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WHAT IS IOWA'S TAX LAW? WHO KNOWS?

February 04, 2004

Whatever you think about the Iowa Supreme Court's decision yesterday on casino taxes, you can't say that they fear more work. They made sure they will be hearing state tax cases for a long time.

Yesterday the Court decided that there is no "reasonable basis" to tax riverboats differently from racetrack casinos. That opens up a world of dispute in tax cases.

The Court ruled that distinctions between a business that can float across the river or downstream to a different state and a stationary racetrack are unreasonable. As best we can tell, the test for "reasonable" tax rules is what the majority of the Court considers "reasonable" on a given day.

It's easy to find distinctions in the tax law that seem vulnerable under this new outlook.

Apportionment on Pass-through entities: S corporation shareholders get a credit against Iowa tax for their income from sales outside of Iowa; sole proprieters and LLC owners get no such credit, even though their businesses are identical.

Rehabilitation Credits and Economic Develoment Credits: These credits are limited by law to an amount that the legislature has decided the state can afford. Apparently the state's fiscal needs no longer provide a reasonable basis for tax distinctions. How can taxpayers be reasonably treated differently just because the credits appropriated for a fiscal year have been used up?

Sales tax on services: In this day of alternative medicine, how can massage therapists and foot reflexologists reasonably be subjected to sales tax, while doctors are excluded? For that matter, how can the state even consider taxing accounting and engineering services, but not attorney and medical services?

NOW WHAT?

Tax practitioners this year will need to consider these "equal protection" arguments as we do returns. Should we claim Iowa apportionment credits that the statute clearly doesn't allow to partners and proprietors, on the grounds that their K-1 income is not getting "equal protection" to S corporation income?Should we claim unappropriated rehabilition and economic development credits?

Should we amend all of our 2000 returns before April 30 to prevent the statute of limitations from running? Or is the statue of limitations itself an equal protection violation? The Des Moines Register editorial supporting the decision unhelpfully notes that "Such issues will be sorted out in future cases." That's for sure.

WHO MAKES IOWA TAX LAW?

The legislature has to make a lot of messy decisions between conflicting good causes, often under severe fiscal pressure and late in the evening. These decisions will now be reviewed for "reasonableness" by the Iowa Supreme Court at their leisure. Given the Governor's expansive use of line-item vetoes and the Iowa Supreme Court's new monopoly on reason, the legislature can be forgiven for feeling that their role is now merely to offer up a menu of policy choices for the reasoned consideration of the other branches of govenment.

UPDATE: House Speaker Tom Rants is not pleased.

UPDATE II:

Tusk and Talon weighs in, as does the Cornfield Commentary.

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