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Supreme Court may hear retroactive taxation case

If an Illinois company doing business in Washington State has its way, the Supreme Court may be forced to decide at what point retroactive taxation provisions becomes unenforceable. The case at issue involves an Illinois company, Dot Foods, and its business transactions in Washington.

There could be landmark, precedent-setting value to this case, because similar taxation issues have been seen in states around the country.

Background of the case

For years, Washington's tax laws were structured in such a way as to allow out-of-state companies to avoid paying a certain portion of their taxes via an exemption. In 2010, the legislature closed the loophole and decided to make their amendment retroactive in nature, sending bills to businesses that had previously avoided taxation.

The retroactivity came with no time limit, meaning that businesses were potentially on the hook for taxes due on returns they'd filed years or even a decade or more previously. Dot Foods initially paid the taxes, but then challenged the legitimacy of the retroactive taxation, arguing that the lack of a temporal limit to the enforcement could be seen as a violation of due process and thus unconstitutional.

Initially, Dot Foods was successful in their arguments, with the court finding that the retroactive tax collection scheme was indeed unfair, and refunded the amounts payable for the period during when the exemption that the company had legally taken advantage of was in effect. The Washington Supreme Court, however, disagreed, and found that there was indeed a legitimate purpose for the law, and that there was no mandate for a limitation on retroactivity. The issue has meandered through administrative hearings and the court system for years now, and there is a chance that the nation's highest court might hear the case.

The question before the Supreme Court, should they choose to hear the case, will likely be whether it does indeed violate the equal protection clause of the Constitution to have an indefinitely retroactive taxation regulation. A corollary to that issue is whether a valid, legal reason to collect the tax makes the need for retroactivity limitation moot.

It could easily be argued that not mandating temporal limits on retroactive tax collection creates a slippery slope for any taxing authority experiencing revenue shortfalls or budget woes to close tax loopholes and apply their revisions retroactively. This might have a chilling effect on business, however, as companies could fear taking advantage of otherwise legal and allowable exemptions and credits that could possibly be repealed in the future and lead to a lofty tax bill.

Only time will tell if the SCOTUS is even going to take this case, and, if they do, whether they will in fact decide that time limits are necessary for valid retroactive application of tax collection. In the meantime, if you are dealing with back taxes, audits, tax evasion allegations or other complicated tax problems, don't try to negotiate with taxing authorities alone: contact an experienced local tax attorney for advice and counsel.

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