Opinion ID: 1990251
Heading Depth: 1
Heading Rank: 11

Heading: H.B. 541 Unconstitutionally Withdraws The Remedy For An Illegal Tax.

Text: Section 1 of H.B. 541 amended KRS 141.200 in pertinent part by adding the following two provisions, now codified, respectively, as KRS 141.200(17) and 141.200(18): No claim for refund or credit of a tax overpayment for any taxable year ending on or before December 31, 1995, made by an amended return or any other method after December 22, 1994, and based on a change from any initially filed separate return or returns to a combined return under the unitary business concept or to a consolidated return, shall be effective or recognized for any purpose. No corporation or group of corporations shall be allowed to file a combined return under the unitary business concept or a consolidated return for any taxable year ending before December 31, 1995, unless on or before December 22, 1994, the corporation or group of corporations filed an initial or amended return under the unitary business concept or consolidated return for a taxable year ending before December 22, 1994. The first provision, KRS 141.200(17), pertains to the remedy available to corporate taxpayers post- GTE . As the parties note, in a case such as this one where the tax has not been challenged on constitutional grounds, KRS 134.580 is the applicable remedy statute. That statute provides in pertinent part that [w]hen money has been paid into the State Treasury in payment of any state taxes, except ad valorem taxes, whether payment was made voluntarily or involuntarily, the appropriate agency shall authorize refunds to the person who paid the tax, ... of any overpayment of tax and any payment where no tax was due. KRS 134.580(2). The Court of Appeals held, and I agree, that the Due Process Clause prohibits the General Assembly from withdrawing this remedy as KRS 141.200(17) purports to do.
The Due Process Clause of the Fourteenth Amendment to the United States Constitution provides that no state may deprive any person of life, liberty, or property, without due process of law. The essence of this guarantee is that citizens must be given an opportunity, at a meaningful time and in a meaningful manner, to challenge the legality of the government's impositions. Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976). Payment of a tax constitutes a deprivation of property, and the United States Supreme Court has held that to satisfy the requirements of the Due Process Clause, the taxing jurisdiction, the state in this case, must provide either predeprivation or postdeprivation procedural safeguards. McKesson Corporation v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990). Furthermore, where the state, as did Kentucky at the time these taxes were collected, requires or encourages its citizens to rely upon a postdeprivation refund action, that action must provide taxpayers with, not only a fair opportunity to challenge the accuracy and legal validity of their tax obligation, but also a `clear and certain remedy,' ... for any erroneous or unlawful tax collection to ensure that the opportunity to contest the tax is a meaningful one. Id. at 39, 110 S.Ct. 2238 (quoting from Atchison, T. & S.F.R. Co. v. O'Connor, 223 U.S. 280, 32 S.Ct. 216, 56 L.Ed. 436 (1912)). The state may not, moreover, `hold[ing] out what plainly appears to be a clear and certain postdeprivation remedy and then declare, only after the disputed taxes have been paid, that no such remedy exists.' Newsweek, Inc. v. Florida Department of Revenue, 522 U.S. 442, 444, 118 S.Ct. 904, 139 L.Ed.2d 888 (1998) (quoting from Reich v. Collins, 513 U.S. 106, 108, 115 S.Ct. 547, 130 L.Ed.2d 454 (1994)). This, of course, is precisely what KRS 141.200(17) purports to do, and accordingly the Court of Appeals correctly determined that that statute violates the Due Process Clause.
