ATTORNEYS FOR APPELLANTS
Jeffrey A. Modisett
Attorney General of Indiana
Jon Laramore
Deputy Attorney General
Indianapolis, Indiana
ATTORNEYS FOR APPELLEES
Peter L. Benjamin
Merrillville, Indiana
Gerald M. Bishop
Merrillville, Indiana
John S. Dull
Indianapolis, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
STATE BOARD OF TAX )
COMMISSIONERS, et al., )
)
Appellants (Respondents Below), )
) Indiana Supreme Court
v. ) Cause No. 45S00-9906-TA-340
)
TROY MONTGOMERY, et al., )
)
Appellees (Petitioners Below). )
__________________________________________________________________
APPEAL FROM THE INDIANA TAX COURT
The Honorable Thomas G. Fisher, Judge
Cause No. 45T10-9807-TA-84
__________________________________________________________________
ON PETITION FOR INTERLOCUTORY APPEAL
__________________________________________________________________
June 27, 2000
BOEHM, Justice.
The petitioners in this case are Lake County, on its own behalf and on
behalf of property owners in that county, the Lake County Council, the
Board of Commissioners of Lake County, and several individual members of
the Council or the Board who seek to sue in their official capacities and
as taxpayers owning property in Lake County. All petitioners brought suit
in the Indiana Tax Court against the Indiana State Board of Tax
Commissioners, seeking a declaratory judgment that the Health Care for the
Indigent program (“HCI”) violates Article 10, Section 1 and Article 1,
Section 23 of the Indiana Constitution. The Tax Court held that it had
subject matter jurisdiction, despite the State’s contention that the
taxpayers had not exhausted their administrative remedies. That issue was
certified for interlocutory review, and we granted the State Board’s
Petition for Review to address whether under these circumstances the
taxpayers must first exhaust administrative remedies. We hold that the
taxpayers must first exhaust the administrative remedy of requesting a
refund, and that the Tax Court is without jurisdiction because no
petitioner seeks review of a final order of the State Board.
Factual and Procedural Background
HCI was first enacted in 1986 and recodified in 1992 at Indiana Code §
12-16-2-1 to 12-16-16-3. It is designed to provide emergency medical care
to indigent patients who do not qualify for Medicaid benefits. Before
1986, the counties bore all responsibility for indigent health care. HCI
transferred the administration of indigent health care to the State and
imposed an “HCI tax levy” to fund it. The State Board of Tax Commissioners
is required to “review each county’s property tax levy under this chapter
and . . . enforce the requirements of this chapter with respect to that
levy.” Ind. Code § 12-16-14-4 (1998). The levy is imposed as a property
tax, but unlike the general property tax levy,[1] the amount of the HCI
levy for each county is statutorily prescribed as last year’s levy
increased by the percentage of growth in assessed value of all property in
the state.[2] Certain statutory limits on property tax rates may be
exceeded “[t]o meet the requirements of the county hospital care for the
indigent fund.” Id. § 6-1.1-18-3(7).
The Act provides for the establishment of an HCI fund in each county.
Each county fund’s balance is transferred monthly to a state fund. The
initial HCI levy for each county was set at the average over 1984-86 of its
indigent hospital care expenditures, with certain adjustments not relevant
here.
The petitioners contend that the statutory formula for setting the HCI
tax levy has resulted in a wide disparity between the contribution of Lake
County residents to the HCI state fund and Lake County’s percentage of
statewide assessed value. According to petitioners, even though the
assessed value of property in Lake County is 6.5% of the statewide assessed
value, 37% of the HCI tax levy is imposed on Lake County.
Two taxpayers who are parties to this action, Troy Montgomery and
Frances DuPey,[3] directed a letter to the State Board in which they posed
four questions:
(1) Is the State Tax Board of Commissioners willing to voluntarily
adjust and revise the current funding formula for the HCI tax levy to
assure that Lake County health care providers substantially receive
the benefit of tax dollars that are paid in?
(2) If the answer to question number one is in the affirmative, please
further state the mechanism and timetable regarding same.
(3) Please itemize where the distribution of the remaining sum of
approximately $42,000,000.00 paid in by Lake County is allocated?
