Tax cases in Tennessee often get decided on whether a deduction is properly claimed, whether an exemption applies and whether nexus exists over an out-of-state taxpayer. Those substantive tax issues are often out of the taxpayer’s control, and it is just a matter of how the tax law applies to the taxpayer's facts and circumstances. Sometimes we win, and sometimes we lose and maybe we can change a structure or transaction through planning such that the tax does not apply. BUT its procedural cases that are often the ones that are the hardest to swallow.
In procedural cases, typically involving a statute of limitation, the issue is not whether the taxpayer is taxable or not as a matter of substantive tax law. In fact, my experience is that the taxpayer in these types of cases is usually right and shouldn't have to pay the tax, except for some minor detail ... Before getting to the point of proving their right to a refund or the abatement of assessment, there is a procedural foot-fault that the Department of Revenue or local taxing authority latches onto as a basis for why the state gets to keep the money. Common examples of this are:
1. Was exemption paperwork obtained from the purchaser;
2. Did the taxpayer file an application for exemption or tax election form;
3. Was a refund request timely filed;
4. Was a challenge to a proposed assessment requested before the 90-day deadline; or
5. Was a lawsuit timely filed.
Based on the Tennessee Supreme Court's recent holding in Chuck's Package Store et al. v. City of Morristown, you can add another potential procedural foot-fault to the list, paying local taxes under protest, and this is one that is a little under-the-radar so taxpayers’ must be careful.
In Chuck’s Package Store, at issue was an inspection fee paid to municipalities pursuant to Tenn. Code Ann. § 67-3-502 on the wholesale price of alcoholic beverages sold in the municipality. Let’s set aside the fact for a moment that this was a “fee” and not a “tax” under the statute, but we will come back to that. See Practice Point #1.
Tennessee law provides that the procedure applicable to state taxes administered by the Commissioner of Revenue is set forth in Tenn. Code Ann. § 67-1-1801 et seq., and these statutes establish refund and assessment procedures for all taxes administered by the Commissioner, including franchise/excise tax, sales tax, business tax, liquor-by-the-drink taxes and various other state-level taxes. Notably two local taxes (the local sales tax and the business tax) are administered by the Commissioner of Revenue despite being local taxes, so the State’s procedural rules apply to those taxes as well.
There remains a myriad of other taxes that are administered by local taxing authorities such as property taxes, hotel occupancy taxes, and various privilege taxes such as taxi cabs and whitewater rafting. For those taxes, Tenn. Code Ann. § 67-1-901 et seq. establishes certain procedures on how a challenge to these local taxes should be pursued and generally requires that a taxpayer pay the taxes “under protest.”
There is some additional history here that is relevant to this issue because before passage of Tenn. Code Ann. § 67-1-1801 et seq. (what is known as the Wilder Bill in Tennessee for former Lt. Governor John Wilder) all taxes were required to be paid under protest. When the new assessment and refund procedures were adopted in 1986 as part of a tax procedure overhaul in Tennessee, the new provisions only applied to taxes administered by the Commissioner of Revenue, leaving Tenn. Code Ann. § 67-1-901 et seq. applicable to locally-administered taxes, thus requiring a payment under protest for those taxes. This rarely comes up but can still be an issue for certain challenges of property taxes and more likely in the improper application of hotel occupancy taxes (note to the Air BNB folks of the world).
Albeit rare, Chuck’s Package Store was litigated because Chuck decided that the wholesale alcoholic beverage fees paid in Morristown, Tennessee were excessive under the authorizing statute, so he and others sought a refund of the fees paid. The locals responded arguing that the fee was not paid under protest, so they had no authority or obligation to refund the amounts paid regardless of whether the amounts collected and paid were in error. The Trial Court and Court of Appeals agreed with Chuck, but the Tennessee Supreme Court accepted review and reversed, concluding that the fees had to be paid under protest before a refund would be proper, relying on Tenn. Code Ann. §67-1-901 and § 67-1-1807. Based on this finding, the Tennessee Supreme Court did not address the substantive issue of whether the fee was proper or not.
Practice Point #1: The fact that the payment was a “fee” and not a tax apparently does not change the payment under protest requirement. The issue was not raised by the Court or the parties likely because Tenn. Code Ann. § 67-1-901 applies the payment-under-protest requirements to the “collection of revenue due to the state,” so the distinction between a fee and tax is irrelevant to the inquiry. This is noteworthy because this holding has potential application outside the scope of taxes and could apply to any payments made to the state or a local government that are not administered by the Commissioner of Revenue. If there are any such amounts the validity of which are at all in question, payments should be made under protest pursuant to the provisions of Tenn. Code Ann. § 67-1-901 et seq.
Practice Point #2: If this were a state tax in Tennessee, no payment under protest requirement exists, there only needs to be a refund request.
Practice Point #3: Call your Legislator! Mobilize Government Relations Teams! When the Wilder Bill was originally passed, the legislative history was clear that it was only intended to apply to state-level taxes. The Tennessee Supreme Court notes this in a footnote seemingly issuing an invitation for the Legislature to consider this result and whether the Wilder Bill should be extended to local revenues. If history has shown us anything in the Legislature it’s that when you start messing with local revenue, you get the attention of a whole lot of local politicians, so while this is clearly an alternative that should be considered, it is much easier said than done to enact such a change.
Practice Point #4 (Multistate): While this is a Tennessee case, it highlights an issue that could be lurking in other states where the administration of local revenue differs from the administration of state revenues. Before making any disputed payment to a state or local government, businesses should analyze whether there are an procedural requirements that dictate the nature in which the payment should be made and what additional procedural requirements may exist to seek a refund of such amounts. Knowing that on the front end could save taxpayers a lot of heartache.
Like many procedural disputes, Chuck may have been out of luck for the previous payments that he made, but he can fix this issue going forward by paying only the amount he believes is correct, and to the extent that he is still making a payment that is disputed, I’m certain there will be an “UNDER PROTEST” notation prominently included on the check.
We hope you have learned something from Chuck.