WASHINGTON -- The U.S. Supreme Court on Friday ordered several of its state counterparts to review tax refund cases that could cost the states involved hundreds of millions of dollars.
Closing out its 1990-1991 term, the court ordered the supreme courts of Virginia and South Carolina to reexamine whether those states must pay tax refunds to federal retirees. The court also ordered the Minnesota Supreme Court to take another look at whether that state must refund a discriminatory tax on bank holdings of U.S. government securities.
The U.S. high court's action in the cases came one week after the justices decided in James B. Beam Distilling Co. v. Georgia that its rulings should be applied retroactively. But the court stopped short of ruling that tax refunds are necessary when state taxes have been ruled unconstitutional -- leaving the volatile issue for state courts to decide.
However, Justice Sandra Day O'Connor, writing in dissent, said the court's ruling opened the door to potentially "ruinous" refund liability for states.
The Virginia and South Carolina cases, Harper v. Virginia Department of Taxation and Bass v. South Carolina, arose following a 1989 Supreme Court decision in Davis v. Michigan. In that case, the court ruled that states may not impose higher taxes on the retirement benefits of former federal workers than they do on former state employees. About 20 states had similar tax laws.
State supreme courts have subsequently differed widely on whether federal retirees are entitled to refunds on such discriminatory taxes. Michigan and Missouri were required by their courts to pay refunds. But the Virginia and South Carolina supreme courts have ruled refunds are not required.
Virginia finance officials estimate refunds could cost the state about $300 million and warn that that amount is accruing interest daily. South Carolina officials say refunds could cost the state about $200 million if all federal retirees file for refunds.
The Minnesota case, Norwest Bank Duluth v. Minnesota Revenue Commissioner, arose because the state imposed an excise tax on bank net income, which included the interest earned on U.S. government securities but not the interest earned on municipal bonds.
The Minnesota Supreme Court ruled the tax was unlawfully discriminatory against the federal government but refused to order a refund of taxes banks had paid. About 700 banks in the state have filed claims for refunds totaling millions of dollars.
In another development Friday, Justice Thurgood Marshall explained his surprise announcement Thursday that he would retire from the court once his successor is confirmed. He said assertions that he is retiring out of frustration over the court's conservative drift are "a double-barreled lie."
"I'm old," he said at a press conference Friday. "I'm getting old and coming apart."