Following an unfavorable court decision, state legislatures have been able to effectively reverse a decision by retroactively changing the law. Several taxpayers have challenged the validity of retroactive state tax changes by arguing that the retroactive laws violate the US Constitution’s Due Process Clause, which requires that no state may “deprive any person of life, liberty, or property without due process of law.”
The US Supreme Court last addressed the constitutionality of retroactive tax legislation in 1994 in United States v. Carlton, 512 U.S. 26 (1994). In Carlton, the Court upheld retroactive tax legislation because it was enacted for a “legitimate legislative purpose furthered by rational means” and the legislature “acted promptly and established only a modest period of retroactivity.” Carlton involved a one-year retroactive effective date. The standard provided in Carlton, however, does not give clear guidance on a constitutionally acceptable length of time for retroactive tax changes and what is considered a “modest period of retroactivity.” On May 22, 2017, the US Supreme Court declined two opportunities to clarify what is an acceptable length of time: (1) Dot Foods Inc. v. Wash. Dep’t of Revenue, 372 P.3d 747 (Wash. 2016), where the taxpayer challenged Washington’s retroactive application of tax law changes going back 27 years; and (2) six cases, including Gillette Comm. Ops. N. Am. v. Mich. Dep’t of Revenue, 878 N.W.2d 891 (Mich. Ct. App. 2015), denying appeal, 880 N.W.2d 230 (Mich. 2016), challenging Michigan’s retroactive repeal of an alternative apportionment method going back six years. Both cases involve decisions upholding a statutory amendment applied retroactively after the statute had been reviewed by the states’ supreme courts in favor of the taxpayers. In the absence of additional guidance by the US Supreme Court, victorious taxpayers may find their hard-fought successful litigation undone by a retroactively applied tax law.