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Kentucky Legislature Deals Setback to Transparency

Posted on Mar. 25, 2019

The Kentucky General Assembly failed its citizens last week by sneaking language into a bill that pokes holes in the state’s Open Records Act and reduces the level of transparency at the Department of Revenue. The change was inserted into the law at the last minute, without any discussion or debate. While discussions of transparency in tax administration often turn on whether tax officials make public their procedures and other guidance documents, transparency begins in state legislatures. The Kentucky legislature used nontransparent means to enable a state agency to be less transparent.

Late in the day on March 13, the General Assembly added language to H.B. 354 that would, among other things, prohibit DOR employees from divulging unappealed final department rulings, requests for guidance, private letter rulings, and alternative apportionment requests and responses.1

H.B. 354 was a tax “cleanup” bill designed to correct some unintended consequences of a 2018 bill. But in the end, it became a great vehicle to quietly slip in a few extra items. The language limiting the state’s Open Records Act was added, along with other language that provides tax benefits to specific groups, during free conference committee. The bill was then brought back to the full General Assembly, to be quickly voted on and enrolled. It is now with the governor for his signature.

I am personally outraged by this — but then again, Tax Analysts has been fighting with the department for years to get it to release unappealed final rulings.2 Many states that issue informal written guidance to taxpayers in the form of a private letter ruling or other ruling will publicly release those documents. The documents are redacted so confidential taxpayer information is not released, but the substance of the documents provides useful guidance to other taxpayers about how the department would rule on particular issues and transactions.

Tax Analysts became aware of the DOR’s refusal to release these rulings after a Kentucky practitioner made a request under the Open Records Act for redacted versions of all final rulings issued by the DOR and the Finance and Administration Cabinet since 2004. The department objected to disclosing the documents, and the matter went to court.3 Tax Analysts intervened in the lawsuit in 2013.

The department’s objection to producing the documents is primarily related to the difficulties of redaction. It alleges that redaction would be too burdensome and that the redactions necessary to protect the taxpayer’s identity would render the final product useless.

Yet other states and the IRS release similar documents. Franklin Circuit Court Judge Phillip Shepherd was also not persuaded by the DOR’s arguments. He acknowledged that the letter rulings have “real and significant consequences for the taxpayer and the public,” and expressed doubt that the burdens of publication were insurmountable.

Shepherd rejected the DOR’s claims that redacted versions of its final rulings were protected by the state’s confidentiality statutes and ordered their release. The judge concluded that it was “abundantly clear” that the department could “comply with its obligations under the Open Records Act to disclose to the public the substance of its final rulings.”

The opinion also included a well-reasoned discussion of taxpayer confidentiality. Shepherd recognized the importance of taxpayer confidentiality laws, but rightly noted that a taxpayer’s right to privacy is not absolute. There is necessarily a balancing test between the taxpayer’s right to privacy and the interest of the public in the fair administration of a tax system. Shepherd wrote, “Without public disclosure of the final rulings, there is no way for the public to know whether the Department has been fair and consistent or whether it has displayed political favoritism to some taxpayers over others. These considerations outweigh any privacy interest that may exist for taxpayers, especially when the names and identifying indicators have been redacted.”

An appeals court upheld the circuit court’s decision, finding that the rulings “contain great bodies of information related to the reasoning and analysis of the Department of Revenue” that could be released without jeopardizing privacy interests.

The DOR appealed that decision to the state supreme court. A divided court on November 1, 2018, affirmed the court of appeals’ decision that the DOR must publish redacted final letter rulings. The DOR filed a motion for reconsideration, which is still pending.

It’s been a long road to get this far, and now, if the governor signs H.B. 354, despite the outcome of the pending litigation, the DOR will not have to release redacted unappealed final rulings. It will be a loss for transparency and a loss for Kentucky taxpayers and their advisers.

Moreover, the DOR has demonstrated that it is willing to take whatever measures are necessary to hide these documents — including sneaky legislative tactics. Why would it want to hide guidance from taxpayers? Often it is because state tax officials see their goal as maximizing revenue, not treating taxpayers fairly.

But Kentucky is missing the forest for the trees. Not only does the state have an obligation to have a fair system in which like taxpayers are treated similarly, but compliance is made more efficient if taxpayers understand how the system works and have the guidance necessary to properly follow the rules.

Cara Griffith is president and CEO of Tax Analysts, publisher of Tax Notes.

FOOTNOTES

1 Andrea Muse, “Kentucky Legislature Passes Bank Franchise Tax Repeal, Marketplace Provisions,” State Tax Notes, Mar. 25, 2019, p. 1098.

2 Muse, “Court Affirms Tax Transparency Opinion,” State Tax Notes, Nov. 5, 2018, p. 564.

3  Finance and Administration Cabinet v. Sommer , No. 2015-CA-001128-MR (Jan. 13, 2017).

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