Harper v. Virginia Department of Taxation

Present: Carrico, C.J., Compton, Stephenson, Whiting 2 , Lacy,
Hassell, and Keenan, JJ.

HENRY HARPER, ET AL.

v. Record No. 940326

VIRGINIA DEPARTMENT OF TAXATION

OPINION BY
CHIEF JUSTICE HARRY L. CARRICO
September 15, 1995
LAWRENCE E. LEWY, ET AL.

v. Record No. 940411

VIRGINIA DEPARTMENT OF TAXATION
FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA
Donald H. Kent, Judge

This appeal involves the interpretation of a tax-refund

statute, Code § 58.1-1826, which provides in pertinent part as

follows:
If the court is satisfied that the applicant is
erroneously or improperly assessed with any taxes, the
court may order that the assessment be corrected. If
the assessment exceeds the proper amount, the court may
order that the applicant be exonerated from the payment
of so much as is erroneously or improperly charged, if
not already paid and, if paid, that it be refunded to
him. If the assessment is less than the proper amount,
the court shall order that the applicant pay the proper
taxes . . . .

The question for decision is whether the trial court erred in

denying refunds for taxes erroneously or improperly collected for

pension income received by federal retirees. The question is

presented against the following factual and legal background.

On March 28, 1989, in Davis v. Michigan Dept. of Treasury,
2
Justice Whiting participated in the hearing and
decision of this case prior to the effective date of his
retirement on August 12, 1995.
489 U.S. 803, the Supreme Court of the United States held that a

Michigan statute which defined taxable income in a manner

exempting from taxation the pension income of retired state

employees, but not the pension income of retired federal

employees, violated the doctrine of intergovernmental tax immunity

embodied in the supremacy clause of the United States

Constitution. Id. at 817. The Court stated that Michigan "having

conceded that a refund is appropriate in these circumstances," the

appellant "is entitled to a refund" to the extent he "has paid

taxes pursuant to this invalid tax scheme." Id.

Virginia similarly exempted the pension income of retired

state and local government employees, but not the pension income

of retired federal employees. Following Davis, the Virginia

General Assembly repealed the exemption for state and local

employees, Acts 1989, Spec. Sess. II, c. 3, but made no provision

at the time for the relief of federal retirees for the taxes they

had paid prior to Davis. 3

Also in 1989, Henry Harper and Lawrence and Miriam Lewy,
3
In 1994, the General Assembly enacted the Federal
Retirees Settlement Program. Acts 1994, Spec. Sess. I, c.
5. This legislation authorized the Tax Commissioner "to
make settlement payments to taxpayers to resolve disputed
claims for refunds of taxes paid with respect to retirement
or pension benefits received from a federal retirmenet
system . . . for any taxable year beginning on or after
January 1, 1985, and ending on or before December 31, 1988."
The legislation provided that "[t]he taxpayers shall be
given the option of whether they want to participate in the
settlement" and "[t]hose who do not want to participate will
have the option of having their entitlement to refunds
determined by existing litigation or filing suit
themselves." The Harper taxpayers have exercised the latter
option and seek to have their entitlement to refunds
determined in the present litigation.
along with numerous other federal pensioners, brought proceedings

in several Virginia circuit courts seeking refunds of taxes paid

since 1985 on income from civil service annuities or pensions for

federal employment or military duty. The several proceedings were

consolidated into one action in the Circuit Court of the City of

Alexandria, where the matter has been litigated, and the case is

before this Court for the third time. The Circuit Court of the

City of Alexandria will be referred to hereinafter as the trial

court; the plaintiffs in the consolidated action will be referred

to collectively as Harper or the Harper taxpayers; and the

Virginia Department of Taxation will be referred to as the

Department.
In the initial proceeding below, the trial court ruled that

Davis should be applied only prospectively and denied the refunds

sought by Harper. We awarded Harper an appeal and affirmed the

judgment of the trial court, holding that Davis should not "be

applied retroactively" and that "state law does not require tax

refunds, but to the contrary, grants prospective-only application

to decisions that invalidate a taxing scheme." Harper v. Virginia

Dept. of Taxation, 241 Va. 232, 243, 401 S.E.2d 868, 874 (1991).

