Matt Hedstrom, senior associate in the firm’s State & Local Tax Group, was quoted in a State Tax Notes article titled “News Analysis: Did the Tennessee Court of Appeals Phone It In?”
The article discussed Vodafone Americas Holdings Inc. v. Roberts and how the Tennessee Court of Appeals might have resorted to a results-driven analysis in upholding the Department of Revenue’s decision to issue a variance that resulted in higher state taxes for Vodafone.
Hedstrom said that some alternative apportionment cases like Vodafone read as though courts are using a results-driven analysis to ensure states do not get less than what the courts think is a "fair" amount of tax, adding that results-driven opinions should be avoided.
“Courts are charged with interpreting the law; they should not determine the outcome and then work backward to develop the reasoning to fit the outcome,” he said.
“When they do so, their opinions will lack thoughtful analysis of both the underlying statute and its purpose,” Hedstrom said. “By focusing on what it thought was a ‘fair’ result, the court failed to provide a thorough analysis of when equitable apportionment is appropriate and why it believed overriding the statutory formula was warranted for Vodafone.”
“There seems to be confusion regarding when alternative apportionment is appropriate and the more abstract concept of fairness, as measured by tax liability,” Hedstrom said.
"Courts have looked at applying alternative apportionment from the perspective of whether the statutory result is fair to the state—measured by tax liability—but I think the analysis is much different than a simple fairness inquiry," he said. "The inquiry should be focused on whether the statutory regime fairly reflects the in-state business activities and whether alternative apportionment is necessary to remedy an incongruous result based on those specific activities."
“Judicial analysis that takes a simple fairness approach to determine the amount of tax the judge thinks the state should be getting does not align with what alternative apportionment is supposed to do,” Hedstrom said. “The judge should look to whether it is necessary to override the statutory formula to fairly reflect—that is, approximate—a company's actual activities within the taxing state, which requires a detailed review of those activities.”
“The court cannot simply override the statute because it does not like the result,” he added.