APA in the crosshairs part II: Chevron Doctrine overturned, tax implications to follow

As I mentioned in my previous post last year, new legal precedents are narrowing the application of the Administrative Procedure Act (APA) by limiting agency [expert] interpretation of regulations while returning primary statutory interpretation to the courts. The demise of the Chevron Deference as previously applied in APA rulemaking and the full devolution of (re)interpretation of federal regulations to U.S. courts reaffirms the primary judicial responsibility for interpreting the law. This is a broad trend will also proactively alter how federal agencies issue regulations; it will also shape legal challenges to tax regulations (especially in state transfer pricing rules) and indirect tax policymaking at the state and local levels to some degree. Lawyers and officials in states such as North Carolina, Massachusetts and New Jersey are debating what the demise of the Chevron Deference will mean to their respective state and local jurisdictions. Consequently, we certainly expect litigation to rise as more states and taxpayers challenge federal regulations, including those related to taxation in 2025 and 2026 encouraged in part by the expected de-regulatory ambiance to come.

The U.S. Supreme Court’s June 28 Loper Bright Enterprises v. Raimondo opinion qualifies as a whopper within this growing body of APA-related legal precedents. It significantly revises and shifts the importance and potency of the legislative intent found within federal regulation, as well as its judicial understanding and application.  

This epic decision overturns a longstanding legal precedent referred to as the Chevron (deference) standard, which essentially required federal courts to yield to federal agencies’ interpretations of uncertain or ambiguous statutes.

The Supreme Court’s succinct blog post on the ruling crystallised the decision’s connection to the APA: “The Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron v. Natural Resources Defense Council is overruled.”

This definitive ruling means that federal courts will interpret ambiguous language within laws based on legislative intent and their own judgment rather than deferring to interpretations by federal agencies. That said, the older Skidmore deference standard remains in effect; as it enables courts to consider a federal agency’s interpretation of a statute when that agency’s reasoning and expertise are deemed sufficiently persuasive, and within its delegated scope.

Still, the Chevron Doctrine’s overturning will likely have major ripple effects on indirect tax policymaking throughout the government, including at the state and local levels. A PwC bulletin identifies several potential changes and uncertainties that indirect tax managers should monitor in the wake of Chevron, including:  

• Additional legal challenges to federal tax regulations: The environment surrounding federal tax regulations could grow more litigious as interpretations of the Internal Revenue Code by the Internal Revenue Service (IRS) and the U.S. Department of the Treasury are targeted by new legal challenges.  
• Trickle-down impacts to state tax rules: While the Loper ruling addresses federal agencies and courts, the decision could affect how states design and interpret their own tax codes, which are often based on federal regulations. State courts could also elect to give state agencies less deference concerning ambiguous statutes, changing how state and local indirect tax rules are applied and enforced.
• New compliance opportunities – and new challenges: The PwC bulletin notes that the decision “is likely to lead to a greater divergence of opinions among courts when they are confronted with challenges to regulatory validity. This development may pose compliance challenges or opportunities for taxpayers.”
• More transfer pricing uncertainty: The bulletin also notes that the Loper ruling could have a “near-term” impact on a topic of particular interest to me – transfer pricing. Some noteworthy transfer pricing court challenges are pending, and their outcomes could be affected.  

While a Supreme Court majority showed little respect for the Chevron standard, it remains to be seen precisely how evolving deference interpretations will affect federal, state and local tax policymaking and future APA-related court battles. My best reading of this judicial trend is that the impacts will be substantial.    

We should also bear in mind that another recent U.S. Supreme Court decision, Corner Post, Inc. v. Board of Governors Federal Reserve System (2024), will likely accelerate legal challenges to federal agency actions under the APA. This decision expands the statute of limitations to begin running six years from the time an agency’s final action first injures the plaintiff, rather than from the date the action becomes final, thereby extending the period for filing a claim.