Report Ranks States with Best and Worst Tax Administration

A new study by the Council on State Taxation compares states' tax appeals processes and procedural requirements. See how your state ranks.
by | December 17, 2013 AT 9:00 AM

Taxpayers filing appeals in Maine and Ohio are far better off than those doing so in California and Louisiana.

That’s according to a report published Monday by the Council on State Taxation (COST) assessing a range of criteria on states’ tax appeals processes and procedural requirements. In its review of policies, COST reports some states have established more fair and effective systems than others.

While relatively few taxpayers are audited, COST argues it’s crucial that they perceive a system to be balanced and fair.

“If you feel the system is not rigged against you and is fair, you’re more willing to comply with it,” said Douglas Lindholm, COST’s president and executive director.

Ohio and Maine were the only states to earn "A” grades in the report, while Alaska, Arizona, Kansas, Minnesota, Montana and Pennsylvania also received high scores. The report slapped Louisiana and California with the worst grades, along with Colorado and Alabama.

COST, a trade association representing multi-state corporations, maintains that one of the key components of a fair system is an independent tax court or tribunal, which rules on complex state tax cases and, in some states, property tax appeals.

COST advocates that tax tribunals be independent of and not located within executive branch agencies responsible for administering state taxes, ensuring they function more objectively and independently.

“The [administrative law judges] who work for tax commissioners may be working in a very objective manner, but because of the perception they work under the tax commissioner, they’re unfairly tainted,” Lindholm said.

Many states moved to make tax tribunals independent over the past decade, and more than half now have such systems in place.

COST criticized Alabama for failing to establish a tax appeals commission this past legislative session. Under the state’s current system, the administrative law judge reports to the state tax commissioner.

Another way treatment of taxpayers varies from state-to-state involves “pay to play,” or mandates requiring payments of taxes in question before they can be contested.  In some states, taxpayers must pay an assessed tax or post a bond if cases reach the circuit or district court level. Fourteen states currently impose varying types of bond or prepayment requirements, according to the report.

The report also identifies states where a disparity exists in interest rates for assessments and tax refunds. Wisconsin, for example, recently cut its interest rate for overpayments from 9 percent per year to 3 percent for refunds paid after July 1. For underpayments, the interest rate remains a much higher 12 percent. Similarly, the District of Columbia imposes a 10 percent rate per year (compounded daily) for underpayments and uses the Richmond Federal Reserve Bank’s discount rate plus 1 percent -- a lower rate -- for overpayments.

Lindholm said that if states want to raise additional revenue with higher rates on assessments, they should also raise rates for refund claims, calling it an issue of “fundamental fairness.”

COST further evaluated states on transparency measures, arguing “secret tax laws” hinder both administration and public compliance. Better performing states, COST says, provide libraries of letter rulings and administrative decisions, allowing for a better understanding of how tax laws are applied.

The following table summarizes COST’s state rankings. Lower numbers represent better scores. The “independent dispute forum” and “pay-to-play” scores were weighted slightly more than other listed criteria. Details for each state are outlined beginning on page 11 of the report.