(4) On behalf of Lake County taxpayers, we are requesting a refund of
the HCI overpayment for the past three (3) years. Members of the
County council have filed timely objections over the years regarding
our inflated HCI tax levy. Please advise us regarding your position
to voluntarily repay to Lake County the amount of overpayment into the
HCI fund for the past three (3) years.
The Chairman of the State Board, Frank J. Sabatine, was sympathetic to
the concerns expressed by Montgomery and DuPey, but he responded that,
“there is nothing the Board can do to voluntarily adjust the amount of Lake
County’s HCI property tax levy.” He described the State Board’s role as
“ministerial” in nature, and told Montgomery and DuPey that the Board had
no discretion either to adjust the formula for assessing the HCI tax levy,
or to order a refund of taxes for the alleged overpayment.
Sabatine expressed the State Board’s willingness to “review the
funding and reimbursement formulas[4] to determine if there are ways to
improve the HCI program.” He also directed a letter to the Citizens’
Commission on Taxes, asking it to consider Lake County’s concerns in its
recommendations to the General Assembly on proposals to remove the HCI tax
levy from the property tax. Sabatine explained to Montgomery and DuPey
that some of the apparent inequity of the HCI program is counterbalanced by
its interaction with Medicaid.[5] He concluded that any “concerns
regarding inequities in the current levy calculation . . . must be
addressed to the General Assembly and not to this agency.”[6]
The petitioners, along with the Lake County Council and Board of
Commissioners, then brought suit in the Indiana Tax Court against the State
Board. They allege that the HCI tax levy violates the Indiana
Constitution, specifically, Article 1, Section 23, the Privileges and
Immunities Clause, and Article 10, Section 1, which provides for a uniform
and equal rate of property assessment and taxation. They sought a
declaration that the formula for calculating the tax levy was
unconstitutional. They contended that jurisdiction of the Tax Court was
conferred by the Sabatine letter, which constituted a “final determination”
within the meaning of the Tax Court’s jurisdictional statute. The State
Board responded with a motion to dismiss, contending that the governmental
entities lacked standing and the taxpayers were barred by the doctrine of
exhaustion of remedies because they had neither objected to the levy nor
claimed a refund pursuant to procedures set forth in the tax code.
The Tax Court concluded that the Sabatine letter did not constitute a
final determination conferring subject matter jurisdiction, but
nevertheless concluded that the claim was proper because administrative
remedies for challenging the HCI levy were inadequate and therefore the
parties were excused from pursuing them. See Lake County Council v. State
Bd. of Tax Comm’rs, 706 N.E.2d 270, 275-77 (Ind. Tax 1999). The Tax Court
first held that the taxpayers’ ability to object to the tax levy was an
insufficient remedy because an objection could be filed only by a group of
ten taxpayers, and the adjudication of a constitutional claim could not be
made to depend on agreement by nine others to bring the claim. See id. at
275-76. The Tax Court viewed the option of filing a claim for a refund as
“more promising,” but it nevertheless concluded that the refund process was
also impractical. If a refund were ordered as to amounts remitted from the
county fund to the State, the Tax Court surmised, it would have to be paid
out of the county coffers, even though the ultimate recipient of the funds
from the county tax was the State. See id. at 277-78. The Tax Court then
noted the absence of any mention of a refund process in the HCI statute and
concluded that the legislature did not intend the county to be commandeered
into granting refunds of money it had forwarded to the State. In the Tax
Court’s view, the legislature “could not have intended” the refund
provisions of the property tax to apply to the HCI tax levy. Id. at 277.
The Tax Court then concluded that jurisdiction properly lay with the Tax
Court. See id. at 278-79. It also ruled that the governmental entities,
with the exception of Lake County itself, had no standing to contest the
constitutionality of the HCI levy. See id. at 279-81.
Lake County was deemed a proper party to the declaratory judgment
action because it had a cognizable interest in the lawsuit. If the
petitioners were successful, the county would be required both to fund and
also to administer the refund process. See id. at 281.
