Navigating the state and federal tax codes is hard enough for taxpayers as policymakers load them up with ever-more-complicated credits, deductions and write-offs that they can take as well as increasingly burdensome requirements that they must follow.
Now imagine what life would be like for taxpayers if guidance on those items was disclosed only selectively to the taxpaying public.
Imagine no more because that, in fact, is reality in Washington state.
Washington is one of a small number of states that doesn’t routinely publish its “private letter rulings” — written communications from state tax officials to taxpayers about how Washington’s tax law applies to a particular situation.
Worse, the state’s Department of Revenue refuses to release the vast majority of its “written determinations” — rulings by administrative law judges in the department’s Appeals Division — which leaves taxpayers with no way to navigate the state’s tax laws with any confidence.
A 2003 report from the American Institute of Certified Public Accountants outlines the harm that insufficient transparency in tax law can produce. The harm includes government’s impaired ability to administer the tax system, taxpayer frustration, and higher costs for taxpayers, advisers and government as they all face the inefficiencies and uncertainties of a less-than-transparent system.
With the state publishing so few determinations, concern is rising that the revenue department may be selectively publishing determinations for its own purposes, possibly generating inconsistencies among specific rulings.
The recent case of Tesoro Refining and Marketing Co. v. Department of Revenue illustrates the confusion that can result from that secrecy.
Tesoro was a Texas-based oil company with an oil refinery in Washington. The company didn’t know that its competitors were taking deductions for taxes arising from the sales of bunker fuel to vessels in interstate commerce. So when it learned from other taxpayers that the state was treating it differently from its competitors, Tesoro filed a refund claim for more than $6.6 million.
The department denied the refund claim, the Court of Appeal overturned that decision, and the state Supreme Court eventually denied the deduction to Tesoro. The high court, however, noted the existence of “contrary agency interpretations” that had been set forth only in unpublished rulings and determinations.
That case and others like it have left practitioners with a general sense that the state has been applying its tax laws inconsistently.
Transparency and consistency are essential to the administration of a fair and balanced tax system, one in which everyone can play by the same rules and the state treats everyone equitably in applying the tax law.
Taxpayers crave certainty above all else. They want to know both what the law is and how to follow it, and they need to be comfortable that taxing authorities are enforcing the law consistently.
When states provide insufficient guidance on how they administer or interpret their tax laws, particularly in situations where there is broad discretionary authority, taxpayers are left without the ability to anticipate the consequences of a specific transaction or position.
Both states and taxpayers benefit when there is open dialogue and information exchange with regard to tax determinations. Washington lawmakers should permit open public access to all letter rulings and tax determinations — a move that will enhance taxpayer compliance and lead to a fairer and more even playing field for all taxpayers.
Christopher E. Bergin is president and publisher of Tax Analysts, the nonprofit publisher of State Tax Notes.