After nearly 100 years manufacturing signs, Greg Stuart was shocked to learn that his company, Vancouver Sign Group, was not legally a manufacturer – At least as far as the Washington State Department of Revenue was concerned.
The distinction seems small: The agency said the fact that the company installs some of the signs they manufacture disqualifies them from a manufacturing sales tax exemption. The difference could cost Vancouver Sign roughly $40,000 in back taxes, plus any future sales tax assessments on equipment purchased.
“This is not right,” Stuart said, of the decision against his Vancouver, Wash.-based company.
Stuart is just one of many business owners who face audits each year by the Department of Revenue. He is also one of many who feels the rules have been rewritten – without transparency – to capture more revenue from small business owners like himself. It’s left Stuart with few options.
“This company has been in the state of Washington since 1923,” Stuart said. “And now my state government is telling me I’m not a manufacturer.”
Some state lawmakers are mounting an effort to address the issue. Sen. John Braun, R-Centralia, is hosting a hearing Friday morning in his Trade and Economic Development Committee on setting up an independent tax tribunal. While the tribunal carries a price tag, Braun said he hopes it will be among the various tax reform proposals the Legislature considers in the upcoming session.
CRITICISM FROM WITHIN
When Administrative Law Judge Dave Dressel retired from the Washington state Department of Revenue (DOR) in 2012, he couldn’t part without a few biting criticisms.
In an email sent to colleagues with the subject line, “Adios!” the long-time attorney and agency employee described a painful and unfair tax appeals process that many businesses across the state have experienced firsthand.
“Appeals management needs to lose its rubber stamp-whatever-the-operating-division-does mentality,” Dressel wrote, in an email obtained by the Washington State Wire. “Appealing taxpayers, except in a few slam-dunk cases, don’t stand a snowball’s chance in you-know-where. The current structure is an affront to due process.”
David Dressel
Dressel isn’t alone in that sentiment, but it’s difficult to persuade people to talk on the record about what has been described as a lack of transparency and internal, secretive, policy-making. The problems have affected people across the state, and any business owner could find themselves subject to an audit – and the DOR’s internal appeals process – at any time.
But Gil Brewer, the DOR’s senior director of tax policy, said it’s important to note that the process isn’t intended to be independent, but a chance for the taxpayer to ask the agency to review a decision that’s been made. Any final decision should be consistent with agency policy, he said.
“We want the department to be able to speak with one voice,” Brewer explained
In addition to the “rubber stamp” approach Dressel describes, the DOR has been criticized for making decisions on appeals cases using nonpublic documents that have allowed the agency to make new policy without going through a typical public rule-making process.
Those documents, produced as part of the agency’s Tax Advice Request System (TARS), contain private taxpayer information that can’t be handed out to the public, Brewer said. But he said any relevant information contained in a TARS would be included in the decision produced for the taxpayer.
“People think there’s something in TARS that I really don’t think there is,” he said.
Brewer, who established the TARS as a tracking system for the agency’s work in 2010, acknowledged that the TARS can sometimes result in policy making, but said that isn’t the whole story.
Gil Brewer
“To some extent, yes, we make individual policy,” Brewer said. “But then we take that back to the rule writers and we say, ‘do we need to change something? Do we need to add some nuance? Do we need to change our policy outright?’”
Without seeing those TARS documents, many people fighting a tax claim argue they don’t have access to all of the information the DOR is using to make a decision on their case. Attorneys and accountants who have helped clients fight tax liens say the process puts the taxpayer at a significant disadvantage.
According to DOR, for appeals worth $25,000 or more, only 3 percent were successful so far in 2014. During the same period 68 percent were denied outright, 15 percent were settled, 12 percent were adjusted and the final 3 percent were remanded.
APPEALS THAT DON’T PRETEND TO BE INDEPENDENT
The DOR has three routes for appeals, but the most commonly pursued is called Rule 100.
The DOR explains that Rule 100 proceedings aren’t supposed to be independent, and that it’s provided as a more convenient, affordable and unofficial way for taxpayers to appeal an agency decision. It’s also the only way to do so without having to pay taxes up front, or to avoid compounding interest and being sent to collections.
