In Loper Bright Enterprises v. Raimondo, the US Supreme Court overruled the 40-year-old Chevron doctrine, which had directed courts to defer to any reasonable agency interpretation of an ambiguous law. This development prompts significant implications for state and local tax authority, notably in the realm of transfer pricing.
Although the exact impact of Loper Bright on state tax authorities remains uncertain, taxpayers are already utilizing the case to challenge state actions. At the federal level, it has influenced a taxpayer appeal in US Tax Court concerning the IRS’s enforcement of Section 482 of the tax code.
Loper Bright revived Skidmore deference, where the respect given to agency determinations depends on the thoroughness and validity of the agency’s reasoning, as well as its consistency over time. While state courts are not bound by Loper Bright or the Skidmore standard, this reestablishment encourages greater scrutiny of state tax agencies’ actions.
Most states lack robust transfer pricing capabilities and consistency in enforcement. Compounded by reliance on outside consultants for audit assistance, such as New Jersey’s recent request for an external transfer pricing consultant, the question of whether tax departments should receive deference arises. Without in-house expertise, state determinations are often deemed unworthy of deference under the Skidmore standard or any rational criterion.
The broader trend reflects a movement away from granting substantial discretion to state tax authorities, a stance highlighted by legislative rejections of Chevron-style deference and mixed judicial rulings on agency discretion. A pertinent example includes American Honda Motor v. Walther, where the Arkansas Supreme Court ruled against the presumption of correctness in the Arkansas Department of Finance and Administration’s assessments.
Considering these developments, it is apparent that transfer pricing may be the next frontier for challenging state authority, especially in courts where states lack competing studies or compelling evidence to counter taxpayer documentation. As Loper Bright sets a precedent against deference to reasonable federal agency regulations, state courts may establish their own standards for deference, presenting additional challenges to state tax agencies.
The case in question is Loper Bright Enterprises v. Raimondo, U.S., No. 22-451, decided on June 28, 2024.