Loper Bright and the future of deference to state tax authorities

Editor: Brian Myers, CPA

Loper Bright Enterprises v. Raimondo.¹ In a 6–2 decision, the Court overturned 40 years of precedent in Chevron U.S.A. v. Natural Resources Defense Council,² which required federal courts to defer to federal agencies’ reasonable interpretations of ambiguous statutes. While Loper Bright addressed a specific provision under the federal Administrative Procedure Act (APA) and did not address a tax matter, the decision could significantly impact state as well as federal taxation, particularly in those states that have adopted and follow similar agency deference standards to those enunciated in Chevron. The state tax implications may be even more pronounced, given recent taxpayer efforts to use the decision as a tool to challenge the authority of state tax agencies to make tax policy that, arguably, exceeds the authority of state tax law.

This column explores the history and background of the Chevron doctrine and historical state approaches to agency deference. It then reviews the Loper Bright decision and the most recent taxpayer efforts using the decision as an argument to challenge state tax policy. Finally, it considers the extent to which the state tax impact of Loper Bright may be felt from a controversy, legislative, and administrative rulemaking perspective.

Background

In Chevron, the Supreme Court held that an administrative agency’s interpretation of a statute administered by that agency should be given deference by a court if (1) the statutory provision is ambiguous and (2) the agency’s interpretation of the statute is a reasonable construction of the statute. In a related case, Auer v. Robbins, the Court expanded on the concept of Chevron deference, holding that agencies should be given deference in interpreting their own regulations if the language of the regulation itself is ambiguous.³ Before Chevron and Auer, in Skidmore v. Swift & Co., the Court took a different approach to administrative deference, concluding that the weight given to a ruling, interpretation, or opinion of an agency depends on the “thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.”⁴

Over time, the Chevron doctrine has become pivotal in administrative law, influencing how regulations have been interpreted, invalidated or sustained, and applied by both federal and state courts. Indeed, Chevron has become one of the most cited cases in modern public law. However, opposition to the doctrine had increased over the years, with opponents of it arguing that the courts are better suited to interpret the meaning of ambiguous statutes rather than the agencies charged with implementing them.

Chevron overturned

It bears repeating that Loper Bright is not a state tax case, nor is it a tax case at all. Indeed, the petitioners challenged the validity of a regulation promulgated by the U.S. Department of Commerce affecting commercial fisheries. However, the action directly challenged federal court deference to agency regulations under Chevron. In rejecting Chevron, the Court held that the federal APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority and that courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. Instead, the Court determined that the concept of deference to an agency’s reasonable interpretation of an ambiguous statute “has proved to be fundamentally misguided.”⁵

Importantly, the Court was careful to say that some level of deference to administrative agencies is appropriate, especially as to agency authority that was issued contemporaneously with the relevant statute and that has remained consistent over time. In doing so, the Court has tacitly retained the less deferential Skidmore standard, concluding that courts, in exercising their independent judgment, may look to the interpretations and opinions of the agency as guidance.⁶ In the short term, Loper Bright immediately reduces the power of federal agencies to interpret the laws they administer. But what about state agencies and, more specifically, state taxing agencies?

State tax historical approaches to Chevron deference

Chevron deference has historically carried great weight in the tax world, given that many aspects of tax law are largely administrative law. At the state level, state tax agencies have amassed and exercised extensive administrative authority in the implementation of state tax laws, perhaps exceeding the authority of the IRS at the federal level. As a result, they play an active role in developing and adopting regulations and other guidance. These agencies find themselves in the unique position of interacting with both the state legislatures that draft and enact tax legislation and the taxpayers that are required to apply the enacted legislation in determining their overall tax liability. When a state enacts legislation, there may be ambiguities within the statute to allow some room in its implementation. As at the federal level, state tax agencies have established various degrees of expertise to interpret often complex state tax statutes and have filled in statutory gaps through the promulgation of regulations and the development of administrative guidance ranging from formal technical bulletins or letter rulings to less formal frequently asked questions documents posted on their websites.