The Supreme Court granted certiorari, vacated our judgment,

and remanded the case "for further consideration in light of James

B. Beam Distilling Co. v. Georgia, [501 U.S. 529, 540 (1991)

(error to refuse to apply rule of federal law retroactively after

case announcing rule has already done so)]." Harper v. Virginia

Dept. of Taxation, 501 U.S. 1247 (1991) (Harper I). Upon remand,

we reaffirmed "our prior decision in all respects," stating that
"having reconsidered our . . . decision in light of Beam, we

conclude that nothing articulated in Beam requires a result

different from that reached in our prior decision." Harper v.

Virginia Dept. of Taxation, 242 Va. 322, 327, 410 S.E.2d 629, 632

(1991).

The Supreme Court again granted certiorari. Harper v.

Virginia Dept. of Taxation, 504 U.S. 954 (1992). Disagreeing with

this Court's treatment of the retroactivity issue, the Court

stated that its response in Davis to Michigan's concession that a
refund was appropriate "constituted a retroactive application of

the rule announced in Davis to the parties before the Court."

Harper v. Virginia Dept. of Taxation, 509 U.S. ___, 113 S.Ct.

2510, 2518 (1993) (Harper II). Therefore, the Court held, "the

Supreme Court of Virginia must apply Davis in [Harper's] refund

action." Id.

The Court reversed our judgment, but did not enter judgment

for the Harper taxpayers because, it said, "federal law does not

necessarily entitle them to a refund." 509 U.S. at ___, 113 S.Ct.

at 2519. Rather, the Court stated, "the Constitution requires

Virginia 'to provide relief consistent with federal due process

principles.'" Id. (quoting American Trucking Assns., Inc. v.

Smith, 496 U.S. 167, 181 (1990)). But, the Court explained, "'a

State found to have imposed an impermissibly discriminatory tax

retains flexibility in responding to this determination.'" Harper
II, 509 U.S. at ___, 113 S.Ct. at 2519 (quoting McKesson Corp. v.

Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 39-40

(1990)).
 The Court stated further that "[i]f Virginia 'offers a

meaningful opportunity for taxpayers to withhold contested tax

assessments and to challenge their validity in a predeprivation

hearing,' the 'availability of a predeprivation hearing

constitutes a procedural safeguard . . . sufficient by itself to

satisfy the Due Process Clause.'" Harper II, 509 U.S. at ___, 113

S.Ct. at 2519 (quoting McKesson, 496 U.S. at 38 n.21). "On the

other hand," the Court continued, "if no such predeprivation

remedy exists, 'the Due Process Clause . . . obligates the State

to provide meaningful backward-looking relief to rectify any

unconstitutional deprivation.'" Harper II, 509 U.S. at ___, 113

S.Ct. at 2519 (quoting McKesson, 496 U.S. at 31). Finally, the

Court said that "[i]n providing such relief, a State may either

award full refunds to those burdened by an unlawful tax or issue

some other order that 'create[s] in hindsight a nondiscriminatory

scheme.'" Harper II, 509 U.S. at ___, 113 S.Ct. at 2519-20

(quoting McKesson, 496 U.S. at 40).

The Court remanded the case to this Court "for further

proceedings not inconsistent with [its] opinion." Harper II, 509

U.S. at ___, 113 S.Ct. at 2520; Lewy v. Virginia Dept. of

Taxation, ___ U.S. ___, 113 S.Ct. 3024 (1993). In turn, we

remanded the matter to the trial court "for further proceedings

not inconsistent with the views expressed in the written opinion

of the Supreme Court of the United States [in Harper II]."