The State Board sought rehearing, arguing that because Lake County
could seek reimbursement from the State for any refunds it would be forced
to pay, the taxpayers’ remedies were adequate and exhaustion should not be
excused. [7] In a second opinion,[8] the Tax Court again concluded that it
had subject matter jurisdiction and that petitioners’ administrative
remedies were inadequate and exhaustion was excused. See Montgomery v.
State Bd. of Tax Comm’rs, 708 N.E.2d 936 (Ind. Tax 1999). The Tax Court
also concluded that reimbursement was too speculative. See id. at 938.
The Tax Court subsequently certified its opinions for interlocutory review
by this Court, and this appeal followed.
The State Board argues that: (1) the taxpayers failed to exhaust their
administrative remedies and they are not excused from pursuing these
remedies on grounds of futility; (2) even if exhaustion were not required,
the taxpayers still had no final determination by the State Board and
therefore jurisdiction was improper in Tax Court; and (3) Lake County lacks
standing to assert this claim against the State Board.
I. Exhaustion of Administrative Remedies
In State v. Sproles, as here, the taxpayer sought a declaration that
the tax at issue was unconstitutional. See 672 N.E.2d 1353, 1354-55 (Ind.
1996). Sproles held that the taxpayer there could not circumvent
administrative remedies and challenge the constitutionality of a tax
directly in court, even if the administrative agency to which the taxpayer
appeals is without the power to grant the exact remedy the taxpayer seeks.
See id. at 1358-61. Rather, a taxpayer must first exhaust administrative
remedies. See id.
The reasons for requiring a party to seek administrative remedies are
well established. Premature litigation may be avoided, an adequate record
for judicial review may be compiled, and agencies retain the opportunity
and autonomy to correct their own errors. See Austin Lakes Joint Venture
v. Avon Utils., Inc., 648 N.E.2d 641, 644 (Ind. 1995). Even if the ground
of complaint is the unconstitutionality of the statute, which may be beyond
the agency’s power to resolve, exhaustion may still be required because
“administrative action may resolve the case on other grounds without
confronting broader legal issues.” Sproles, 672 N.E.2d at 1358.
A. Objecting to the Tax Levy
The State Board points to two administrative remedies that it contends
must be pursued before the taxpayers may bring suit. First, pursuant to
Indiana Code § 6-1.1-17-5(b), “Ten (10) or more taxpayers may object to a
budget, tax rate, or tax levy of a political subdivision . . . by filing an
objection petition with the proper officers of the political subdivision
not more than seven (7) days after the hearing.” Under Indiana Code § 6-
1.1-17-3, a political subdivision is required to hold a public hearing
after it has formulated its estimated budget. If an objection petition is
subsequently filed, then the political subdivision must, along with its
budget, adopt a finding regarding the petition.[9] This provision appears
in the general property tax statutes. It is not, in our view, an
administrative remedy required to be exhausted before a taxpayer may
challenge an unlawfully collected tax. Theoretically, each property’s
valuation and every amount budgeted affects the levy of each “political
subdivision.” The effect of a requirement that each taxpayer who wishes to
challenge, for example, the assessment of his property, must object to the
budget or levy would be to cause a large volume of essentially pro forma
objections to no practical purpose. This could not have been the intent of
the legislature. The tax code otherwise allows petitions for reassessment
of real property. See Ind. Code § 6-1.1-4-5 (1998). In addition, the
State Board has the discretion to revise an assessment of all or a portion
of the property located in this state “[i]n order to maintain a just and
equitable valuation of real property.” Id. § 6-1.1-4-9. There is no
comparable provision for the property owner who wishes to challenge the
assessment of the HCI levy, and even if a property owner challenges the
levy with nine other taxpayers, the formula for calculating the HCI tax
levy is statutorily prescribed, and therefore the State Board cannot alter
it.
B. Claim for Refund
The second remedy the State Board identifies is a claim for a refund.
