State private letter rulings: What to consider before you ask

Editor: Mo Bell-Jacobs, J.D.

State and local tax professionals have many tools and resources in navigating an extraordinarily complex, often nuanced, and always evolving landscape of state tax law. Among those tools, and perhaps the least understood, are private letter rulings. State tax private letter rulings can provide direct guidance on the treatment of a state tax issue from the taxing authority itself — one of the best sources of certainty. However, taxpayers should understand the risks and opportunities of such rulings.

This item seeks to bring light to the salient considerations before seeking a state private letter ruling. Due to the complexity and extraordinarily different treatment of private letter rulings among the states, the authors highly recommend seeking guidance before requesting a private letter ruling and caution that the considerations addressed herein may not apply to federal private letter ruling requests, a topic not discussed in this item.

What is a private letter ruling?

Private letter rulings are a form of written guidance issued by a taxing authority providing its interpretation of the law as applied to a taxpayer’s facts and circumstances. Private letter ruling requests generally follow specific formats and process procedures. Requests are almost always prospective; they seek tax guidance on future operations or transactions. With exceptions, a taxpayer can rely on the taxing authority’s ruling, provided the pertinent facts have not changed. This can be a tremendous benefit for a taxpayer because businesses are unlikely to be subject to future state tax audits or additional state tax liability when the ruling is followed. The rules governing letter rulings vary, sometimes widely, by state. It should be noted that in some states, letter rulings are called advisory opinions, advice letters, or technical advice. Two states, Alaska and Minnesota, do not issue private letter rulings.

What are the benefits?

As long as the facts do not change, the taxpayer can generally rely on a taxing authority’s ruling. Some states specifically state that their private letter rulings are “nonbinding.” However, even in those states, tax authorities rarely if ever reverse the opinion set forth in the ruling. Again, assuming the facts do not change, taxpayers will have assurance that the tax ramifications of a particular transaction will be consistent with the ruling. This is beneficial especially in transactions involving significant potential tax liability. If the facts or circumstances change from those asserted in the private letter ruling, the guidance may no longer apply. Subsequent changes in the tax law, regulations, or guidance may also nullify the ruling.

Private letter rulings by their nature offer a degree of privacy. While they are made public in most states, identifying taxpayer information is always redacted. However, even though the published rulings are redacted, many businesses do not want to provide facts that may identify their name or operations. Businesses in certain industries may be easily identifiable just by the issue(s) involved. In a small number of states, private letter rulings can be requested anonymously. However, taxpayers can sometimes still be identified, especially if the same request has been made in multiple states — which is not uncommon for large, multistate businesses.

Some states are required by law to respond to a request for a private letter ruling. If a request is made in one of those states, the taxpayer can be assured of a response. But taxpayers can expect some response in virtually all states.

Understanding the drawbacks

Private letter rulings may offer a number of drawbacks that should be considered before pursuing the request. Such cautions include but are not limited to:

• Private letter ruling requests may require identifying the taxpayer to the state. Disclosing the taxpayer provides the state with information on the transaction at issue in the request and alerts the state to the taxpayer’s presence in the state and calls attention to the specific transaction.
• Private letter rulings may not answer questions of administrative discretion or tax policy, such as waivers of interest and penalties, missed deadlines, legislative intent, and general taxpayer rights.
• The ruling constrains the taxpayer. Taxpayers can rely upon positive outcomes in private letter rulings, but they may be disappointed if the ruling produces an undesirable or unexpected outcome.
• Private letter rulings are issued prospectively. Taxpayers cannot apply a ruling to previous tax years or transactions. Some taxpayers and practitioners mistakenly believe the private letter ruling process can resolve open audit issues. Similarly, taxing authorities may also decline to answer issues addressed through previous audit or appeal actions.
• Most states will not issue private letter rulings for questions that involve settled tax law. Taxing authorities will either decline to answer the request, provide a general information letter, or provide a recitation of the established application of the law. Taxpayers should avoid requesting guidance on the taxability of a transaction addressed by a previous ruling or that is substantially similar to a transaction in current law. Such a request is unlikely to produce a new result.
• Some states charge the taxpayer a fee for considering the request and issuing a private letter ruling. The fees are nonrefundable even if the taxing authority refuses to issue a ruling because the tax law is settled. These fees, combined with a service provider’s engagement fees, may exceed the taxpayer’s materiality and lessen the benefit of proceeding with a private letter ruling request.
• State taxing authorities may take some time to respond to the request. It is possible that a taxpayer will not receive a response prior to the relevant transaction or filings at issue. Taxpayers should provide as much lead time as possible when requesting a ruling.
• It should be noted that other taxpayers — those not seeking the private letter ruling — generally cannot rely on a private letter ruling of another taxpayer in analyzing their own tax liabilities in a particular state. However, a ruling that addresses a similar fact pattern may help to provide informal guidance on how the state taxing authority interprets the relevant law in a similar fact pattern.

