Support for the Prior Audit Determination Provision in the 2013-15 State Budget – memo to legislators

A recent article in the Wisconsin State Journal (“Fine print in Scott Walker’s tax proposals draws criticism,” WSJ Mar. 3, 2013), inaccurately describes a proposal in Gov. Walker’s budget that does nothing more than establish guidelines for the enforcement of a principle―the principle that taxpayers can rely on their own past audit determinations― that has been part of Wisconsin law for more than 30 years.  As a result of this proposal, there will be much more certainty for both taxpayers and the Department of Revenue (DOR) in knowing when this principle applies and when it does not apply.

The proposal found in section 1466 of the AB 40 will provide, with certain limitations, that if a taxpayer was audited by DOR and it can be shown that DOR reviewed a certain tax issue during this audit, DOR cannot in a subsequent audit with take a contrary position adverse to that taxpayer on that same tax issue.  However, there is an important limitation; if DOR publishes guidance―in any one of a number methods―that indicates that DOR will no longer take the position which it took in the earlier audit, the taxpayer may no longer rely on the earlier audit.  Most important, the proposal, a copy of which is attached, establishes guidelines for when a taxpayer can and cannot rely on prior audit determinations.

The idea that taxpayers can rely on past audit determinations is not new.  In a 1979 Wisconsin Supreme Court case, Department of Revenue v. Moebius Printing Co., 89 Wis. 2d 610, 279 N.W.2d 213 (1979), the Court held that a taxpayer is entitled to rely upon a prior written determination from DOR and that it would be unconscionable for DOR to later change its position when the taxpayer had relied upon DOR’s earlier statement.

In the years since Moebius, the idea that taxpayers can rely upon past audit determinations has been inconsistently enforced by DOR.  There have been times when DOR has acknowledged that a taxpayer had justifiably relied upon an earlier audit determination and refrained retroactively trying to collect a tax when it would be unfair to do so.  In these cases, DOR has worked to make sure to alter the situation going forward.

Unfortunately, DOR has not always followed the holding of Moebius. The most celebrated case was Manpower, Inc. v. Department of Revenue, Wis. Tax Rep. (CCH) ¶401-223 (WTAC Aug. 12, 2009).  In Manpower, DOR had audited the taxpayer three times and never once sought to impose the sales tax on temporary help services.  During a fourth audit and without giving the taxpayer advance notice that it was changing its position, DOR sought to impose the sales tax on temporary help services.  Ultimately, the Tax Appeals Commission rejected DOR’s position.

The language in AB 40 incorporates common sense guidance which will provide a more uniform application of the Moebius holding by helping DOR and taxpayers to know when a taxpayer can rely upon a past audit holding and what DOR can do to provide notice that it will no longer be bound by a past audit holding.  Career staff at DOR have approved of this language.  WMC urges the Legislature to enact the prior audit determination provision found in section 1466 of AB 40.