Pursuant to Indiana Code § 6-1.1-26-1, a taxpayer may file a claim for
refund, which, if denied, constitutes a final determination reviewable by
the Tax Court.[10] The petitioners correctly point out that there is no
statute authorizing the State Board to order a refund, even if it should
determine, pursuant to Ind. Code § 6-1.1-26-1(4)(ii), that the tax is
“illegal” as a matter of law. In that respect, they are in the same
position as the taxpayer in Sproles, who protested that exhaustion of
remedies was not required because the agency could not declare its own
statute unconstitutional. See Sproles, 672 N.E.2d at 1353. We
nevertheless held that exhaustion was required. The Tax Court recognized
this point, but nonetheless found the claim for a refund unavailable
because the legislature “could not have intended” that the refund procedure
of Ind. Code § 6-1.1-26-5 apply. See Lake County Council, 706 N.E.2d at
278. For the reasons the Tax Court identified in support of its own
jurisdiction, however, one reason to require that procedure is to force the
dispute into a channel that leads ultimately to the Tax Court. This, as
noted in Sproles, avoids the problem of multiple conflicting litigation on
a matter as complex and critical to state government as the validity of a
tax. This also provides for the legal infrastructure to process the case
in an orderly manner, including timetables for decision.
The Tax Court rejected this contention on the ground that the County
must pay the refund, and there is no explicit provision under the HCI
statute for the State to reimburse the County for refunds to taxpayers.
This result would be, the Tax Court pointed out, highly problematic in
terms of fairness and perhaps also legality. For that reason, the Tax
Court concluded that the legislature did not consider the procedure to
obtain a refund of the HCI tax unlawfully collected and therefore there was
none available.
The State Board points out, however, that Ind. Code § 6-1.1-27-6(b)
provides for repayment by the State of tax overpayments, and applies
generally to all taxes. It therefore provides a workable mechanism for the
county to recover from the State for any required taxpayer refunds. It
thereby avoids the difficulties the Tax Court identified in reliance on the
refund procedure as a remedy for unlawfully collected HCI taxes. In short,
a claim for refund may be presented and, if refused, will permit the
taxpayer petitioners to proceed to the Tax Court with their
contentions.[11]
II. The Jurisdiction of the Tax Court
The Tax Court identified a number of reasons why in its view this case
should be presented directly to the Tax Court, notwithstanding the absence
of any specific grant of jurisdiction. In general, these track the
considerations outlined in Sproles that favor concentration of tax
litigation in one forum with expertise and avoiding inconsistent results on
issues of significance to financing state and local government statewide.
The sound policy reasons supporting the Tax Court’s direct jurisdiction
also argue in favor of requiring exhaustion of the refund procedure,
because that process ultimately brings the case to the Tax Court. If the
legislature wishes to confer original jurisdiction on the Tax Court to
entertain claims of unconstitutional taxation, it is of course free to do
so. The current statutory framework limits access to the Tax Court to
specified procedural channels. For the reasons discussed in Sproles, it is
not irrational to require plaintiffs who wish to present such a claim to
proceed through the administrative apparatus the legislature has set up to
deal with tax disputes, even if the ultimate constitutional issue may be
resolved only at the Tax Court stage. That requirement assures that an
adequate record is developed and that nonconstitutional issues that may
moot the constitutional challenge will be considered. The advantages of
consolidating the litigation in a forum with expertise are retained. If
the cost in time and effort imposed by this procedure is too great, the
remedy lies with the General Assembly.
Finally, the Tax Court held that Lake County, but not the other non-
taxpayer petitioners, had standing to pursue this claim. Because we have
concluded that the tax court has jurisdiction only to the extent granted by
statute, the claims of Lake County and the other governmental entities and
officials must also be dismissed. None of these petitioners sought review
of an order of the State Board or otherwise meets the jurisdictional
requirements of the Tax Court. Thus, we need not address whether they have
standing to pursue this claim.
Conclusion
We reverse the judgment of the Tax Court and remand with direction to
dismiss the petitioners’ claim for declaratory relief against the State
Board of Tax Commissioners.
SHEPARD, C.J., and DICKSON, SULLIVAN and RUCKER, JJ., concur.
-----------------------
[1] “Levy” is a term used to describe the aggregate dollar amount of
property taxes imposed to fund a given operation of local government. The
levies imposed under the general property tax are subject to review by the
State Board. See Ind. Code §§ 6-1.1-17-1 to 20 (1998).
