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Tax Foundation lauds AOL's Iowa triumph

October 13, 2008

One advantage of procrastination is that sometimes somebody else will take care of the problem before you get to it (it works much better on spouses than kids, I find). For example, the Tax Foundation has taken a look at AOL's recent victory over the Iowa Department of Revenue, so I don't have to:

The Iowa Court of Appeals should be lauded for not knuckling under to their revenue officials' overreaching. The officials had demanded that America Online (AOL) cough up sales taxes for services it provided from 1995 to 1999 (conveniently back when everyone had AOL and such taxes meant something). AOL refused, saying that these transactions were interstate and thus beyond Iowa's taxing power, and demonstrated that to access AOL one must have gone through their Virginia servers. Iowa responded saying that they were local communications services. The court rejected that argument as contrary to the evidence and ruled for AOL.

Even though this was a blatant overreach by the Department, AOL has had to litigate this at both the district and appellate court levels, and Iowa still can take this to the Iowa Supreme Court. While the taxpayer has prevailed so far, it's only because AOL has the deep pockets to finance the fight. Iowa has taken equally abusive positions on other areas, like taxing non-residents on income from investment partnerships, and will continue to do so until somebody is willing to spend the time and money to fight them in court.

Iowa could really use an independent tax appeals function, similar to the IRS Appeals Division. Iowa could also use a tax administrative hearing function that would enable taxpayers to get an independent hearing on tax issues outside the Department of Revenue bureaucracy without having to file a lawsuit.

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