Supreme Court of Mississippi Clarifies Standard of Review in Tax Cases

The Supreme Court of Mississippi has issued its decision in the case of Toolpushers Supply Co. v. Mississippi Department of Revenue (No. 2021-CT-01186-SCT). While the judgment of the lower court was upheld, the Supreme Court of Mississippi clarified that the deferential standard of review cited by the Court of Appeals was incorrect under current law. The case presented both substantive and procedural issues important to Mississippi taxpayers.

The substantive issue dealt with the meaning of “good faith” in Miss. Code Ann. Sec. 27-65-5(1) as it relates to resale exemptions. That section identifies “wholesale sales” as those made in good faith to a retailer regularly selling or renting that property when the dealer is licensed to collect sales taxes. The lower courts found that Toolpushers had given resale treatment to customers that provided a Mississippi sales tax permit without any other inquiry into whether the purchases would actually be resold. The lower courts indicated this did not satisfy the “good faith” requirement of the statute, and the Supreme Court of Mississippi agreed. The “good faith” requirement is separate from the requirement that purchasers presenting resale certificates have a sales tax permit.

The procedural issue was the main reason for which the court granted certiorari. Toolpushers claimed that the Court of Appeals erred by applying the deferential standard of review laid out in Equifax, Inc. v. Mississippi Department of Revenue, 125 So. 3d 36 (Miss. 2013), and the version of Miss. Code Ann. Sec. 27-77-7 in effect before the 2015 amendments. The Supreme Court of Mississippi agreed but stated that this was not “reversible” error because the chancery court had in fact provided sufficient de novo review.

In Equifax, the Supreme Court of Mississippi had ruled that taxpayers challenging Department of Revenue and Board of Tax Appeals (BTA) determinations must prove that the decision was unsupported by substantial evidence, was arbitrary and capricious, was beyond the power of the administrative agency to make, and/or violated the complaining party’s statutory or constitutional right. Courts were not authorized to examine the merits of the agency’s decision, instead examining only the “legality” of the decision.

The Legislature responded with amendments to Miss. Code Ann. Sec. 27-77-7 prohibiting the chancery court from using the more limited standard of review expressed in Equifax. The amendments also clarified that the chancery court was to give no deference to prior agency decisions and must try the case de novo and conduct a full evidentiary judicial hearing on all factual and legal issues raised.

Recent Mississippi Supreme Court cases further undercut pre-2015 agency deference. In Barlow v. Miss. State Bd. Of Chiropractic Exam’rs, 233 So. 3d 223, 228 (Miss. 2017), the Supreme Court of Mississippi noted that the lower standard of review endorsed in Equifax is predicated on “the deference given to agency decisions.” The legislative changes to Miss. Code Ann. Sec. 27-77-7 explicitly removed the deference afforded to the decisions of the Department of Revenue and the BTA.

In HWCC-Tunica, Inc. v. Mississippi Department of Revenue, 296 So. 3d at 677, the Supreme Court of Mississippi went even further and ruled that the last vestiges of agency deference remaining in Section 27-77-7 were unconstitutional as a violation of separation of powers. Courts should no longer give deference to department regulations and publications but should instead conduct their own legal review of the statutes and evidentiary record.

The latest Toolpushers ruling from the Supreme Court of Mississippi is in line with these decisions removing agency deference as a factor of judicial review.

Mississippi courts are prohibited from giving deference to any of the following:

1. Decisions of the Department of Revenue
2. Decisions of the Board of Tax Appeals
3. Department interpretations and applications of statutes as reflected in regulations and other official publications

Given this history, it was a clear mistake for the Mississippi Court of Appeals to cite the standard of review set forth in Equifax and ignore subsequent statutory amendments. But this was not “reversible” error. The Supreme Court of Mississippi focused on the discussion of the evidence reviewed by the chancery court. The only evidence Toolpushers presented to support its contention that the sales made were wholesale was the fact that the purchasers had sales tax licenses. As a matter of law, accepting a resale certificate in good faith required something more. On that narrow ground, the judgment of the lower courts was upheld.

The decision puts any procedural concerns about a revival of Equifax to rest. However, it does not provide helpful guidance on the meaning of good faith acceptance of resale certificates.

Valid resale certificates must meet many specific requirements in addition to good faith acceptance. Ryan tax experts can help your business develop strategies and procedures to ensure your resale and other exemption certificates are accepted by tax agencies under audit. Reach out today if you have any questions or concerns.

TECHNICAL INFORMATION CONTACTS:

Brian Stromen
Principal
Ryan
763.445.4200
brian.stromen@ryan.com

Jonathan Geiger
Manager
Ryan
425.440.2333
jonathan.geiger@ryan.com

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