The Hinds County Chancery Court recently ruled that the Mississippi Supreme Court’s widely-discussed decision in Equifax, Inc. v. Mississippi Department of Revenue is a double-edged blade and, much to the Department of Revenue’s chagrin, cuts sharply in both directions. Miss. Dept. of Rev. v. Hotel and Restaurant Supply, Civil Action No. G2013-820 S/2, Hinds County Chancery Court (Nov. 5, 2014).
If it stands, this decision confirms the role of the Board of Tax Appeals (“BTA”) as an independent and substantive agency, and that the Department will be held to the same standard of review in judicial appeals as it imposed on taxpayers in Equifax. Furthermore, because the court cannot simultaneously defer to the conflicting decisions of two separate and independent agencies, it will defer to neither. The holding should go a long way toward leveling the playing field in Mississippi tax appeals.
Governor Phil Bryant signs H.B. 799. Jones Walker SALT Partner John Fletcher stands on the far right. Photograph is courtesy of the Mississippi Economic Council, which was integral in the passage of H.B. 799.
In Equifax, the Department successfully argued that taxpayer appeals to the chancery courts were not actually de novo proceedings as stated in the statute but, rather, were to be decided under the far more restrictive and deferential “arbitrary and capricious” standard of review. Under that limited standard of review, the appealing party must establish that the agency’s decision was unsupported by substantial evidence, was arbitrary or capricious, was beyond the authority of the agency to render, or violated the taxpayer’s statutory or constitutional rights. The Equifax decision was widely panned by taxpayers and practitioners throughout the country, and resulted in major tax legislation earlier this year to reverse that holding and, among numerous reforms, explicitly reinstitute the de novo standard going forward. See H.B. 799, Reg. Sess. 2014 Miss. Legislature.
In the meantime, however, the Department lost a sales tax case before the BTA and appealed the unfavorable decision to the Hinds County Chancery Court. In its pleadings, the Department did not allege any of the grounds for overturning an agency decision as set forth in Equifax. Rather, the Department argued that the courts had to defer to the Department’s decision over that of the BTA in any instance in which the BTA ruled against the Department. Heads the Department wins, tails the taxpayer loses. In essence, the Department’s position would have rendered the BTA wholly irrelevant and, in the Court’s words, “a useless agency incapable of any independent action.”
The Court noted that under the statutes and prior Mississippi Supreme Court decisions, it was required to defer simultaneously to two separate state agencies, an illogical result that could not be reconciled in light of the Legislature’s creation of the BTA as an “independent agency which shall not in any way be subject to the supervision or control of the Department of Revenue.” Language in H.B. 799 passed earlier this year explicitly prohibited the chancery courts from granting any deference to the decisions of the BTA, the Department or the Department’s Board of Review, thereby ensuring that the courts could entertain all issues brought on appeal without anyone’s thumb resting on the scales. Although technically that provision of H.B. 799 does not come into effect until January 1, 2015, the Court took that into consideration in determining the Legislature’s intent in resolving the conflicting deference issue.
While the decision did not apply the de novo standard of review which should apply to future appeals, the holding suggests the courts will not ignore the BTA’s independent holdings and rubberstamp the Department’s position in all cases they lose at the BTA. Until the reforms of H.B. 799 come into effect fully, all parties must be wary of Equifax and the profound changes it mandates to appeals of BTA decisions by both taxpayers and the Department.
Update: On November 26, 2014, the Department filed a Notice of Appeal with the Mississippi Court of Appeals in Jackson, Mississippi.