Of course, more recently, the level of deference given to state tax authorities in developing guidance interpreting state tax law has become increasingly controversial. Many states have incorporated elements of Chevron into their rules of statutory construction over the years, but they have their own variation of deference afforded to administrative agencies, leading to uncertainty over whether the law will be applied the same way under factually similar circumstances. The states may be thought of as falling into four distinct groups with respect to agency deference:

• The first are the “strong deference” states that have explicitly adopted the Chevron doctrine or very similar rules. For example, Kentucky and Pennsylvania courts have traditionally applied Chevron deference to an agency’s formal interpretation of statutes.⁷
• The second group are the states that have taken a “hybrid” approach to agency deference, relying on blended elements of Chevron and Skidmore. For example, Michigan has given “respectful consideration” to state agency interpretations, with the Michigan Supreme Court instructing lower courts to reject agency interpretations only if they conflict with legislative intent.⁸ Similarly, the Texas Supreme Court has held that agency construction of a statute is entitled to “serious consideration” if the construction is “reasonable and does not contradict the plain language of the statute.”⁹
• The third group are the states that do not allow deference to be given to state agency interpretations, either through the enactment of statutory provisions or through the development of case law. For instance, in 2024 alone, Idaho,¹⁰Indiana,¹¹ and Nebraska¹² enacted legislation specifically ending judicial deference to state agencies.
• Fourth, for the remaining states that do not fit into one of the above three groups, it is unclear which deference standard should be applied, either because the state has not announced a clear deference standard or because the state has applied different levels of deference depending on the facts and circumstances of the case.

State tax implications

An immediate question is whether and to what extent Loper Bright impacts state tax policy and rulemaking authority, including the level of deference given to state taxing authorities responsible for administering state tax laws. From a tax controversy perspective, taxpayers are likely to use Loper Bright as a tool in challenging existing state tax regulations and administrative guidance that contradict their tax positions, given that many state courts may adjust their deference standards post–Chevron. Taxpayers that may have been hesitant to challenge conflicting administrative decisions in regulatory guidance may feel more empowered to do so now that agency rulemaking is likely to undergo a more rigorous judicial review. Indeed, the American Catalog Mailers Association explicitly referenced Loper Bright in its complaint challenging portions of recently promulgated New York regulations limiting the protections of P.L. 86–272 (the Interstate Income Act of 1959) for out–of–state companies engaging in certain internet activities.¹³ The complaint argues that New York’s regulations interpreting P.L. 86–272 conflict with the federal law, should not be accorded deference, and are thus invalid.

More recently, in appealing a South Carolina Administrative Law Court (ALC) decision related to the interpretation of a service receipts sourcing statute for income tax apportionment purposes, the taxpayer argued that the reviewing court owes no deference to either the ALC or the South Carolina Department of Revenue’s construction of the statute, even if in the form of a “longstanding policy.”¹⁴ In making this argument, the taxpayer relied on a South Carolina Appeals Court decision issued in July 2024 quoting Loper Bright.¹⁵ It remains to be seen how effectively such taxpayer arguments will fare before the courts, keeping in mind that when it comes to agency deference, state courts are required to follow their own state constitutional and judicial precedents.

In the longer term, the rejection of Chevron deference may have significant implications for state tax administrative rulemaking and judicial review, particularly in those states that have adopted some form of Chevron deference. From a judicial perspective, courts in these states are likely to give increased scrutiny to agency interpretations of state tax laws — they may now be charged with finding the best statutory interpretation instead of merely deferring to the state tax authority’s interpretation. In the case where a state’s APA contains language similar to the scope–of–review language in the federal APA, or where the law is silent, Loper Bright may encourage state courts to reject the tax agency’s existing interpretations and apply their own.

Within the tax controversy realm, Loper Bright may also impact state administrative tax appeals that have not yet reached the courts. Although the neutrality of the state courts in tax litigation can be debated (it is but one reason that taxpayers often desire to bring state tax cases in the federal courts instead), the independence of tax administrative tribunals is often questioned, since many tribunals are creatures of the very state agencies that have created them. While such tribunals are unlikely to rule on questions of agency deference and other constitutional issues, Loper Bright may nonetheless encourage taxpayers to make such arguments earlier on in the controversy process in support of reaching a compromise or settlement based on the hazards of litigation.

