WASHINGTON -- States may have to pay out billions of dollars in refunds as a result of a recent Supreme Court decision on the arcane issue of retroactivity, legal analysts said last week.
The court's ruling in James B. Beam Distilling Co. v. Georgia could leave the states open to a massive refund liability ranging between $6 billion and $15 billion, according to some estimates. To Georgia alone, which already is facing a $400 million deficit, the decision could add $30 million to the red ink, the state's potential refund liability.
But the court's splintered opinion in the case failed to provide clear guidance to state officials on when they must provide refunds of unconstitutionally collected taxes, leaving a lot of uncertainty.
Ferdinand P. Schoettle, a law professor at the University of Minnesota, said reading the court's opinion "was like watching a bad baseball game. I had to draw up a scorecard to see what they were doing."
The upshot of the opinion is that the court's 1984 ruling in Bacchus Imports Ltd. v. Dias must be applied retroactively. In that case, the justices struck down as unconstitutional a Hawaii liquor tax that discriminated against out-of-state manufacturers of spirits.
Georgia had a similar law, prompting James Beam to seek a refund on the theory Georgia never should have been able to collect the money. The Georgia Supreme Court agreed the tax was unconstitutional, but said no refund was necessary. It said the state, relying on previous Supreme Court precedents, had no reason to believe the tax would be declared unconstitutional.
Even though the U.S. Supreme Court said the decision should be applied retroactively, it divided over broader application of retroactivity rules and soft-peddled the refund issue.
Justice David H. Souter, joined by Justice John Paul Stevens, said once the court has applied a rule of law to litigants in one case, it must do so to all others unless procedural requirements bar the move. The justices said the Georgia Supreme Court may decide the state, relying on previous precedent, should not be forced to shell out the money.
Taking a stronger approach, Justice Antonin Scalia, Justice Harry A. Blackmun, and Justice Thurgood Marshall said the court's rulings always should be applied retroactively -- a position that does not take into account whether a state relied on previous precedent and inevitably would lead to refunds for unconstitutionally collected taxes.
By contrast, Justice Byron R. White said he believes there may be circumstances under which it would be appropriate for the court to announce a new rule of law, but apply it only prospectively, a view that would keep states off the refund hook.
And in a blistering dissent, Justice Sandra Day O'Connor, joined by Chief Justice William H. Rehnquist and Justice Anthony Kennedy, said the court must carefully balance the "equities" of cases to determine whether states that have had their taxes overturned must pay refunds.
The court's split is sure to encourage states that have had their taxes declared unconstitutional to argue they relied heavily on Supreme Court precedents, some lawyers said. But how lower courts will treat the issue remains unclear.
Gene M. Connell, a partner with Kelaher, Bass & Connell in Surfside Beach, S.C., said, "I've been a lawyer for 10 years. I looked at what they wrote and I don't know what to make of it."
Mr. Connell, whose firm is representing about 60,000 federal retirees who are seeking refunds on a state tax on their retirement benefits, said the South Carolina Supreme Court has demonstrated a decided bias against refunds in the past. "In two previous cases, they've not only said, 'No,' but 'Hell no,'" he said.
Mr. Schoettle said state courts are under pressure to side with their respective state revenue departments because tax issues are complicated, as well as "pure political pressure. States are under financial strain and don't want to give the money back."
The South Carolina dispute could cost the state about $200 million, and a similar case in Virginia could cost that state $440 million. Another case involving federal retirees in Utah could cost the treasury $120 million.
Edward T. Alter, Utah's treasurer, said he has mixed feelings about the refund issue. He said states generally should not keep money they collected unconstitutionally. But if states believed they were acting constitutionally when they collected the money, they should not have to return it.
He noted it was not until 1989 when the Supreme Court issued a ruling in Davis v. Michigan that states were put on notice that they could not impose higher taxes on federal pensioners than on their own retirees.
Of the court's muddled message in the Beam case, Mr. Alter said: "The court is basically screwed up. They've got themselves all tied up in their own underwear." He added that the court should develop a strong standard so states "can navigate and know where they are."
Mr. Schoettle agreed, but said the "cleanest position" is one that would require retroactivity of all Supreme Court rulings. "If a state can discriminate against out-of-staters in its tax laws, the unambigous message is to go ahead and discriminate," he said.
