High court passes on taxpayers' right to get attorneys' fees.

WASHINGTON--A relatively obscure battle over attorneys' fees that the Supreme Court disposed o last week could benefit states, at least for the time being.

At issue in the dispute, Quill Corp. v. North Dakota, was whether taxpayers who have had a state tax levy overturned can use a federal civil rights law to obtain attorneys' fees. The North Dakota Supreme Court said taxpayers may not use the federal law.

As it did in nearly 1,500 cases last week, the U.S. Supreme Court justices declined to review the matter. The court's decision not to hear arguments in the case provided states with at least a temporary victory over taxpayers.

"As states become more aggressive in pushing taxes to the limit, one of the taxpayers' most powerful weapons is attorneys' fees," said Timothy Dyk, a partner with Jones, Day, Reavis & Pogue who chairs the firm's issues and appeals group.

"The amounts of money we're talking about are significant," Dyk said at a recent Supreme Court seminar sponsored by his law firm. "We're talking about hundreds of thousands of dollars."

Dyk said that if states know they may end up paying a large legal bill, they may be less inclined to be aggressive when taxpayers challenge the constitutionality of their assessments. "But the court has left this for another day," he said.

The Quill case arose out of a 1992 Supreme Court ruling in which the justices said North Dakota could not require Quill, an out-of-state mail-order firm, to collect and remit state sales taxes.

The ruling partially reaffirmed the court's 1967 decision in National Bellas Hess Inc. v. Department of Revenue, in which the court struck down an Illinois law requiring out-of-state mail-order firms to collect and remit sales and use taxes. The court said the law violated both the U.S. Constitution's due process and commerce clauses.

But in the Quill decision, the court said such state laws violate only the commerce clause, a technical but important distinction for states. The commerce clause gives Congress exclusive authority to regulate interstate commerce. Consequently, Congress is free to pass legislation that would allow states to impose tax collection responsibilities on mail-order firms.

Left unresolved, however, was the issue of remedy.

Most state statutes limit the amount that taxpayers can recover in attorneys' fees after challenging state taxes. But when the taxpayers have relied upon provisions of the U.S. Constitution to attack their assessments, many have tried to file suit under federal civil rights law, which generally provides a more liberal approach to attorneys' fees than state laws.

But at the same time, the federal Tax Injunction Act requires plaintiffs to bring challenges to state taxes only in state courts. Although the Supreme Court in the 1990 case of Howlett v. Rose said state courts generally must entertain the civil rights claims, the justices have not specifically said whether state courts must entertain the suits if they involve state tax matters.

As a result, there is a conflict among the state courts as to whether the Supreme Court's ruling in Howlett applies to state tax cases. For example, the Tennessee Supreme Court has held that state courts there are obligated to entertain the civil rights claims for attorneys' fees, and that the state statute governing attorneys' fees in tax refund cases does not apply in disputes that successfully questioned the constitutionality of a state tax.

But the North Dakota Supreme Court reached the opposite conclusion in the Quill case. The U.S. Supreme Court's decision not to review the case was curious in that one of the things the justices look for when deciding whether to hear arguments in a dispute is whether there is a conflict among the lower courts on how laws are to be interpreted.

Because the justices did not agree to review the matter, the question remains without a definitive answer, and the uncertainty could benefit states hoping to stave off constitutional challenges to their taxes.

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