The trial court ruled that Virginia does provide a taxpayer a

meaningful predeprivation opportunity to challenge a tax,

sufficient to satisfy due process, in the form of a declaratory
judgment proceeding brought under Code § 8.01-184. The trial

court ruled further that, assuming there had been no due process

violation, Virginia's refund statute, Code § 58.1-1826, did not

mandate refunds to the taxpayers in the present case because the

statute vests courts with discretion in determining whether

refunds should be ordered. Accordingly, the trial court denied

Harper's request for refunds.

We awarded Harper an appeal. Harper argues that because a

court exercises discretion in determining whether to entertain

requests for declaratory judgments, Haughton v. Lankford, 189 Va.
183, 198, 52 S.E.2d 111, 117 (1949), Virginia's declaratory

judgment proceeding does not provide a meaningful opportunity for

taxpayers to withhold contested tax assessments and to challenge

their validity in a predeprivation hearing.

Hence, Harper asserts, under McKesson and Harper II, due

process obligates Virginia to provide meaningful backward-looking

relief, in the form of a clear and certain remedy, to rectify an

unconstitutional assessment of taxes. Harper says that we have

interpreted language in the statutory ancestor of Code § 58.1-1826

as mandating the refund of taxes illegally collected and,

therefore, that § 58.1-1826 provides the backward-looking relief

due process requires. Accordingly, Harper concludes, it was error

for the trial court to refuse to apply § 58.1-1826 and order

refunds in this case.

The Department argues on the other hand that Virginia's

declaratory judgment proceeding provided the Harper taxpayers an

adequate and meaningful predeprivation opportunity to challenge
the validity of the taxes in dispute, yet they failed to avail

themselves of the opportunity. Hence, the Department concludes,

the requirements of due process are satisfied, and Virginia is not

required to provide any backward-looking relief in the form of

refunds.

With respect to Code § 58.1-1826, the Department contends

that use of the word "may" in the statute denotes the exercise of

discretion in the ordering of refunds. The Department makes this

argument:
If the assessment is below the proper amount, the court
"shall" order the payment of the taxes. The court has
no discretion. If the assessment is above the proper
amount, the court "may" order the refunds of the taxes.
The court is clothed with discretion in regard to
refunds. There is no other explanation for the
legislature's choice of "shall" and "may" within § 58.1-
1826.

Hence, the Department concludes, § 58.1-1826 "simply cannot be

read as a legislatively mandated 'entitlement' to refunds," and

the trial court did not err in refusing to order refunds.

Finally, the parties debate the effect of a decision of the

Supreme Court announced after the trial court decided the present

case. In Reich v. Collins, 513 U.S. ___, 115 S.Ct. 547 (1994),
Reich, a retired military officer, filed suit following the

Supreme Court's decision in Davis seeking a refund from the State

of Georgia of income taxes paid on his military pension.

Georgia's refund statute provided that "[a] taxpayer shall be

refunded any and all taxes or fees which are determined to have

been erroneously or illegally assessed and collected from him."

513 U.S. at ___, 115 S.Ct. at 549.
 The Georgia trial court denied Reich's request for a refund,

and the Supreme Court of Georgia affirmed, holding that the refund

statute did not "apply to 'the situation where the law under which

the taxes are assessed and collected is itself subsequently

declared to be unconstitutional or otherwise invalid.'" Id.

(quoting Reich v. Collins, 422 S.E.2d 846, 849 (Ga. 1992)). Reich

petitioned for certiorari, but while his petition was pending, the

United States Supreme Court decided Harper II. The Court then

remanded Reich's case to the Supreme Court of Georgia for further

consideration in light of Harper II. 513 U.S. at ___, 115 S.Ct.

at 550.

On remand, the Supreme Court of Georgia again denied Reich's

request for a refund, this time holding that Georgia's

predeprivation remedies were ample to provide a "'meaningful

opportunity[, sufficient for due process purposes,] for taxpayers

to withhold contested tax assessments and to challenge their

validity.'" Reich v. Collins, 437 S.E.2d 320, 321 (Ga. 1993)

(quoting Harper II, 509 U.S. at ___, 113 S.Ct. at 2519). Reich

again petitioned for certiorari, and the writ was granted. The

Supreme Court reversed, saying that, under McKesson, a state has

"the flexibility to maintain an exclusively predeprivation

remedial scheme, so long as that scheme is 'clear and certain.'"

