asked the DOR how it would enforce a new tax exemption that was part of the 2017-19 state budget. The new exemption excludes machinery and equipment not used in manufacturing from a business’s personal property tax. It complements a property tax exemption on manufacturing activities that has existed since the 1970s.

WMC’s investigation focused on a hypothetical example. As they often do, DOR staff assessed the example and responded to the WMC with advice; in this case, they said, the hypothetical example would not qualify for the tax relief.

What happened next came as a surprise to the DOR: WMC sued the Ozaukee County Department. The business lobby argued that the advice provided by the DOR should have been enacted as an administrative rule.

Over the past decade, the state legislature has made the process of making administrative rules more complex. It often takes more than a year and elements of a rule are vetoed by a legislative committee. Lobby groups such as WMC have challenged state regulators alleging regulatory violations.

State agencies, meanwhile, have historically welcomed “what if” questions about the limits and details of state regulations. It’s standard practice in some areas of regulation, and it allows regulators to be transparent, says Colin Roth, a former Wisconsin Department of Justice attorney who is now a partner at Stafford Rosenbaum’s Madison firm.

“When people ask these kinds of hypothetical questions, whether they’re about taxation or environmental regulations, the agency [personnel] want to be helpful,” says Roth. “They want to share their views so people know what to expect in terms of regulations.”

The circuit court dismissed the lawsuit without ruling on the key issue. Instead, the trial court said the WMC’s request should go through the Tax Appeals Commission, the first stop to challenge the DOR’s administration of state tax laws. An appeals court upheld the circuit court’s dismissal.

Thursday’s Wisconsin Supreme Court ruling, however, overruled lower court rulings and ordered the circuit court to take the case instead of adjourning it.

Judge Brian Hagedorn wrote in the majority opinion that determining whether the DOR’s guidance was rule-making was “a pure question of law” and therefore “a question properly addressed to the expertise of the court”. Hagedorn was joined by judges Ann Walsh Bradley, Rebecca Dallet and Jill Karofsky.

In a concurring opinion, Justices Patience Roggensack and Rebecca Bradley sided with WMC, which had argued that the tax commission had no jurisdiction over the regulatory issue. Their agreement faulted the majority for not reaching this conclusion.

In a separate agreement, Chief Justice Annette Zeigler said the majority opinion should have simply recognized that WMC could not take its claim to the tax commission because it was not appealing an actual assessment. “There is only one jurisdiction for WMC to bring a complaint: the courts,” she wrote.

Zeigler disagreed with Roggensack’s opinion because she did not want to prevent someone with a tax appeal from using a regulatory argument in their case before the appeal board.

Thursday’s decision does not decide whether the DOR guidelines require administrative regulation. But if that claim gains traction, Roth says, “You’re creating this incentive so the agency won’t say anything at all.”

The result could be less candor from regulators. “Lawsuits arguing that departmental guidance should only be issued through rulemaking will certainly create a ‘chilling’ effect on how the department responds to requests for advice from an individual and/or ‘organizations,” said Patty Mayers, director of communications for the DOR.

As the case returns to circuit court, events have moved beyond WMC’s hypothetical claim. The Tax Appeal Commission has ruled on at least one interpretation of the non-manufacturing machinery tax relief, and that decision is currently pending in the Dane County Circuit Court.

Mayers said the DOR will follow up on the hypothetical case with the plaintiffs “on how to proceed” with the Supreme Court’s order returning the case to the circuit court.

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