Connecting the Dot: Retroactive State Tax Statutes Revisit United States v. Carlton

Abstract

This article evaluates recent state cases upholding a retroactive amendment of a tax statute that reversed a judicial interpretation of the predecessor statute. Practitioners have criticized these cases because the seeming length of the statute’s retroactivity has typically been lengthy. The practitioners’ claim has been that the amendments violate the test for due process that applies to a retroactive tax statute, as stated in the Supreme Court case, United States v. Carlton, 512 U.S. 26 (1994). Since Carlton evaluated different circumstances, practitioners also urge that Carlton should be reconsidered.

This article focuses on Dot Foods, Inc. v. Dep’t of Revenue, 372 P.3d 747 (Wash. 2016), cert. denied, 137 S. Ct. 2156 (2017), which upheld retroactive legislation that amended a tax statute dating back 27 years. This article contends that Carlton appropriately addresses cases like Dot Foods by focusing not on the retroactive tax statute’s formal length of retroactivity but rather on its “actual retroactive effect.” As Dot Foods and the other recent state tax cases reveal, often when a retroactive tax statute reverses a court decision the actual retroactive effect is minimal, despite the formal length of the retroactive period.

Carlton’s premise was that tax and fiscal policy-making is rightfully the province of the legislative process. Dot Foods, like the other recent state tax cases, demonstrates that this premise would be undermined if a legislature was generally restricted from correcting a costly, questionable judicial decision. This concern is of especial relevance in the state tax context because the states grapple with balanced budget requirements.

Keywords: state tax, federal tax, due process, retroactive, Carlton, Dot Foods, Welch v. Henry, Multistate Tax Compact, Caprio, separation of powers

JEL Classification: H25, H26, H71, K34