Take a Pass on the Pass-On Defense

6 Pages Posted: 23 Feb 2013

See all articles by Alan D. Viard

Alan D. Viard

American Enterprise Institute

Date Written: January 17, 2011

Abstract

When confronted with large refund claims by businesses that have paid unconstitutional or otherwise illegal taxes, state governments sometimes invoke a pass-on defense, arguing that businesses have passed on at least part of the tax to consumers in the form of higher prices and should not receive refunds for the amounts passed on. The argument for the pass-on defense seems straightforward: Granting a business a full refund of taxes that it has passed on to consumers is a form of unjust enrichment. To be sure, the appeal of the argument is undermined by the failure of most states that invoke the defense to offer refunds to the consumers who are said to be the real injured parties. After denying refunds to businesses, states generally propose to simply retain the unlawfully obtained funds.

In any event, the argument for the pass-on defense suffers from a fundamental flaw. If the tax is passed on to consumers, the refund is also passed on to them (in expected value). As a result, denying the defense does not result in unjust enrichment. Moreover, allowing the defense harms consumers as well as producers. Drawing on a recent survey of this issue by Jacob Nussim and my own past writing, in this article I elaborate on those economic flaws.

Suggested Citation

Viard, Alan D., Take a Pass on the Pass-On Defense (January 17, 2011). State Tax Notes, Vol. 59, No. 3, 2011, Available at SSRN: https://ssrn.com/abstract=2221906

Alan D. Viard (Contact Author)

American Enterprise Institute ( email )

1150 17th Street, N.W.
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United States
(202) 419-5202 (Phone)
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