Now, questions are being raised about whether a non-independent appeals process is the best solution for Washington taxpayers.
“An appeals process should afford both parties a fair chance,” Dressel wrote in his parting email. “The odds, presently, are (stacked) so heavily against a taxpayer, why even have one?”
DOR officials say the Rule 100 proceedings are a more convenient and low-cost option for taxpayers, and if they don’t want to use the non-independent option they can pursue other means. But not everyone can afford to pay their tax liens upfront in order to fight the Department of Revenue.
CHALLENGING THE SYSTEM
During the 2013 legislative session, Sen. Braun introduced legislation that would have created an independent tax tribunal that would take on the powers and duties currently held by the state board of tax appeals.
The bill went nowhere, which Braun said was a result of the costs associated with it; fiscal staff estimated it would cost state tax coffers $105 million over a two-year biennium.
But after a public dispute over judicial independence at the Office of the Insurance Commissioner (OIC) this year where the state ended up paying $450,000 to settle the case, more lawmakers are taking a look at the issue within individual agencies.
“I think there is definitely momentum building to have some reforms in that area (of independence in agency appeals),” said Sen. Mike Padden, R-Spokane. “I think we need to focus as broadly as possible on all agencies, not just on one.”
Braun agreed, saying he believes his new proposal will be of lower cost than last session’s.
“They really were a starting point,” Braun said. “In the short session it wasn’t exceptionally likely to get something accomplished. Some of the ideas would have created too much expense. It provides a path to appeals that is much shorter and much clearer than the current one.”
State Auditor Troy Kelly declined to investigate the OIC case involving a whistleblower judge accusing the agency of interfering with her decisions on appeals. Later it was discovered the judge leaked her own whistleblower document, which ultimately distracted from the issue of judicial independence in agency appeals.
But earlier this year, in an editorial in the Spokesman Review, Kelly said he believes a “larger, system review” of in-house administrative law judges is warranted. He raises the question of whether these administrative law judges can be independent when ruling on appeals against the agencies that employs them.
Kelly’s new interest in this issue has the potential to apply to the DOR, even though it’s informal appeal process was never intended to be independent in the first place. It may be the first time a public official challenges an agency appeals processes that patently lacks independence.
THE SAME RULES DON’T APPLY TO ALL TAXPAYERS
The DOR doesn’t publish most of its decisions, even though they can be used as precedence in the cases of other taxpayers. DOR officials explain that not all decisions can be “sanitized” – or redacted to a degree guaranteed to provide anonymity to the taxpayer involved.
The agency is trying to improve on this front. Previously it published as few as five decisions a year, but it’s been increasing that in recent years and it now has the goal of releasing up to 60 published decisions annually.
Brewer, of the DOR, said publishing all of the decisions would result in unnecessary, duplicative information flooding the system and confusing tax payers.
“Ideally you would have everything done in a public process and get input and reach a decision and we certainly try to do that, but that requires us to anticipate any possible factual variation. We’ll never (be able to) do that.”
Instead, Brewer said they work to make the most significant decisions available; the ones that would truly affect many tax payers or set a precedent for the future.
But he said the cost of redacting all taxpayer information from each decision and making it public would be costly and not worth the final outcome.
But in the meantime, without many of the new tax determinations being made public, other companies like Stuart’s Vancouver Sign won’t be subject to the same tax policy (in that case, being recategorized as something other than a manufacturer) until they are audited and fined for the same unreleased interpretation of the rules.That doesn’t mean they won’t also be subject to paying back taxes once the DOR finds them.
One of the most frustrating things to Stuart is that when he petitioned for another review of the outcome, the agency told him he could appeal back to the same administrative law judge who made the initial decision.
“We’re a business that’s not getting a fair deal.” Stuart said. “We’ve appealed and it goes back to the person that has already adjudicated the case. We don’t get someone else’s viewpoint? I don’t think that’s a level playing field.”
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