Harper v. Virginia Dept. of Taxation

• Decision Date: 01 March 1991
• Docket Number: 900792,Nos. 900770,s. 900770
• Citation: 241 Va. 232,401 S.E.2d 868
• Court: Virginia Supreme Court
• Parties: , 59 USLW 2554, 13 Employee Benefits Cas. 1783 Henry HARPER, et al. v. VIRGINIA DEPARTMENT OF TAXATION. Lawrence E. LEWY, et al. v. VIRGINIA DEPARTMENT OF TAXATION. Record

Page 868

401 S.E.2d 868

241 Va. 232, 59 USLW 2554, 13 Employee Benefits Cas. 1783

Henry HARPER, et al. v. VIRGINIA DEPARTMENT OF TAXATION.

Lawrence E. LEWY, et al. v. VIRGINIA DEPARTMENT OF TAXATION.

Record Nos. 900770, 900792.

Supreme Court of Virginia.

March 1, 1991.

Michael J. Kator (Stephen A. Bryant, W. Lester Duty, Mary-Leslie Duty, Gregory S. Hooe, Duty and Duty, Traylor & Morris, on briefs), for appellants in Record No. 900770.

Joseph Hyman (Lawrence E. Lewy, George J. Rabil, on briefs), for appellants in Record No. 900792.

Gail Starling Marshall, Deputy Atty. Gen. (Mary Sue Terry, Atty. Gen., H. Lane

Kneedler, Chief Deputy Atty. Gen., Barbara M. Rose and Gregory E. Lucyk, Sr. Asst. Attys. Gen., Barbara H. Vann, Asst. Atty. Gen., on brief), for appellee in both cases.

Present: CARRICO, C.J., COMPTON, STEPHENSON, WHITING, LACY, and HASSELL, JJ., and COCHRAN, Retired Justice.

STEPHENSON, Justice.

In Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), the Supreme Court of the United States declared that state taxation of pension income of retired federal government employees, while exempting from taxation pension income of retired state government employees, violated the doctrine of intergovernmental tax immunity embodied in the supremacy clause of the Constitution of the United States. The Supreme Court, however, did not decide whether its decision in Davis had retrospective application. ¹

In these consolidated appeals, the appellants (collectively, Harper) are retired federal employees who receive either civil service retirement benefits or military retired pay. They filed suits in the trial court against the Virginia Department of Taxation (the Commonwealth) in May 1989, seeking refunds, pursuant to Code § 58.1-1826, for state income taxes paid for tax years 1985, 1986, 1987, and 1988. After consolidating the several suits, the trial court ruled that Davis should be applied prospectively only and, therefore, that Harper was not entitled to the refunds. Harper appeals.

In this appeal, the principal issue is whether Davis should be applied only prospectively, thereby denying the refunds, or retroactively, thereby granting the refunds.

I

Whether a constitutional decision of the Supreme Court is applied retroactively is a matter of federal law. American Trucking Associations, Inc. v. Smith, 496 U.S. 167, ----, 110 S.Ct. 2323, 2330, 110 L.Ed.2d 148 (1990). In the civil context, retroactive application of such decisions is governed by the three-pronged test announced in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). Smith, --- U.S. [241 Va. 236] at ----, 110 S.Ct. at 2331; see U.S. v. Johnson, 457 U.S. 537, 563, 102 S.Ct. 2579, 2594, 73 L.Ed.2d 202 (1982).

In Smith, the Supreme Court considered a state's taxing statute that previously had been declared unconstitutional under the commerce clause of the Federal Constitution. 496 U.S. at ----, 110 S.Ct. at 2329. The Court denied the claimant's request for a refund of taxes paid prior to an earlier decision that invalidated the taxing statute. Id. at ----, 110 S.Ct. at 2334. In so doing, a plurality of the Court employed the three-pronged Chevron test and concluded that its earlier decision should not be applied retroactively. The Court found that its earlier decision invalidating an Arkansas highway tax, American Trucking Assns., Inc. v. Scheiner, 483 U.S. 266, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987), established a "new principle of law" under the commerce clause. Id. at ----, 110 S.Ct. at 2332. Arkansas's legislature, therefore, was justified in relying upon existing precedent and had "good reason to suppose" the enactment of the tax would not violate the Federal Constitution. Id. at ----, 110 S.Ct. at 2333.

Harper contends, nonetheless, that "because the taxes at issue here ... constitute[d] an 'unconstitutional deprivation,' ... Virginia must provide 'backward-looking relief' to the refund claimants." Harper asserts that such relief is required by the holding in McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990).

