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Mississippi High Court Upholds Amended Return Statute of Limitations

Posted on Dec. 3, 2018

Mississippi’s statute of limitations for amending tax returns is constitutional, despite not having an exception for amending a return in response to another state’s audit, according to the state supreme court.

The Mississippi Supreme Court held November 29 in Kansler v. Department of Revenue that the state’s three-year statute of limitations for amending a tax return did not violate the dormant commerce clause of the U.S. Constitution, upholding the Mississippi Department of Revenue’s denial of a refund claim.

Michael Kansler lived in New York and received stock options as part of his compensation working for Entergy Corp. Kansler relocated to Mississippi in 2007 but continued to work for Entergy. Kansler and his wife filed Mississippi income tax returns for 2008 and 2009 and paid taxes on income from the exercise of stock options, taking the position that the income was taxable only to Mississippi.

Though New York began an audit of the Kanslers’ taxes in 2012 relating to the exercise of the stock options, the audit wasn’t completed until December 29, 2014. The Kanslers paid the additional tax and interest to New York and filed amended Mississippi tax returns in January 2015, asking for a refund of more than $250,000 based on the credit for taxes paid to other states.

However, the DOR denied the refund because the three-year limitations period had expired. Both the DOR’s Board of Review and the Mississippi Board of Tax Appeals agreed with the denial of the refund claim.

The Kanslers argued on appeal to the Chancery Court of the First Judicial District of Hinds County that the statute of limitations violated the federal commerce, due process, and equal protection clauses, but the chancery court determined that the statute was constitutional.

The state supreme court agreed, finding that “Mississippi’s treatment of the statute of limitations for amending tax returns is unremarkable.”

Though the court acknowledged that Massachusetts and Oregon have exceptions allowing taxpayers to amend their returns in response to another state’s audit, it said neighboring states Alabama, Arkansas, Louisiana, and Tennessee appear to lack an exception for refunds based on an audit by another state.

The Kanslers claimed that Mississippi's limitations period impermissibly burdened interstate commerce by not giving taxpayers enough time to amend their returns after an audit by another state and violated the dormant commerce clause because in-state taxpayers did not have the same difficulty. The Kanslers claimed that the Mississippi DOR gives taxpayers the benefit of unclaimed credits and reductions in tax liability if found during an audit conducted by the DOR.

According to the court, the statute of limitations provision should not be judged by the Complete Auto Transit Inc. v. Brady test to determine whether the statute violates the dormant commerce clause because the test “is specifically intended for evaluating the constitutionality of taxes, not state regulations in general.”

The court said compliance costs for retailers, which was a major concern for the U.S. Supreme Court in South Dakota v. Wayfair Inc., included costs associated with errors in administering the tax.

Adding that out-of-state retailers would presumably commit more errors that in-state retailers, the state supreme court concluded that the Kanslers’ argument was essentially the same — that the statute of limitations “exposes people who engage in interstate commerce to a greater risk of suffering for tax mistakes.”

The court said the proper test for determining whether the statute of limitations violated the dormant commerce clause is a balancing test like the one employed by the Court in Wayfair.

Using the balancing test from Pike v. Bruce Church Inc., the state supreme court first determined that the statute of limitations was not facially discriminatory against interstate commerce. Though the court acknowledged that it may be difficult to determine how to apportion income arguably earned in multiple states, it found that the Kanslers had not shown that the burden on interstate commerce was clearly excessive in relation to the state’s interests in finality and ease of tax administration; thus, the court upheld the statute.

Rejecting the Kanslers’ argument that it should apply the internal consistency test, the court held that the test makes no allowance for balancing the state’s interest against the impact on interstate commerce, and that no tax on interstate commerce would survive under such a hard-line rule.

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