By CHRISTOPHER BUTLER

During his tenure, former Department of Revenue Commissioner Reagan Farr had too much power to make decisions involving millions of dollars, without any accountability from other government officials, according to the state Comptroller’s Office.

Under Farr’s leadership, the Department sharply increased the number of taxpayer-requested variances, which are discretionary reductions in a taxpayer’s tax bill, usually involving large companies doing business in Tennessee, State Comptroller Justin Wilson said in a report released this week.

Department of Revenue rules require that commissioners invoke variances only in specific and unusual cases.

Half of the 40 approved taxpayer-requested variances since 2000, however, were approved during Farr’s nearly four-year stint as the Department’s commissioner, which coincided with the Department receiving more requests for variances than other commissioners. Many of those variances were promised to certain businesses as part of an economic investment deal, and not strictly for tax apportionment reasons, the report said.

Farr (seen here in this YouTube video), for instance, approved six out of seven taxpayer requested variances during his first year in office.

Until recently the commissioner had the sole power to determine if and when a taxpayer had paid taxes inconsistent with the amount he or she actually should have paid. Farr (and other commissioners preceding and succeeding him) thus could decide which businesses deserved a variance — and he also had the power to decide which businesses did not deserve a variance.

Wilson’s report implied that someone might construe Farr’s actions as showing favoritism to some companies, but not to others.

“One experienced department official gave us an example of a situation in which a taxpayer-requested variance was granted to one taxpayer but was denied to a similarly-situated taxpayer. The department official, while acknowledging the commissioner’s discretionary authority, expressed discomfort to us about that particular taxpayer-requested award.”

Allowing one person to have this much power is a practice that could easily lead to abuse, Wilson warned.

Among Wilson’s findings:

• “Key department employees who should be involved in the decision-making process to grant taxpayer requested variances were excluded from the process. They sometimes were not aware of the taxpayer-requested variances that a commissioner granted or promised.”

• “Department officials made it clear to us in our conversations that there were not regularly followed procedures regarding variances.”

• Those same Department officials also expressed concern about the appropriateness and the reasoning for some of the variances that were granted (A variance currently requires no review or approval from anyone beyond the Commissioner of the Department of Revenue.)

• Documentation of these deals was so poorly kept that any third party could not comprehend whether Farr’s actions were even appropriate, the report said.

The report went further, adding that no one at the Department investigated what sort of precedent Farr was setting for the future.

Wilson warned that such practices could lead to inconsistent application of tax laws and cause problems in litigation between the state and taxpayers.

Farr did not respond to Tennessee Watchdog’s phone calls and e-mail requests seeking comment.

Farr told Comptroller officials, however, that Tennessee taxpayers are analyzing their tax situations in the state, and potential for audits, with greater care, thus leading to the increased number of variance requests.

As Tennessee Watchdog has previously reported, Farr’s economic investment deals involving tax credits, particularly the TNInvestco program, have already stirred much controversy.

TAX VARIANCES

Tennessee’s business tax statutes are based on the Uniform Division of Income for Tax Purposes Act (UDITPA), which is designed to help individual states determine the total taxable income of its multi-state corporations.

The purpose is to prevent any one state from taxing an entity more than its net income in a particular state, thus providing for equitable taxation. Corporate officials may request a variance from the Department of Revenue’s commissioner if they feel a state’s apportionment method does not accurately reflect their true business activities in that state.

Conversely, the commissioner also has the power to impose a higher tax amount if he or she believes a business did not pay enough taxes based on the circumstances.

Thus far, Tennessee courts have not addressed whether there are boundaries to the commissioner’s discretion in granting such variances. They have ruled, however, that any taxpayer requesting a variance must have “clear and convincing evidence” that the commissioner has improperly taxed them for revenue earned out of state.

Courts in other states, meanwhile, have ruled that commissioners must exercise reasonable discretion when deciding whether the circumstances warrant a tax variance.

Those same out-of-state courts said government officials must narrowly interpret the laws on the subject and that a strong presumption already exists against a tax variance. Such laws were written to prevent different states from applying different methods, thus preventing any confusion on the matter.

In prior decades, the state attorney general’s office had to approve the commissioner’s actions on tax variances, but that changed in 1976, when Tennessee formally adopted UDITPA.

UDITPA’s provisions do not appear to provide for any review outside of the commissioner, according to Wilson’s report.

The Department implemented a program in August to more thoroughly evaluate each taxpayer variance request. The new process includes checks and balances and documentation from multiple levels of Department employees, auditors, and legal officers,

The recent Comptroller’s letter also urged the state legislature to require outside review of the Revenue commissioner’s actions to ensure that the power to grant tax variances is not abused.

Christopher Butler is the editor of Tennessee Watchdog and the Director of Government Accountability for the Beacon Center of Tennessee. Contact him at chris@beacontn.org

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