June 4, 2018

A due process right to a refund

By Deborah J. La Fetra Senior Attorney

If a state illegally taxes you, and you successfully sue to recover the money, does the state have to refund the taxes? Oddly enough, the answer to this question may depend on whether the state’s illegal taxes violated federal law or state law. In McKesson Corp v. Div. of Alcohol, Bev. & Tobacco (1990), the Supreme Court held that the Due Process Clause requires a state to refund money that was collected in violation of the federal constitution or federal laws. Because that case didn’t involve violation of state laws, the Court didn’t say anything about whether the rule applied in that situation. Lower courts are divided on the question. In Nextel Communications v. Pennsylvania, the Pennsylvania Supreme Court held that the state collected about $4 million in taxes from Nextel in violation of that state’s constitution. But when the state complained that repaying the illegally collected taxes would hurt the public treasury, the court refused to grant Nextel a refund. Nextel is now asking the Supreme Court to review the case and PLF filed an amicus brief supporting the effort.

Protecting the state treasury is an objective that serves a state as a whole, and is not properly made the burden of a few taxpayers. Yet, as in this case, the burden in many illegal tax cases of protecting constitutional rights frequently falls upon those few taxpayers who pay the most. Without the ability to regain their property (money) that was wrongly taken from them, these taxpayers have little incentive to spend the time and money necessary to challenge unlawful taxes—to the detriment of all taxpayers and to the rule of law. The government should not be allowed to profit from illegal acts. Had the Pennsylvania tax law been declared invalid as violating a federal statute or the United States Constitution, there is no question that Nextel would have been entitled to a remedy under McKesson. A taxpayer who remits millions of dollars under an illegal collection scheme cares not whether the illegality derives from federal or state law. Justice—and due process—require a remedy.

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