Will there be a lump of coal in corporate stockings? A recent federal report held that states have inadequate safeguards in place to protect confidential taxpayer information from unauthorized use and disclosure. 1 Alarming! But what is perhaps more alarming is the recent move by state legislatures to expand the types of disclosures that are "authorized," thus undercutting federal and state taxpayer privacy laws. The legislatures’ battle cry of "shame-the-cheaters" may make for interesting sound bites, but could have a chilling effect. Rather than boosting state revenues, fear of public disclosure could force the "cheaters" underground and cause law-abiding taxpayers to avoid certain states altogether. After all, the erosion of taxpayer privacy laws in pursuit of McCarthy-esque witch-hunts is bad for business.
I. Oregon-The-Outrageous: Putting Privacy To The Vote
Several proposed ballot initiatives that would force corporate disclosure of currently confidential taxpayer information have been filed in Oregon for inclusion in the November 7, 2006 general election. 2
Despite long-standing policy recognizing that protection of taxpayer information benefits the state by alleviating a taxpayer’s motivation to withhold information, 3 the drafters of the initiatives maintain:
Based upon experience at the federal level, where publicly traded corporations must report their total taxable income and actual tax liability, there is no evidence of harm to the corporations of such disclosure. 4
Forced Disclosure Of Taxpayer Information
The corporate disclosure initiatives provide that corporations engaged in business in Oregon, that are either publicly held, have more than a specified number of employees 5 or have annual sales in excess of $10,000,000, must file annual disclosure statements with the Secretary of State. The statements must contain information such as (i) the corporation’s name; (ii) its state excise tax or income tax liability; (iii) its Oregon property value and the gross assessed tax on such property; (iv) the amount and percentage of sales, payroll expenses, and property within and without Oregon that is allocated or apportioned to Oregon; (v) the apportionment factor; (vi) its total taxable income allocated or apportioned to Oregon; and (vii) total federal taxable income. 6
These statements will be maintained as a public record and made available on the internet. 7 Failure to file will result in penalties yet to be detailed. 8
Vigilante Tax Enforcers
The stated reason for requiring the disclosure is that corporations do not currently pay enough Oregon taxes. Purportedly, forcing corporations to disclose how much they pay will:
improve the ability of Oregon citizens to evaluate the fairness of state income tax policies and to hold lawmakers accountable for laws that reduce corporate taxes and thereby reduce revenue available to fund essential government services. 9
Oregon statutes provide that, except in limited circumstances, the Oregon Department of Revenue may not disclose any information from a report or return required of a taxpayer pursuant to state income tax laws. 10 The earliest filed corporate disclosure initiatives provide that:
Nothing in this section permits disclosure to the Secretary of State, or any employee or agent of the Secretary of State, by the Department of Revenue or its employees of any information under ORS 314.835 that the department may not disclose. 11
While this provision has been removed from later versions, 12 it may reveal the mindset of the drafters: an end-run around of state and federal privacy laws. 13 Instead of an unauthorized state disclosure, the taxpayer should be required to make the disclosure! If this circumvention of federal and state law is approved by the voters, expect a chilling effect on business.
Rather than improving revenues by making the legislature responsible to the voters, the corporate disclosure initiatives may decrease revenues because of perceived disadvantages from full disclosure on tax returns or from fewer companies choosing to do business in Oregon. Further, public disclosure of tax information may be an open invitation to vigilante tax enforcers and class-actions or other claims by would-be private attorneys general.
II. Connecticut-the-Contentious: Legislatures Quest for Private Information
Recently, the legislatures of some states have once again tried (with varying degrees of success) to gain access to private taxpayer information. 14 Their reason for requesting the information is usually expressed as furthering their loopholeclosing agenda, but at what expense?
On October 18, 2005, the Connecticut Attorney General, Richard Blumenthal, issued an opinion regarding whether certain tax information must be released by the Connecticut Department of Revenue Services ("CDRS") to the Legislative Program Review and Investigative Committee ("Committee"). The Attorney General concluded that:
if the Committee "determines it needs" the tax return information it is requesting "to fulfill its duties" and the information requested is "required in the course of [the Committee’s] duty," [CDRS] must supply the requested tax information to the Committee. 15
Further, the Attorney General opined that the Committee "may disclose such information to an outside consultant engaged to assist in the program review and investigation, subject to strict contractual measures to ensure confidentiality and security of the information." 16
The Governor of Connecticut, M. Jodi Rell, expressed "grave concerns" regarding the Attorney General’s opinion that disclosure of tax returns to the Committee and their outside consultants is permitted. 17 The Governor said the "precedentsetting opinion is extremely troublesome," and she sees "no justification for such a comprehensive and unwarranted government intrusion into the privacy of every taxpayer in the state of Connecticut." 18
In response, the Attorney General’s Office issued a press release essentially providing that if the Governor doesn’t like the law, she should change it, 19 and "in the meantime" the committee should really, really need the requested information and be very, very careful with it. 20
III. Montana…Awaiting the Supreme Court’s Decision
In Montana, Senator Elliott filed suit against the Montana Department of Revenue ("MDOR") to force the release of Montana income tax return information for publicly-traded Corporations with at least $1 million in Montana sales. 21 Elliott maintains that the corporate returns are public documents and must, therefore, be released to the public. The MDOR, which prevailed at district court, 22 maintains that releasing the information would violate state law and harm Montana’s ability to collect those taxes.