Questions to ask before pursuing a private letter ruling

Before making a private letter ruling request, taxpayers and their tax advisers should carefully consider the taxpayer’s specific facts and the totality of circumstances. The following questions will help the taxpayer assess whether to proceed with a request:

Is a private letter ruling necessary to resolve this specific issue? In some cases, private letter ruling requests for a simple transaction, a transaction covered by previous private letter rulings or other relevant state guidance, or a transaction that is clearly addressed by current tax law may not be responded to by the taxing authority. Taxing authorities generally will not respond to a private letter ruling request for an issue clearly explained in the tax law or addressed in existing guidance. Taxpayers and tax practitioners therefore should diligently research existing tax law, including cases, rulings, statutes, regulations, and guidance to ensure that the issue has not been previously addressed.

Does the tax issue lend itself to private letter ruling resolution? Is the request for a private letter ruling one that a taxing authority could respond to? Requests should be related to unique or complex issues that involve the application of unsettled or unaddressed tax law to a taxpayer’s particular facts. A private letter ruling cannot be used to override statutory or case law, and while taxpayers occasionally attempt to do this through a private letter ruling, usually it results in a suboptimal outcome.

Do the benefits of a private letter ruling outweigh the costs? Ongoing and material transactions may be ideal for private letter ruling requests, as well as requests not clearly addressed by current state tax law. Small–dollar, one–off issues may not provide the taxpayer with a benefit once the aggregate time, fees, and costs involved in requesting a private letter ruling are considered.

Does the taxpayer risk further scrutiny from the state by submitting its private letter ruling request? Once the private letter ruling is issued, the state could review the taxpayer’s actions for compliance with the response. Such informal auditing could include tracking taxpayer changes in tax return filings and payments, new registrations or permits, and any other information available to the taxing authority.

Does the taxing authority have a clearly defined process for private letter rulings? Engagement teams should consider the rules and regulations, if any, for filing a private letter ruling request. Some states require specific formats for requests and that specific information be submitted with requests (e.g., the facts, the applicable law with citations, and a requested treatment or proposed interpretation). Requests should not deviate from state rules and procedures. A state may use the basis of a well–written taxpayer request in its response. Also, a state is more likely to respond quickly if all applicable law is cited and a proposed response is diligently researched and thoroughly presented.

Takeaway

Private letter rulings are associated with significant benefits — namely, certainty. But taxpayers need to consider whether a private letter ruling is the right vehicle to seek taxing authority guidance before spending time and money to do so. A best practice for taxpayers is to consult with experienced state and local tax practitioners to evaluate the pros and cons of pursuing a private letter ruling request and to ensure compliance with all required procedures.

Editor

Mo Bell-Jacobs, J.D., is a senior manager, Washington National Tax, with RSM US LLP and a member of the AICPA Tax Executive Committee.

For additional information about these items, contact Bell-Jacobs at Mo.Bell-Jacobs@rsmus.com.

Contributors are members of or associated with RSM US LLP.