Chevron’s Last Dance? Judicial Deference to Regulations is the Next State Tax Battleground

On January 17, 2023, the United States Supreme Court heard oral arguments in two challenges to a federal regulation issued by the National Marine Fisheries Service, Relentless, Inc. v. Dept. of Commerce and Loper Bright Enterprises v. Raimondo, which seek to end longstanding requirements of judicial deference to agency regulations.¹ While the regulation itself, which addresses whether owners of certain fishing vessels are required to pay for oversight monitors at sea, seemingly has nothing to do with state and local taxation, the central question before the Court has the potential to fundamentally change how both federal and state courts decide cases involving tax regulations. Namely, the Court is being asked to reconsider the “Chevron doctrine,” which for four decades has required judicial bodies to defer to administrative regulations that interpret ambiguous statutes, as long as those regulations are based on a “permissible construction” of the statute at hand.² Following oral arguments in Relentless and Loper Bright, the Court potentially appears poised to overturn Chevron altogether, leaving taxpayers and their advisors wondering how, if at all, courts will defer to the bevy of regulations issued by the IRS and state tax departments. Putting an end to the Chevron doctrine also has the potential to upend precedent that relied upon judicial deference, and at the same time could create new opportunities for taxpayers to challenge agency rules and regulations.

If Chevron is overturned, the impact at the federal level will be immediate, because Chevron itself addresses the level of deference that must be afforded to federal agencies interpreting federal law. However, reverberations will also be felt at the state level; the significance of the ruling will vary state to state, depending on how closely a given state currently follows the Chevron doctrine. This article provides a brief overview of the Chevron case, the resulting Chevron doctrine, and the current Court’s skepticism about the doctrine’s viability as expressed in January’s oral arguments. It also provides a sampling of how states have chosen to adopt, modify, or reject Chevron at the state level. Finally, this article offers a preview of how states may choose to respond if Chevron is overturned.

The Chevron two-step.

Although Chevron was not the first Supreme Court case addressing the level of deference to which administrative regulations are entitled, it is widely viewed as the seminal decision on the matter. The Chevron decision involved a regulation issued by the Environmental Protection Agency interpreting the Clean Air Act. ³ A lawsuit against the EPA was brought by the Natural Resources Defense Council, which challenged the EPA’s interpretation of the Clean Air Act provision. When the case ultimately reached the Supreme Court, the Court announced a new deference standard that has applied for the past 40 plus years. Namely, the Court held that when a judicial tribunal reviews an agency’s construction of a statute, the tribunal must answer two questions. The first is whether the statute is ambiguous. If the statute is unambiguous, the court must simply give effect to the clearly stated intent of the legislature. If the statute is ambiguous, the court cannot adopt its own construction of the statute; instead, the court must defer to the agency’s interpretation if the interpretation is based on a “permissible construction of the statute.” This dual inquiry—whether the statute is ambiguous and whether the agency’s interpretation is reasonable—has come to be known as the “Chevron two-step.” What makes the Chevron decision noteworthy and sets it apart from the pre-Chevron deference standards that had been articulated by the Court is that, if both prongs of the inquiry are satisfied, the court must give deference to the agency’s interpretation. In this way, Chevron effectively takes interpretive power away from the reviewing court and transfers it to the implementing agency.

This transfer of power has garnered the ire of several current Supreme Court justices. Before his appointment to the Supreme Court, Justice Neil Gorsuch authored multiple appellate court decisions critical of Chevron. In one concurring opinion, then-Tenth Circuit Court Judge Gorsuch asserted that Chevron “permit[s] executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framers’ design.”⁴

In the oral arguments for Relentless that were held earlier this month, Justice Gorsuch appeared to remain skeptical of Chevron, and questioned whether its deference standard required a judge to “abdicate [the] responsibility” for statutory interpretation and instead conclude “automatically” that “whatever the agency says wins?”⁵At another point, Justice Gorsuch suggested that, in every case where an agency has interpreted an ambiguous statute, “Chevron is exploited against the individual and in favor of the government.”⁶ Justice Gorsuch was joined in his criticism of Chevron by Justices Thomas, Alito, and Kavanaugh, whereas the other Justices either expressed preference for keeping Chevron intact or were more neutral in their questioning. If Chevron is indeed overturned by the Court, it is not entirely clear whether administrative deference will be rejected outright, whether the Court will revert to a pre-Chevron deference standard, or whether the Court will announce a wholly new standard of deference.