Reich, 513 U.S. at ___, 115 S.Ct. at 550. Due process, the Court

continued, also allows a state "to maintain an exclusively

postdeprivation regime . . . or a hybrid regime." Id. And, the

Court declared, a state "is free as well to reconfigure its

remedial scheme over time, to fit its changing needs." Id.
 But, the Court said,
what a State may not do, and what Georgia did here, is
to reconfigure its scheme, unfairly, in midcourse -- to
"bait and switch," as some have described it.
Specifically, in the mid-1980's, Georgia held out what
plainly appeared to be a "clear and certain"
postdeprivation remedy, in the form of its tax refund
statute, and then declared, only after Reich and others
had paid the disputed taxes, that no such remedy exists.

Id.

The Department argues that Reich is inapplicable here. The

Department points out the mandate in the Georgia statute that "[a]

taxpayer shall be refunded any and all taxes . . . which are
determined to have been erroneously or illegally assessed and

collected." (Emphasis added.) The Department then says that

"[d]espite this mandatory language, . . . the Georgia Supreme

Court ruled, apparently for the first time and in conflict with

its own precedent, that its statute would not apply to cases

'where the law under which the taxes are assessed and collected is

itself subsequently declared to be unconstitutional.'" It was

this ruling, the Department states, that prompted the United

States Supreme Court in Reich to use the "bait and switch"

terminology and to note that "no reasonable taxpayer would have

read the 'illegally collected' statutory language to exclude

constitutional decisions."

"Unlike the Georgia law," the Department maintains, "the

Virginia statute provides in plain language that 'the court may

order that any amount which has been improperly collected' be

refunded to the taxpayer." The Department asserts that "[n]o

reasonable taxpayer can claim he was misled by the clear and
unequivocal language of this discretionary statute." Furthermore,

the Department says, "unlike the Georgia Court, this Court has not

'reconfigured' Virginia law by adding a judicial gloss to the

clear language of § 58.1-1826, or by failing to follow its own

precedent." Hence, the Department concludes, "[i]t is clear that

Reich has no application and, in fact, is completely

distinguishable from the litigation in Virginia."

We disagree with the Department. We think Reich is

applicable and cannot be distinguished. If, as Harper contends,

we have previously interpreted the statutory ancestor of Code

§ 58.1-1826 as mandating a refund of taxes illegally collected but

we now adopt, for the first time, the Department's view that a

refund is discretionary, we certainly will have done what the

Supreme Court said in Reich a state may not do, that is "to
reconfigure its scheme, unfairly, in midcourse -- to 'bait and

switch.'" 513 U.S. at ___, 115 S.Ct at 550.

Harper is correct in saying that we have interpreted the

statutory ancestor of Code § 58.1-1826 as mandating the refund of

taxes illegally collected. Hotel Richmond Corp. v. Commonwealth,

118 Va. 607, 88 S.E. 173 (1916), involved an interpretation of

§ 568 of the Code of 1904. The earlier statute provided as

follows:
If the court be satisfied that the applicant is
erroneously assessed with any taxes, and that the
erroneous assessment was not caused by the failure or
refusal of the applicant to furnish a list of his
property, real and personal, to the commissioner, on
oath, as the law requires; or that the applicant is
erroneously charged with a license tax, and that the
erroneous assessment was not caused by the failure or
refusal of the applicant to furnish the commissioner, on
oath, with the necessary information, as required by
 law, in either case the court may order that the
assessment be corrected. If the assessment exceeds the
proper amount, the court may order that the applicant be
exonerated from the payment of so much as is erroneously
charged, if not already paid, and if paid, that it be
refunded to him. If the assessment be less than the
proper amount, the court shall order that the applicant
pay the proper taxes.

