A federal judge is deliberating whether Arizona has standing in a case against the IRS.
Part of the state’s 2023 budget was a tax rebate for Arizonans with children and older dependents. It benefitted hundreds of thousands of residents and was exempt from state taxes, but the IRS announced this year that the rebate is subject to federal income taxes.
In February, Attorney General Kris Mayes sued the IRS to stop the government from taxing the rebate program, but the IRS asked the case to be thrown out.
“When Arizona’s elected leaders chose to refund tax revenue to Arizona taxpayers last year, their reasonable expectation was therefore that the money would go to Arizona taxpayers, not to the Internal Revenue Service— but the IRS had a different idea,” Mayes' complaint said.
The Arizona Department of Revenue estimates that the federal tax cost Arizona taxpayers $20.8 million, and cost the state and local jurisdictions about $480,000 in privilege tax revenue.
The state also argues that in February of 2023 - right before Arizona’s rebate — the IRS put out guidance determining that similar payments made by 17 other states in 2022 would not be federally taxed.
IRS attorney Amy Matchison told the court that the IRS guidance from February was about 2022 payments, and since 2022 was a different tax year, Arizona shouldn’t have assumed that the same guidance would apply to the 2023 rebate.
“We’re just saying Arizona should be treated like the other states that made almost identical payments,” Arizona attorney Clinten Garrett said.
Judge G. Murray Snow questioned whether the IRS statement from February could be considered a “final administrative act” for Arizona to follow.
In the initial complaint the state asked the court to enjoin the IRS from collecting the tax on the rebate, but since the tax was already collected; Snow asked Garrett to clarify what it’s asking the court for now.
Garrett replied that the court should declare the taxation occurred unlawfully and enjoin the IRS from denying taxpayer’s refund requests..
Both sides argued their case in court on Wednesday, and Snow is now deliberating.
Matchison told Snow that because the alleged injury is to Arizona taxpayers — they’re the only ones who can sue — not the state of Arizona itself.