From a legislative perspective, Loper Bright is likely to affect the amount of authority legislatures delegate to regulatory guidance. Little about the decision changes the power of Congress to specifically delegate authority to an agency to provide further meaning to a statute. Going forward, however, legislatures may be more specific about the authority granted to state agencies and how detailed the regulatory guidance must be. State legislatures could sidestep this issue by drafting more detailed statutes, but this in large part depends on the amount of time and effort state legislators are willing to dedicate to tax legislation. Another complicating factor is the fact that state legislators often lack the expertise necessary to implement sound tax policy, often deferring to lobbyists or other stakeholders to write the law.

Finally, Loper Bright is likely to continue the trend of states moving away from adopting Chevron deference in tax cases through judicial rulings or legislation to satisfy the separation–of–powers concerns raised by the Court. States that have adopted agency deference standards similar to Chevron may need to reassess such standards where long–standing state agency interpretations face increased judicial scrutiny. It will be interesting to see whether these states act more expediently through legislative action to reject Chevron deference or wait for the state’s courts to consider a legal challenge to an agency interpretation of a tax or nontax statute under a Loper Bright analysis. Other states may be more inclined to adjust their deference standards and adopt the Skidmore deference standard and its hodgepodge of factors that were endorsed by the Court. Finally, states without a clear deference standard may now be forced to come up with one. Ideally, Loper Bright could bring state legislatures and tax agencies to work more closely together to draft effective tax legislation and interpretative guidance that provides more certainty for both sides, but until then — let the controversy commence.

¹Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). The case was joined with Relentless, Inc. et al. v. Department of Commerce, No. 22-1219 (U.S. 6/28/24).

²Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

³Auer v. Robbins, 519 U.S. 452 (1997).

⁴Skidmore v. Swift & Co., 323 U.S. 134 (1944).

⁵Loper Bright, slip op. at 29; see also Beavers, “Supreme Court Overturns Chevron Doctrine,” 55-9 The Tax Adviser 68 (September 2024).

⁶According to the Court, the weight given to such guidance would depend on the thoroughness of the agency’s reasoning, in line with the Skidmore decision. See also Walker, “Revisiting Skidmore Deference After Loper Bright,” 238-6 Journal of Accountancy 50 (December 2024).

⁷See, e.g., Winslow-Quattlebaum v. Maryland Insurance Group, 752 A.2d 878 (Pa. 2000), and Estate ofMcVey v. Department of Revenue, 480 S.W.3d 233 (Ky. 2015).

⁸In re: Complaint of Rovas against SBC Michigan, 754 N.W.2d 259 (Mich. 2008).

⁹Tarrant Appraisal District v. Moore, 845 S.W.2d 830 (Tex. 1993).

¹⁰H.B. 626, Relating to the Administrative Procedure Act; Amending Section 67-5279, Idaho Code, to Provide for a Scope of Review and to Make Technical Corrections; and Declaring an Emergency and Providing an Effective Date.

¹¹H.B. 1003.

¹²L.B. 43.

¹³American Catalog Mailers Ass’n v. N.Y.Department of Taxation & Finance, N.Y. Sup. Ct. of Albany County, No. 903320-24 (complaint filed 4/5/24).

¹⁴Mastercard Int’l Inc. v. S.C. Department of Revenue, S.C. Ct. App., No. 2024-001252 (appeal filed 10/30/24).

¹⁵Colonial Pipeline Co. v. S.C. Department of Revenue, 905 S.E.2d 129 (S.C. Ct. App. 2024).

Contributors

Patrick K. Skeehan, J.D., is a state and local tax senior manager in Grant Thornton’s Washington National Tax Office. Brian Myers, CPA, is a partner at Crowe LLP in Indianapolis. Skeehan is a member, and Myers is chair, of the AICPA State and Local Taxation Technical Resource Panel. For more information about this column, contact thetaxadviser@aicpa.org.