Opinion ID: 2011365
Heading Depth: 1
Heading Rank: 5

Heading: Exhaustion of Remedies in Constitutional Challenges

Text: Felix v. Indiana Dept. of State Revenue, 502 N.E.2d 119 (Ind.Ct.App.1986) most closely addressed the issue before us today. There the taxpayer, who alleged violations of the federal Commerce Clause and Indiana Constitution, sued in the Johnson Circuit Court for a refund and injunctive relief from the Indiana Intangibles Tax. Id. Felix claimed the intangibles tax facially discriminated against interstate commerce. Id. The trial court dismissed for lack of subject-matter jurisdiction and lack of standing, because the taxpayer had not yet paid the tax at the time he filed suit. Id. at 120. Felix is similar to this case in that the taxpayer there also sought a declaration that a state tax violated the U.S. Constitution. Felix advanced several arguments for reversing our requirement that he pursue administrative remedies before seeking judicial review. Felix asserted that: a) the administrative process would be futile and ineffective; b) the Department lacked any power to nullify a tax statute on constitutional grounds; and c) the Department could not disregard its own enabling statute. Id. at 121. In affirming the trial court's dismissal, the Court of Appeals cited Marion Circuit Court and Meadowood for the established proposition that the legality of a tax cannot be challenged until statutory remedies have been exhausted. Id. at 120. The court also relied on dicta from our decision in Clark v. Lee, 273 Ind. 572, 406 N.E.2d 646 (1980) suggestingat least to the Court of Appealsthat exhaustion was a prerequisite in constitutionally-based challenges to a tax. [17] Id. at 121-22. Finally, the court offered several policy reasons for requiring exhaustion, including preserving order in the tax collection process and giving the Department an opportunity to revoke the assessment on non-constitutional grounds. Id. at 122. Marion Circuit Court and its progeny clearly established the exhaustion requirement in tax cases, but only Felix directly addressed a constitutional challenge to a tax statute. [18] We recognize that some relevant additional considerations may arise when the challenge is on constitutional grounds. Construing the state and federal constitutions is not the job, nor an area of expertise, of the Department of State Revenue. Constitutional cases may not implicate statutory construction. Rather, the issue can turn on whether a settled interpretation of a tax provision runs afoul of constitutional protectionsan entirely different analysis often well beyond the scope of the Department's expertise. In light of this difference, Sproles argues it is sensible to allow taxpayers to bypass the administrative process when making constitutional challenges, especially of a facial nature, to the tax laws. It is also true that the Department has no authority to strike down a tax statute. IND. CONST. art. III, § 1. However, these are considerations that must be addressed to the Legislature. Requiring exhaustion of remedies even in constitutional cases is well within legislative discretion. Sound policy reasons exist, as the Court of Appeals noted in Felix, for requiring administrative review. Because the Legislature has never indicated that constitutional challenges should be subject to a different standardeven if those challenges are qualitatively different than mere issues of statutory interpretationthe rule of Marion Circuit Court controls today's result. Thus, to challenge the legality of the CSET Sproles must pursue the protest or refund administrative routes, followed by an original tax appeal in the Tax Court once the Department has issued a final determination on Sproles' claim. In the meantime, Sproles can seek an injunction from the Tax Court to enjoin collection of the CSET pending the outcome of his appeal. Finally, we see no federal constitutional bar to the scheme the Legislature has devised to challenge an Indiana tax. States have significant leeway in how they permit taxpayers to bring such claims. In Nat'l Private Truck Council v. Oklahoma Tax Com'n, 515 U.S. ___, 115 S.Ct. 2351, 132 L.Ed.2d 509 (1995), the U.S. Supreme Court held that in federal constitutional challenges to a state tax, state courts do not have to provide relief under 42 U.S.C. § 1983 if adequate remedies for challenging the tax exist under state law. A unanimous Court emphasized the strong federal policy of not interfering with state tax administration. ___ U.S. at___, 115 S.Ct. at 2354, 132 L.Ed.2d at 515-16. The Court noted that federal deference is codified in the Tax Injunction Act of 1937, which prohibits federal courts from enjoining collection of a state tax so long as a plain, speedy and efficient remedy is available in state court. 28 U.S.C. § 1341 (1994). Although the issue in Nat'l Private Truck Council was different from that before us today, the underlying rationale of that decision supports a wide latitude given to the Indiana Legislature's preference as to procedures governing constitutional challenges to state taxes. If federal courts cannot hear federal constitutional challenges so long as adequate remedies for pursuing these claims exist under state law, then surely Indiana can determine how to adjudicate such suits in its own courts. Principles of state sovereignty and comity mandate no less. In short, nothing in the U.S. Constitution requires all Indiana courts to hear federal constitutional challenges to the imposition of an Indiana state tax. It is within the State's discretion to channel tax appeals to the administrative process and the Tax Court, so long as those remedies are adequate.