Against this conclusion, the Cabinet raises two arguments. It contends first that under McKesson, supra , the due process guarantee is only implicated by tax statutes ultimately found unconstitutional. While it is true that McKesson involved a tax invalidated under the Commerce Clause and thus the Court's discussion is sometimes couched in constitutional terms, the due process principle involvedthat a taxpayer may not be deprived of his or her property without a meaningful opportunity to challenge the legality of the deprivationclearly applies regardless of the ground for challenging the tax, whether federal constitution or, as here, state statute. Indeed McKesson, supra , cites earlier United States Supreme Court cases where due process mandated the refund of taxes collected, not in violation of the Constitution, but in violation of federal laws. See, e.g., Ward v. Bd. of County Comm'rs of Love County, Okl, 253 U.S. 17, 40 S.Ct. 419, 64 L.Ed. 751 (1920) (taxes assessed in violation of federal treaty). More recently, the Supreme Court itself has noted that McKesson and the long line of cases upon which McKesson depends, ... stand for the proposition that `a denial by a state court of a recovery of taxes exacted in violation of the laws or Constitution of the United States by compulsion is itself in contravention of the Fourteenth Amendment.' Reich, 513 U.S. at 109, 115 S.Ct. 547. McKesson , thus, is not limited to deprivations which violate the U.S. Constitution, nor, indeed, should it be confined to those in violation of federal law. A tax exacted in violation of state law, no less than one in violation of federal law, raises the exact same due process concerns and requires the same meaningful procedural safeguards.
The Cabinet also contends that KRS 134.580, the refund statute quoted above, effects a waiver of the state's sovereign immunity and that the General Assembly is free to withdraw that waiver and to reassert the state's immunity at any time and to any extent it deems appropriate. KRS 141.200(17) is merely, the Cabinet argues, a limited reassertion of immunity, which, the Cabinet insists, trumps Appellees' rights under the Due Process Clause. [6] In the case just cited, however, Reich, supra , the Supreme Court noted that the Due Process guarantee applies notwithstanding the sovereign immunity States traditionally enjoy in their own courts. Id. at 110, 115 S.Ct. 547. Five years later, in Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999), the Supreme Court reviewed at length the constitutional and pre-constitutional bases of the states' immunity and held that Congress had no power to require waivers of that immunity. The Court distinguished Reich , however, and noted that the state's obligation in that case to provide the tax refund remedy it had held out to its citizens was not subject to sovereign immunity because it was an obligation arising from the Constitution. In Reich v. Collins , we held that, despite its immunity from suit in federal court, a State which holds out what plainly appears to be a clear and certain postdeprivation remedy for taxes collected in violation of federal law may not declare, after disputed taxes have been paid in reliance on this remedy, that the remedy does not in fact exist. This case arose in the context of tax-refund litigation, where a State may deprive a taxpayer of all other means of challenging the validity of its tax laws by holding out what appears to be a clear and certain postdeprivation remedy. In this context, due process requires the State to provide the remedy it has promised. The obligation arises from the Constitution itself; Reich does not speak to the power of Congress to subject States to suits in their own courts. 527 U.S. at 740, 119 S.Ct. 2240 (citations omitted, emphasis supplied). Since Alden , several courts have noted that that case specifically preserved Reich's promise of a state-court remedy, noting, The obligation arises from the Constitution itself,.... Thus, where the Constitution requires a particular remedy, such as through the Due Process Clause for the tax monies at issue in Reich , or through the Takings Clause as indicated in First English [ Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304, 107 S.Ct. 2378, 96 L.Ed.2d 250 (1987)], the state is required to provide that remedy in its own courts, notwithstanding sovereign immunity. DLX, Inc. v. Kentucky, 381 F.3d 511, 528 (6th Cir.2004) (quoting from Reich ). See, e.g. Seven Up Pete Venture v. Schweitzer, 523 F.3d 948 (9th Cir.2008); Manning v. Mining and Minerals Division of the Energy, Minerals, and Natural Resources Department, 140 N.M. 528, 144 P.3d 87 (2006). I agree that this is the import of Reich and Alden , and conclude, therefore, that KRS 141.200(17) cannot be upheld even if construed as an assertion of the state's sovereign immunity. The Due Process Clause requires a meaningful remedy where taxes have been collected in violation of law and the taxing authority, in this case the Commonwealth, cannot invoke sovereign immunity to relieve itself of that constitutional obligation.