United States

Kentucky: Pre-purchase Refund Permit Requirement for Special Fuels Taxes Did Not Violate the Due Process Clause

Mar 19, 2018
From KPMG TaxWatch

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The Kentucky Court of Appeals recently ruled that a statute barring special fuel tax refunds to taxpayers that did not hold a valid refund permit at the time of the fuel purchase satisfied the Due Process Clause. The taxpayer at issue purchased special fuel for consumption in unlicensed vehicles and equipment for non-highway use. At the time of purchase, the taxpayer was unaware that its non-highway use of special fuel was exempt from special fuel taxes and petroleum environmental assurance fee. The taxpayer later discovered its error and filed a refund claim. Under Kentucky law, taxpayers are only eligible for a refund of special fuel taxes and fees if they hold an unrevoked refund permit before the fuel is purchased. Upon learning of the exemption, the taxpayer obtained a motor fuels tax refund permit and filed a refund claim. The Department denied the refund for the periods before the effective date of the refund permit, and the taxpayer appealed. The Board of Tax Appeals, which does not have jurisdiction over constitutional claims, upheld the order denying the taxpayer’s refund claim. The taxpayer than appealed to a circuit court, which ruled that the pre-purchase refund permit requirement violated the Due Process Clause of the U.S. Constitution because it left unwary taxpayers with no avenue for recovery.

Because the exaction of tax constitutes a deprivation of property, states must provide procedural safeguards against unlawful exactions in order to satisfy the Due Process Clause. Accordingly, a state may elect to provide a pre-deprivation (i.e., before the tax is paid) or post-deprivation (i.e., after the tax is paid) process that allows taxpayers to seek relief from unlawful or erroneously collected taxes. Regardless of the method used, a state must ensure that taxpayers have a fair opportunity to challenge the accuracy and legal validity of the tax and a “clear and certain remedy” for any erroneous tax collection. In essence, a state must ensure that the opportunity to contest the tax is a meaningful one. The appellate court rejected the circuit court’s holding, noting that the taxes at issue were not illegally or erroneously collected. Rather, the issue was whether the taxpayer was entitled to a refund within the terms of the statute authorizing the refund. Because the refund process gives taxpayers an opportunity to challenge taxes and fees owed on special fuels as long as they meet the statutory requirements, requiring a permit as a condition of receiving a refund was a valid procedural requirement, similar to a statute of limitations. The court further noted that it is the taxpayer’s responsibility to be aware of the law—here are the procedural refund requirements. Failure to follow statutory requirements cannot serve as the basis for a finding of a due process violation. Please contact Harley Duncan at 202-533-3254 with questions on Kentucky Dep’t of Revenue v. Revelation Energy LLC.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.