In McKesson, decided on the same day as Smith, the Supreme Court held that a "clear and certain remedy," which could include refunds, was required to remedy Florida's unconstitutional liquor tax statute. 496 U.S. at ----, 110 S.Ct. at 2252. In so holding, the Court rejected Florida's contention that its taxing authority implemented the tax preference scheme " 'in good faith reliance on a presumptively valid statute.' " Id. at ----, 110 S.Ct. at 2254. In rejecting that contention, the Court stated that the challenged tax statute "reflected only cosmetic changes from the prior version of the tax scheme that itself was virtually identical to the Hawaii scheme invalidated" in Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200 (1984). Thus, the Court concluded, Florida "[could] hardly claim surprise" when its later statute was invalidated. Id. at ----, 110 S.Ct. at 2255.

In the present case, nothing in the record suggests that the Commonwealth acted other than in good faith reliance upon a presumptively valid taxing statute. We conclude, pursuant to Smith, that the three-pronged Chevron test must be employed to determine whether the Davis decision should be applied prospectively only.

A

For a decision to be applied prospectively only, the first prong of the Chevron test requires that the decision "establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, ... or by deciding an issue of first impression whose resolution was not clearly foreshadowed." 404 U.S. at 106, 92 S.Ct. at 355. Satisfaction of this first prong usually has been stated as the "threshold test" for determining whether or not a decision should be applied prospectively only. Johnson, 457 U.S. at 550 n. 12, 102 S.Ct. at 2587 n. 12.

When Davis was decided, 23 states had statutes similar to the Michigan statute. ² Virginia's statute had been in effect for almost half a century. See Acts 1942, c. 325. As far as the record shows, the federal pensioners had paid the tax without protest. Not a single federal pensioner had brought an action during that period in a Virginia court seeking a refund of taxes on the basis of the intergovernmental tax immunity doctrine. The absence of such litigation reasonably may be explained by examining the doctrine's origin and development.

The intergovernmental tax immunity doctrine had its genesis in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819). The doctrine was grounded on the proposition that "[s]tates have no power, by taxation or otherwise, to retard, impede, burden or in any other manner control, the operations [of the federal government]." Id. at 436.

The pre-Davis cases invalidating state taxing statutes were decided on the proposition that the tax had a foreseeable and direct effect on some operation of the federal government. See, e.g., Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983) (state tax that imposes greater burden on holders of federal obligations than on holders of similar state obligations impermissibly discriminates against securities issued by federal government); Phillips Chemical Co. v. Dumas Indep. Sch. Dist., 361 U.S. 376 80 S.Ct. 474, 4 L.Ed.2d 384 (1960) (state tax that imposes greater burden on lessees of federal property than on lessees of other exempt public property impermissibly discriminates against federal government). Indeed, Davis states that intergovernmental tax immunity is based on "the need to protect each sovereign's governmental operations from undue interference by the other." 489 U.S. at 814, 109 S.Ct. at 1507.

In the present case, therefore, it is difficult to discern how the General Assembly of Virginia should have been expected to perceive that a statutory scheme, exempting state pensioners from state taxation, would have placed any foreseeable and direct burden on some federal operation. Consequently, we conclude that the Davis decision established a new rule of law by deciding an issue of first impression whose resolution was not clearly foreshadowed. Thus, the first prong of the Chevron test is satisfied.

B

The second Chevron prong requires a court to "weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation." 404 U.S. at 106-07, 92 S.Ct. at 355. In applying this factor, we must determine whether the intergovernmental tax immunity doctrine will be retarded or furthered by retroactive application of the Davis decision.

The purpose of intergovernmental tax immunity is not to prevent legitimate state taxation. See Smith, 496 U.S. at ----, 110 S.Ct. at 2332. Virginia's taxing statute was legitimate until a new rule was announced in Davis. As soon as the General Assembly became aware of the Davis decision, it acted to correct the defects in its statute. See Acts 1989, Special Session II, c. 3. As a result, the purpose of the intergovernmental tax immunity doctrine already has been fully served, and applying Davis retroactively would do nothing either to retard or to further the doctrine's purpose. Therefore, the second prong of the Chevron test is satisfied.

C

The third prong of the Chevron test requires a court to "[weigh] the inequity imposed by retroactive application." 404 U.S. at 107, 92 S.Ct. at 355. In weighing the equities, considerable deference must be accorded a state's reliance upon a statute that was presumptively valid. See Lemon v. Kurtzman, 411 U.S. 192, 93 S.Ct. 1463, 36 L.Ed.2d 151 (1973). Indeed, "[i]t is well established that reliance interests weigh heavily in the shaping of an appropriate equitable remedy." Id. at 203, 93 S.Ct. at 1471. As Chief Justice Burg...