Virginia High Court says federal retirees, while wrongly taxed, get no refund.

WASHINGTON -- Federal retirees in Virginia are not entitled to a state tax refund, even though they were found to have been taxed unconstitutionally, the Virginia Supreme Court ruled Friday.

The unanimous opinion, written by Justice Roscoe B. Stephenson Jr., spared Virginia from a potential $440 million refund liability in the case, Harper v. Virginia Department of Taxation.

State officials breathed a sigh of relief at the outcome.

"Nov. 8 is a good day for state government," said Paul W. Timmreck, Virginia's finance secretary. He said the court's decisions Friday in the Harper case and in Dykes v. Northern Virginia Transportation District Commission -- a dispute over whether appropriation-backed lease debt violated the state constitution -- were "good news." In the Dykes case, the court upheld the use of such debt.

The Harper case arose following a 1989 U.S. Supreme Court ruling in Davis v. Michigan, in which the court said states cannot impose higher taxes on the retirement benefits of former federal workers than they do on former state employees. About 20 states, including Virginia, had such arrangements as an incentive for workers to choose state, rather than federal, service.

Although the court struck down the discriminatory tax schemes, it declined to rule whether states levying unconstitutional taxes must provide refunds. That unresolved issue was of extreme importance to Virginia, which is home to about 200,000 federal retirees.

The state court's action Friday marked the second time this year the justices said Virginia was not liable for refunds in the Harper case. The court first ruled on the matter March 1.

But Henry Harper, the plaintiff in the case, appealed to the U.S. Supreme Court. Following its ruling in James B. Beam Distilling Co. v. Georgia, the U.S. Supreme Court sent the Harper case back to the state high court for reconsideration.

In the Beam case, the court said its rulings generally should be applied retroactively. But the court stopped short of requiring tax refunds in all cases when state taxes have been ruled unconstitutional.

Justice Sandra Day O'Connor, however, wrote in dissent that the Beam decision opened the door to "potentially devastating liability without fair warning" to states.

In its reconsideration of the Harper case, the Virginia Supreme Court said the Beam ruling did not require it to find that refunds are necessary.

"Consequently, having reconsidered our March 1, 1991, decision in light of Beam, we conclude that nothing articulated in Beam requires a result different from that reached in our prior decision," Justice Stephenson said. "Accordingly, we reaffirm our prior decision in all respects."

The court's March 1 ruling relied extensively on what has become known as the Chevron test, which was outlined by the U.S. Supreme Court in a 1971 case, Chevron Oil Co. v. Hudson. The three-part test is used to determine whether refunds are required when taxes have been declared unconstitutional.

It asks whether the legal principle used to declare a tax unconstitutional was new, whether the purpose of the Constitution's commerce clause would be furthered by retroactive relief, and whether requiring a refund would produce inequitable results.

Because the U.S. Supreme Court's Davis ruling was unexpected, and because providing a refund to federal retirees would be inequitable to the state, the Virginia Supreme Court concluded in March that no refund was necessary.

In the Beam case, the U.S. high court said principles of equality and "stare decisis" -- the legal doctrine that precedents should not be tossed aside lightly -- should prevail over claims based on a Chevron analysis when the Supreme Court announces a new rule of federal law and applies it to the litigants in the case prompting the new rule.

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