(Emphasis added.) The taxpayer, Hotel Richmond, sought refund of

a license tax it claimed had been erroneously assessed. The

Commonwealth defended on the ground that the tax had been paid

voluntarily. Responding to the Commonwealth's defense, this Court

made the following statements:
[W]e [do not] question the well-settled doctrine that a
voluntary payment of money, under a mistake of law, lays
no foundation for an action to recover back the money so
paid. This principle, however, has, in our opinion, no
application to a proceeding, like the present, under a
statute which expressly provides that, when certain
conditions are complied with, the citizen shall be
refunded a tax paid by him which was erroneously
assessed against him.

118 Va. at 610, 88 S.E. at 174. (Emphasis added.)
The statute in plain terms prescribes the conditions
upon which the erroneous assessment shall be refunded,
and it nowhere intimates that if the applicant for
relief has paid the tax voluntarily he cannot have the
same refunded. . . . The plaintiffs in error have
complied with every requirement of the statute, and are,
therefore, entitled to have the erroneous license tax
paid by them . . . refunded.

Id. at 610-11, 88 S.E. at 174. (Emphasis added.)
The cases . . . cited in support of the contention that
a tax voluntarily paid cannot be recovered back . . .
are, in our opinion, not in conflict with the conclusion
reached in the present case, where the erroneous tax
which has been paid is restored to the aggrieved citizen
by virtue of a plain statute, which provides that it
shall be refunded.

Id. at 611, 88 S.E. at 174. (Emphasis added.)
 The Department dismisses Hotel Richmond as "not on point"

because the issue in the case was whether voluntary payment of the

license tax defeated the right to a refund, not whether a refund

was mandatory. However, the language in the opinion explaining

the mandatory nature of the refund statute was part of the

rationale employed to reach the conclusion that voluntary payment

does not defeat the right to a refund. In other words, had the

Court considered refunds discretionary and not mandatory, the

clear implication is that voluntary payment would have defeated

the right to a refund. Hence, the language dealing with the

mandatory nature of the refund statute was necessary to the

Court's decision, and the case is "on point."
It is obvious that the Court in Hotel Richmond treated the

word "may" in the refund statute as "shall." This treatment was

in accordance with the rule that "'[t]he word "may" is prima facie

permissive, importing discretion, but the courts construe it to be

mandatory when it is necessary to accomplish the manifest purpose

of the Legislature.'" Caputo v. Holt, 217 Va. 302, 305 n.*, 228

S.E.2d 134, 137 n.* (1976) (quoting Chesapeake & O. Ry. Co. v.

Pulliam, 185 Va. 908, 916, 41 S.E.2d 54, 58 (1947)). See also

Pearson v. Board of Supervisors, 91 Va. 322, 333-34, 21 S.E. 483,

485 (1895).

The Department says that "[t]he manifest purpose of § 58.1-

1826 is to grant the courts the authority to deny refunds in the

appropriate case." We disagree. We think § 58.1-1826 was enacted

for a different purpose:
It must be remembered . . . that the [refund] statute is
remedial, and that its avowed purpose is to provide an
 expeditious and inexpensive remedy for relief against
taxes which have been erroneously assessed or collected,
and that remedial statutes are not strictly construed,
but are given a liberal construction with the view of
advancing the remedy sought to be applied in accordance
with the true intent and purpose of the legislature.

Commonwealth v. Smallwood Memorial Inst., 124 Va. 142, 144, 97

S.E. 805, 806 (1919). It was to accomplish the manifest purpose

of the legislature that this Court found it necessary in Richmond

Hotel to give mandatory effect to the word "may" in § 568 of the

Code of 1904.
In practical and legal effect, the language of § 568 is

identical to the wording of present § 58.1-1826, even to the

extent that the two enactments employ both "may" and "shall."