While the district court agreed with Elliott that privacy rights do not extend to corporate returns and that such returns are public records, the court held that state and federal law protect the data at issue from disclosure. 23 Elliott has appealed the decision, which is currently pending before the Montana Supreme Court.
Please, please, Santa, can we maintain confidentiality of tax return information?
Footnotes
1. Treasury Inspector General For Tax Administration, Ref. No. 2005-20-184 (Sept. 30, 2005). The report concluded that increased IRS oversight of state agencies is needed to ensure federal tax information provided to states is protected.
2. Proposed Initiative Petition Nos. 67 and 68 (filed Sept. 7, 2005); Nos. 87, 88, and 89 (filed Nov. 7, 2005); Nos. 97, 98, and 99 (filed Nov. 21, 2005); No. 102 (filed Nov. 21, 2005); and Nos. 119 and 120 (filed Dec. 2, 2005). The comment period for Initiative Nos. 119 and 120 is open until December 27, 2005.
3. See Or. Att’y Gen. Op., No. 8157 (Sept. 11, 1984), citing Webb v. Standard Oil Co., 319 P.2d 621 (1957) (a "purpose of . . . statutory provisions prohibiting disclosure is to facilitate tax enforcement by encouraging a taxpayer to make full and truthful declarations in his return, without fear that his statement will be revealed or used against him for other purposes").
4. Initiative No. 120, Section 1(6).
5. The specified number of employees has varied from 25 to 250 in the various corporate disclosure initiatives. The most recent corporate disclosure initiatives, Initiative Nos. 119 and 120, provide for a threshold of 100 and 250 employees, respectively.
6. The most recent corporate disclosure initiatives, Initiative Nos. 119 and 120, drop items (iv), (v), (vi), and (vii) from the list of information that must be included in the disclosure statements.
7. Initiative Nos. 67-68 and Nos. 87-89 provide, in Section 2(4), that the "statements required by this section shall be maintained as public records in the office of the Secretary of State and shall be made available on the Internet." Initiative Nos. 97-99, No. 102, and Nos. 119-120 provide, in Section 2(4), that "[t]he statements required by this section shall be deemed nonexempt public records under ORS 192.420 et. seq."
8. Initiative No. 120, Section 2(5).
9. Initiative No. 120, Section 1(5).
10. See Or. Rev. Stat. §§ 314.835, 314.840 (prohibiting the divulging of return particulars, except as specifically provided by statute).
11. See Initiative Nos. 67, 68, 87, 88, and 89, Section 2(6).
12. Initiative Nos. 97, 98, 99, 102, 119, and 120 do not have a Section 2(6).
13. See IRC § 6103; Or. Rev. Stat. § 314.835.
14. See, e.g., Missouri Department of Revenue Press Release, Apr. 20, 2005 ("The Missouri Department of Revenue yesterday came under attack from the State Auditor for keeping confidential taxpayer information out of the elected official’s hands. The department stands firm on the decision, and has no intention of allowing the Auditor access to confidential taxpayer records").
15. Conn. Att’y Gen. Op., Oct. 18, 2005, citing Conn. Gen. Stat. § 2-53g(a) (setting forth the Committee’s duties); Conn. Gen. Stat. § 12-15(b)(1)(A) (providing that the CDRS may disclose returns or return information to "an authorized representative of another state agency or office, upon written request by the head of such agency or office, when required in the course of duty or when there is reasonable cause to believe that any state law is being violated").
16. Id.
17. Governor Rell Press Release, Oct. 21, 2005.
18. Id.
19. Connecticut Attorney General’s Office Press Release, Oct. 21, 2005 (providing that the Opinion "set forth the law relating to rights of access authorized to the Committee under Conn. Gen. Stat. 2-53g, which can be amended if either the Governor or other officials believe that the public interest would be best served by such statutory changes. I would be pleased to assist in this process as well").
20. Id. ("In the meantime, my general recommendation is that the Committee limit its request to information that is absolutely necessary and vital to its work, to its oversight and scrutiny of our tax system, and that all sides seek to resolve issues or questions about specific information with maximum respect and privacy interests and rights at stake").
21. Elliott v. Montana Dept. of Revenue, No. 05-336, is currently before the Montana Supreme Court.
22. Elliott v. Montana Dept. of Revenue, Cause No. CDV-2004-777 (Apr. 6, 2005).
23. The Montana constitution makes an exception to the public’s right to examine public documents where the information is protected by statute, such as by Mont. Code Ann. § 15-30-303 (confidentiality of tax documents).
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