[2] This description is not precisely correct, but is adequate for purposes
of this opinion and is hopefully more easily understood than the statutory
formulation:
Each county shall impose a hospital care for the indigent property tax
levy equal to the product of:
(1) the hospital care for the indigent property tax levy imposed for
taxes first due and payable in the preceding year; multiplied by
(2) the statewide average assessed value growth quotient, using all
the county assessed value growth quotients determined under IC 6-1.1-
18.5-2 for the year in which the tax levy under this section will be
first due and payable.
Ind. Code § 12-16-14-3 (1998).
[3] Montgomery is a member of the Lake County Council and DuPey is a
member of the Lake County Board of Commissioners.
[4] Counties receive money back from the HCI state fund to reimburse them
for the cost of indigent care.
[5] Sabatine emphasized that the HCI program and Medicaid funds are
interrelated. The State Board makes the same point in its Brief to this
Court. According to the Board, HCI funds have been used to leverage
federal Medicaid funds, a significant portion of which go to Lake County.
Citing Kerr v. Perry School Township, 162 Ind. 310, 70 N.E. 246 (1904),
petitioners respond that the relationship between the HCI levy and Medicaid
is irrelevant because their constitutional claims are based on provisions
dealing with the assessment of taxes that do not relate one way or the
other to benefits received from tax-supported programs.
[6] Sabatine reiterated in the letter to the Chairman of the Citizens’
Commission on Taxes that “the HCI tax levy formula is mandated by statute,
so there is no action the Board can take at this time.”
[7] The State Board argued that the County could seek reimbursement from
the State pursuant to Indiana Code § 6-1.1-27-6(b), which provides for
refunds from the state treasurer for “improper or erroneous payments” by a
county, and also pursuant to Indiana Code § 6-1.1-26-5(b): “[T]he county
auditor shall deduct the amount refunded from the gross tax collections of
the taxing units for which the refunded taxes were originally paid and
shall pay the amount so deducted into the general fund of the county.”
[8] The Tax Court issued its original opinion on January 19, 1999, see Lake
County, 706 N.E.2d at 270, and granted reconsideration in view of our
intervening modification of State Board of Tax Commissioners v. Mixmill
Manufacturing Co., 702 N.E.2d 701 (Ind. 1998), as modified Feb. 5, 1999.
See Montgomery, 708 N.E.2d at 936.
[9] The Indiana Code provides for revision or reduction of a political
subdivision’s budget by the County Board of Tax Adjustment in order to:
“limit the tax rate to the maximum amount permitted under IC 1971, 6-1.1-18
[Limitations on Property Tax Rates and Appropriations]” and “limit the
budget to the amount of revenue to be available in the ensuing budget year
for the political subdivision.” Ind. Code § 6-1.1-17-6 (1998). The County
Board of Tax Adjustment is also directed to make recommendations for
revision of the budget to the State Board of Tax Commissioners if the
County Board determines “that the maximum aggregate tax rate permitted
within a political subdivision . . . is inadequate,” Id. § 6-1.1-17-8, or
if “the aggregate tax rate within a political subdivision, as approved or
modified by the county board of tax adjustment, exceeds the maximum
aggregate tax rate prescribed . . . .” Id. § 6-1.1-17-10 (1998).
Under Indiana Code § 6-1.1-17-11, the budget, tax rate, or tax levy
is final unless “(2) the action of the county board is subject to review by
the state board of tax commissioners under section 8 or section 10 of this
chapter; or (3) an appeal to the state board of tax commissioners is
initiated with respect to the budget, tax rate, or tax levy.”
[10] A claim for a refund pursuant to Ind. Code § 6-1.1-26-1 must be:
(1) filed with the auditor of the county in which the taxes were
originally paid;
(2) filed within three (3) years after the taxes were first due;
(3) filed on the form prescribed by the state board of accounts and
approved by the state board of tax commissioners; and based upon one
(1) of the following grounds:
. . .
(ii) The taxes, as a matter of law, were illegal.
. . . .
[11] Subsection 6(a) also provides for deduction of refunds for amounts
paid. That remedy may or may not be adequate depending on the timing and
amounts of the refund compared to subsequent amounts due.