SALT Shaker Podcast
A "Third Way" Forward: Declaratory Judgments in State Tax Disputes
Why It Matters
Declaratory judgments give taxpayers a proactive mechanism to resolve tax disputes, limiting costly litigation and protecting state revenue stability.
Key Takeaways
- •Declaratory judgments offer early tax legality rulings.
- •They act as a “third way” beyond litigation and compliance.
- •Growing use due to novel state taxes with constitutional doubts.
- •Limited to facial constitutional challenges; not all states permit.
- •Provide certainty, reduce budget disruption from later refunds.
Pulse Analysis
The rise of declaratory judgments reflects a broader shift toward pre‑emptive dispute resolution in state tax law. Traditionally, taxpayers either complied with a tax and later challenged it, or engaged in protracted litigation after a liability was assessed. A declaratory judgment, however, allows a party to seek a court’s determination on the tax’s constitutionality before any financial exposure occurs, creating a clear legal footing that can guide compliance decisions and investment planning.
For both taxpayers and state treasuries, this “third way” offers tangible benefits. Taxpayers gain certainty, avoiding the uncertainty of retroactive refunds that can strain cash flow and affect business operations. States, in turn, reduce the risk of large, unexpected refund obligations that could disrupt budgetary planning. As state legislatures experiment with novel taxes—such as digital services levies or carbon fees—more entities are turning to declaratory actions to test the constitutional waters early, fostering a more predictable fiscal environment.
Despite its appeal, the tool is not without constraints. Courts typically limit declaratory judgments to facial constitutional challenges, meaning the dispute must focus on the tax’s legal form rather than its application to specific facts. Moreover, only a subset of states permit such actions, and procedural hurdles can vary widely. Practitioners must weigh the speed and certainty gains against jurisdictional limitations and the potential for narrow rulings that may not address all practical concerns. As the tax landscape evolves, declaratory judgments are likely to become a strategic option in the tax attorney’s toolkit, especially where early clarity can avert costly downstream disputes.
Episode Description
In this episode of the SALT Shaker Podcast, Partners Jeremy Gove and Chelsea Marmor sit down with Counsel Charles Capouet to discuss his recent article in Tax Notes State on the use of declaratory judgments to challenge unconstitutional state taxes.
Charles explains how declaratory judgments can serve as a "third way" to contest a tax, allowing taxpayers to seek an early, definitive ruling on a tax's legality, often before experiencing significant financial impact. Interest in these actions is growing as states continue to adopt novel taxes that raise unresolved constitutional questions, and the conversation explores how this approach can benefit both taxpayers and states by providing greater certainty and helping avoid budget disruptions tied to later refunds. The group also discusses the limitations of declaratory judgment actions, which are typically confined to facial constitutional challenges and permitted only in certain states.
The episode concludes with a timely "overrated/underrated" segment where the group discusses Opening Day of baseball.
For questions or comments, email SALTonline@eversheds-sutherland.com. Subscribe to receive regular updates hosted on the SALT Shaker blog.
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