Ruling tees up future legal battle over tax regulations

By: - July 1, 2022 6:00 am
Supreme Court Room in the Madison Capitol Building in fully spherical panorama by Ryan Wick via Flickr CC BY 2.0

Supreme Court Room in the Madison Capitol Building in fully spherical panorama by Ryan Wick via Flickr CC BY 2.0

A business lobby group challenging tax break guidance it got from the state Department of Revenue (DOR) will get to make its case in court, the Wisconsin Supreme Court ruled Thursday.

The decision is a largely technical one. But it sets the stage for a larger challenge: whether guidance from the revenue department on a hypothetical question should be subject to the state law’s formal administrative rulemaking process.

Thursday’s decision doesn’t answer that question; it simply focuses on where  the subject will be argued. All seven justices concluded it will be for the court system to decide if advice requires rulemaking, and not the Tax Appeal Commission, an administrative agency at DOR. 

Lawyers inside and outside the revenue department will be watching for what follows. If the case continues, which isn’t certain, it could have significant implications for how state agencies respond when they’re asked how they might interpret regulations.

In 2018 staff at Wisconsin Manufacturers & Commerce (WMC) asked DOR how it would apply a new tax exemption that was part of the 2017-19 state budget. The new exemption excludes machinery and equipment not used in manufacturing from the personal property tax of a business. It supplements a personal property tax exemption on manufacturing that has existed since the 1970s.

WMC’s inquiry involved a hypothetical example. As they often do, DOR personnel evaluated the example and responded to WMC with guidance; in this case, they said, the hypothetical example would not qualify for the tax break.

What happened next came as a surprise to DOR: WMC sued the department in Ozaukee County. The business lobby claimed that the guidance DOR provided should have been promulgated as an administrative rule.

In the last decade the state Legislature has made the administrative rulemaking process more complex. It often takes more than a year, and elements of a rule are subject to veto by a legislative committee. Lobbying groups such as WMC have been challenging state regulators by alleging rulemaking violations.

State agencies, meanwhile, have historically welcomed “what if” questions about the boundaries and details of state regulations. That is a common practice in certain areas of regulation, and it allows regulators to be transparent, says Colin Roth, a former Wisconsin Department of Justice lawyer who is now a partner at the Madison firm of Stafford Rosenbaum. 

“When people ask these kinds of hypothetical questions, whether they involve taxation or environmental regulation, the agency [personnel] want to be helpful,” says Roth. “They want to share their views so people know what to expect in terms of regulation.”

The circuit court dismissed the lawsuit without ruling on the key question. Instead, the lower court said, the WMC claim should go through the Tax Appeals Commission, the first stop for challenges on how the DOR applies state tax laws. An appeals court upheld the circuit court’s dismissal. 

Thursday’s Wisconsin Supreme Court ruling reversed the lower courts, however, and ordered the circuit court to take the case instead of deferring it. 

Justice Brian Hagedorn wrote in the majority opinion that to determine whether DOR guidance was rulemaking was “a pure question of law” and thus “an issue properly addressed to the court’s expertise.” Hagedorn was joined by Justices Ann Walsh Bradley, Rebecca Dallet and Jill Karofsky.

In a concurring opinion, Justices Patience Roggensack and Rebecca Bradley sided with WMC, which had argued that the tax commission had no jurisdiction on the rulemaking question. Their concurrence faulted the majority for not reaching that conclusion. 

In a separate concurrence, Chief Justice Annette Zeigler said that the majority opinion should have simply recognized that WMC could not bring its claim to the tax commission because it wasn’t appealing an actual assessment. “There is only one jurisdiction for WMC to bring their claims: the courts,” she wrote.

Zeigler differed with the Roggensack opinion because she did not want to preclude someone with a tax appeal from using a rulemaking argument in their case before the appeal commission. 

Thursday’s ruling doesn’t decide whether DOR guidance requires administrative rulemaking. But if that claim gains traction, Roth says, “You create this incentive for the agency not to say anything at all.”

The result could be less candor from regulators. “Lawsuits arguing that departmental guidance should be issued only through rulemaking will certainly create a ‘chilling’ effect on how the department responds to requests for guidance by an individual and/or organizations,” said Patty Mayers, DOR communications director.

While the case returns to circuit court, events have overtaken the WMC’s hypothetical claim. The Tax Appeal Commission has ruled on at least one interpretation of the non-manufacturing machinery tax break, and that ruling is now pending in Dane County Circuit Court. 

Mayers said DOR will be following up on the hypothetical case with the plaintiffs “on how to proceed” with the Supreme Court’s order remanding the case to the circuit court. 


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Erik Gunn
Erik Gunn

Deputy Editor Erik Gunn reports and writes on work and the economy, health policy and related subjects, for the Wisconsin Examiner. He spent 24 years as a freelance writer for Milwaukee Magazine, Isthmus, The Progressive, BNA Inc., and other publications, winning awards for investigative reporting, feature writing, beat coverage, business writing, and commentary.