US Supreme Court Overturns Chevron; Future of Federal and State Tax Guidance in Question

On June 28, 2024, in a pair of companion opinions, the United States Supreme Court overturned Chevron USA Inc. v Natural Resources Defense Council, Inc. , 467 US 837 (1984).

In Loper Bright Enterprises v. Raimondo, No. 22-451 and Relentless, Inc. v. Dept. of Commerce, No. 22-1219 (collectively, “Loper Bright”), the Court overruled 40 years of precedent and held that courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. Chief Justice Roberts, who authored the opinion, wrote that “Chevron cannot be reconciled with the [Administrative Procedure Act (“APA”)] by presuming that statutory ambiguities are implicit delegations to agencies.” Instead, “[t]he APA… incorporates the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions.”

While judicial tribunals may consider factors such as whether Congress expressly delegated interpretive authority to the agency, and may pay “careful attention” to the agency’s guidance, the opinion is clear that “courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”

Justices Gorsuch and Thomas issued concurring opinions, and Justices Kagan, Sotomayor, and Jackson dissented.

In Chevron, the Court articulated the standard that governed administrative deference for the following 40 years; namely, that when a judicial tribunal reviews an agency’s construction of a statute, it must defer to the agency’s interpretation if (1) the statute is ambiguous and (2) the agency’s interpretation is based on a “permissible construction of the statute.”

What made the Chevron decision both noteworthy and controversial was that, if both prongs of the inquiry were satisfied, the court or reviewing tribunal was required to give deference to the agency’s interpretation. The holding of Loper Bright, on the other hand, requires judicial tribunals to exercise “independent judgment” when reviewing ambiguous statutes. Highly technical tax statutes are no exception; the opinion expressly notes that “even when an ambiguity happens to implicate a technical matter, it does not follow that Congress has taken the power to authoritatively interpret the statute from the courts and given it to the agency.” While the Chevron deference standard was overruled, the Court did not issue a new deference mandate.

The impact of the Loper Bright decision at the federal level will be immediate. Courts reviewing agency interpretations will be required to follow Loper Bright and exercise independent judgment when reviewing ambiguous statutes, even in the face of on-point agency guidance.

The trickle-down impact of the Court’s decision to the states depends in large part on how the states currently treat the Chevron doctrine. As discussed at length by this author in Chevron’s Last Dance? Judicial Deference to Regulations is the Next State Tax Battleground, the extent to which state courts have followed Chevron varies widely, with some states expressly adopting or closely following Chevron, other states adopting standards that are much less deferential than Chevron, and still others legislatively or judicially rejecting the idea of deference altogether.

States that expressly follow Chevron or use a Chevron-like deference standard may quickly see challenges brought by litigants, or may experience pressure to legislatively reject Chevron deference. States that have articulated their own, Chevron-independent deference standards will likely experience a less direct impact, but may nevertheless see an increase in challenges to administrative regulations as litigants and agencies navigate this new deference landscape.

As explored by this author in two previous Checkpoint State Tax Updates articles, Another Deference Blow: In Rebuke, California Court Voids Non-Compliant Tax Regulations (February 21, 2024) and The Shifting Deference Landscape: California and New York Decisions Reject Tax Agency Guidance  (March 13, 2024), reviewing tribunals in two influential states — New York and California — have recently refused to defer to agency guidance and have exercised the type of independent judgment encouraged by the Court in Loper Bright. The Loper Bright decision will undoubtedly embolden other challengers, as businesses and their tax advisors seek to redefine the boundaries of deference required to state tax agency guidance in the years to come.

For more information regarding Chevron, see Checkpoint’s Federal Tax Coordinator ¶ T-10101.