Yet, this Court in Hotel Richmond had no difficulty in giving

mandatory effect to both words in interpreting § 568. The case

has remained unchanged as the law of this Commonwealth for almost

eighty years. To avoid doing what Reich teaches a state may not

do, that is, to "bait and switch" by reconfiguring its tax scheme

midcourse, we reaffirm Hotel Richmond's treatment of the word

"may" in the tax refund statute as mandatory.

This leaves for decision the question of Reich's effect upon
the Department's argument that Virginia's declaratory judgment

action provides taxpayers an adequate and meaningful opportunity

to withhold contested tax assessments and to challenge their

validity in a predeprivation hearing and that the Commonwealth is

not required, therefore, to provide backward-looking relief in the

form of refunds. The Department says that the Supreme Court in

Reich "did not even address the issue of predeprivation remedies."
However, the Department overlooks this important passage from the

Reich opinion:
[T]he Georgia Supreme Court's reliance on Georgia's
predeprivation procedures was entirely beside the point
(and thus error), because even assuming the
constitutional adequacy of these procedures -- an issue
on which we express no view -- no reasonable taxpayer
would have thought that they represented, in light of
the apparent applicability of the refund statute, the
exclusive remedy for unlawful taxes.

513 U.S. at ___, 115 S.Ct. at 550.

Given the clear applicability of Code § 58.1-1826, we are of

opinion that no reasonable taxpayer would have thought that a

declaratory judgment proceeding, even assuming its constitutional

adequacy -- an issue upon which we express no view -- represented

the exclusive remedy for relief from unlawful taxes in Virginia.

Accordingly, it would be "entirely beside the point (and thus

error)," Reich, 513 U.S. at ___, 115 S.Ct. at 550, for this Court
to place any reliance in this case on the Commonwealth's

declaratory judgment procedure as a means to avoid providing

meaningful backward-looking relief in the form of refunds.

Alternatively, the Department argues that in addition to the

predeprivation remedy of declaratory judgment, the Harper

taxpayers had a second predeprivation remedy available to them in

the form of an administrative procedure provided by Code §§ 58.1-

1821 and -1822. The Department prays that, if we do not affirm

the judgment of the trial court, we remand the case for a

resolution of the sufficiency of the administrative remedies.

However, any reliance upon these remedies would be beside the

point, and thus error, for the same reason that any reliance upon
the declaratory judgment procedure would be beside the point, and

thus error. In view of the clear applicability of Code § 58.1-

1826, no reasonable taxpayer would have thought that the

administrative procedure represented the exclusive remedy for

relief from unlawful taxes. Therefore, we deny the Department's

prayer.

Finally, the Department argues that, by authorizing the

refund of only so much of the amount paid as is erroneous or

improper, Code § 58.1-1826 "commands that any refund ordered must

be limited to the amount necessary to correct the error (here, the

difference between the amount that plaintiffs actually paid in

taxes and the amount they would have paid had the state also taxed

state pensioners, to be determined in a subsequent evidentiary

hearing)." The Department requests that we remand the case for

such a hearing.
We decline the request. Harper II teaches that "[i]n

providing [meaningful backward-looking] relief, a State may either

award full refunds to those burdened by an unlawful tax or issue

some other order that 'create[s] in hindsight a nondiscriminatory

scheme.'" 509 U.S. at ___, 113 S.Ct. at 2519-20 (quoting
McKesson, 496 U.S. at 40). The courts are powerless to impose a

tax on the state employees whose pension income was exempt prior

to Davis. To reduce the amount of the refunds due the Harper

taxpayers and thus relieve them of only a portion of their

unlawful tax burden, while leaving the state pensioners entirely

untaxed for the pre-Davis period, would only create another

discriminatory scheme.
 Giving Reich its full effect, we reach the inevitable

conclusion that the Harper taxpayers are entitled to full refunds.

Accordingly, we will reverse the judgment of the trial court and

enter final judgment in favor of the Harper taxpayers directing

that the amounts unlawfully collected from them be refunded, with

interest as provided in Code § 58.1-1833.

Reversed and final judgment.