Chevron conformity at the state level.

The extent to which state courts have followed Chevron varies widely. Some states have expressly adopted Chevron by reference. The Kentucky Supreme Court, for example, has explained that it has frequently applied the Chevron doctrine when reviewing state agency interpretations.⁷ Other state courts, without formally following or adopting Chevron, have articulated their own deference standards, and some of these standards closely align with Chevron’s mandate. For example, the Texas Supreme Court has held that agency construction of a statute is entitled to “serious consideration” if the construction is “reasonable and does not contradict the plain language of the statute.” ⁸

At the other end of the spectrum, some states have expressly rejected the idea of Chevron deference, either through case law or statute. For example, the Michigan Supreme Court, in declining to adopt the Chevron doctrine, has held that “the unyielding deference to agency statutory construction required by Chevron conflicts with this state’s administrative law jurisprudence and with the separation of powers principles discussed above by compelling delegation of the judiciary’s constitutional authority to construe statutes to another branch of government.”⁹ Tennessee eliminated the possibility of Chevron deference legislatively in 2022, when the governor signed into law a measure requiring courts to interpret statutes or rules de novo and expressly prohibiting courts from deferring to a state agency’s statutory interpretation. ¹⁰

Of course, as is common across state tax, in a number of states it is unclear what deference standard should be applied, either because the state has not announced a clear deference standard or because the state has applied different levels of deference depending on the facts and circumstances.

Possible paths forward.

Although the abandonment of Chevron by the Supreme Court is not a foregone conclusion, the Relentless and Loper Bright cases do pose the most significant threat to Chevron in recent memory. How this outcome will impact state tax litigation (and ultimately the state tax coffers) depends in large part on how individual states currently treat the Chevron doctrine. On the one hand, states that have articulated their own, Chevron-independent deference standards are likely to be the least impacted. For example, in Michigan, the state high court has held that “agency interpretations are entitled to respectful consideration, but they are not binding on courts and cannot conflict with the plain meaning of the statute.”¹¹ Because this standard does not rise to the level of broad, mandatory deference that the Court appears to find troubling under Chevron, there may not be as much momentum to push for a change to the existing standard.

More states may also choose to go the way of Tennessee and other states and enact laws that codify their rejection of Chevron. If Chevron is indeed on the way out, states may view legislation to this effect as a fairly uncontroversial action that simply conforms to Supreme Court precedent. However, without announcing what deference standard should apply in cases challenging regulations, state legislatures could inadvertently unleash additional litigation from a mere statutory rejection of Chevron.

Finally, states that do expressly follow Chevron may find themselves challenged by litigants arguing that the state should no longer follow an out-of-date legal doctrine that has been discarded by the Supreme Court. For example, Kentucky courts have following the Chevron doctrine on multiple occasions, explicitly referencing the decision and its two-step rationale.¹² If the Supreme Court issues an opinion that lays out why the rationale of Chevron should no longer be followed, this reasoning could provide a blueprint for a litigant to attack the state deference standard head-on. Furthermore, not only could this action by the Supreme Court encourage litigants to challenge agency regulations going forward, it could potentially upend existing precedent that was expressly based on the reviewing court deferring to an agency’s regulation.

As two recent decisions illustrate, reviewing tribunals frequently confront the question of deference and are at times willing to reject administrative overreach. For example, a Texas appellate court recently explained, in a state franchise tax apportionment case, that agency deference “has no place” if the statute is unambiguous.¹³In December 2023, a California trial court nullified a Technical Advice Memorandum and publication issued by the Franchise Tax Board regarding the FTB’s interpretation of Public Law 86-272, ruling that the FTB failed to follow the state’s administrative procedure act in issuing these pieces of guidance and noting that administrative policies that are not adopted in accordance with the state APA are not entitled to any deference.¹⁴ Notably, these decisions occurred in a “Chevron world.” If Chevron deference is overturned, taxpayer challenges to state tax department regulations will likely become even more common.

In sum, any rejection of Chevron deference by the Supreme Court would have significant consequences at the state level, and taxpayers should carefully consider how state regulations and other types of administrative guidance will be viewed by courts following the decision. An opinion is expected from the Supreme Court by the summer, and Checkpoint Catalyst experts will be closely monitoring the decision and anticipate publishing an update once the opinion is released.