Harper v. Virginia Department of Taxation

Supreme Court of Virginia · Federal Courts

Federal Courtstax refundsretroactivitydue processCode § 58.1-1826tax refund statutemandatory mayremedial statute

Facts

Virginia exempted pension income of retired state and local government employees but taxed pension income of retired federal employees. After Davis held a similar Michigan scheme unconstitutional, Virginia repealed its exemption for state and local retirees but did not then provide relief for federal retirees for taxes previously paid. Harper and other federal pensioners sued for refunds under Code § 58.1-1826 for taxes paid since 1985. On remand from the United States Supreme Court, the trial court ruled that Virginia's declaratory judgment procedure provided an adequate predeprivation remedy and that § 58.1-1826 made refunds discretionary, so it denied refunds.

Issue

Whether Code § 58.1-1826 required refunds of taxes unlawfully collected from federal retirees under Virginia's discriminatory pension tax scheme, and whether Virginia could rely on asserted predeprivation remedies to deny backward-looking relief. Also, whether any refund could be reduced rather than paid in full.

Rule

Virginia's tax-refund statute, Code § 58.1-1826, is a remedial statute that must be liberally construed, and the word "may" in its refund provision is mandatory when necessary to effectuate the legislature's manifest purpose of providing relief from erroneously or improperly assessed or collected taxes. Where the statute clearly appears to provide a postdeprivation refund remedy, the Commonwealth may not later reinterpret the scheme to make refunds discretionary or rely on other remedies as exclusive, because doing so would be an impermissible midcourse "bait and switch." Full refunds are required where reducing refunds would recreate discrimination and courts cannot retrospectively tax the previously exempt class.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Colorado imposes a transportation-benefits tax that is later held unconstitutional because it exempts retired county employees but not retired federal transit workers. A Colorado statute says that if a court finds taxes were erroneously collected, it "may" order a refund, while underpayments "shall" be collected. For decades, Colorado courts have described the statute as a remedial measure meant to provide quick relief from improper taxes.

If retired federal transit workers sue for refunds, which is the best argument for ordering refunds?

Explanation. The majority held that a remedial tax-refund statute should be liberally construed and that "may" can be treated as mandatory when necessary to carry out the legislature's manifest purpose of giving relief from erroneous or improper tax collections. The mere presence of both "may" and "shall" does not itself make refunds discretionary where prior interpretation and remedial purpose point the other way. (Derived from Harper v. Virginia Department of Taxation (n.d.).)