Anyone facing a tax exemption dispute with a taxing authority knows it is an uphill battle. The maxim is that tax exemptions are construed narrowly to favor the state. State and local governments have wielded this principle as a cudgel: if any hole can be poked in a taxpayer’s entitlement to the exemption, then the taxpayer loses. Now is an opportune moment to challenge the maxim that makes prevailing in tax exemption challenges so difficult.
This article describes two legal trends that invite arguments against narrowly construing tax exemptions: textualism and anti-deference to the government. First, courts throughout the country are more stringently embracing textualism—the idea that statutes should be interpreted solely according to the words in the statutes, with no underlying presumptions. Second, courts (and legislatures) have disavowed affording deference to administrative agencies. Both trends militate away from placing a thumb on the scale against the taxpayer in an exemption case. In light of these trends, taxpayers arguing for tax exemptions should carefully consider their ability to argue against applying narrow constructions against the exemption or, alternatively, to challenge their state courts’ adoption of such presumptions against tax exemptions.
Textualism
The first legal trend, textualism, requires looking to the plain, ordinary language of statutes. Textualism does not permit courts to make presumptions about intent or add requirements not stated in the statute. Thus, when the legislature writes a statute that exempts widgets from taxation, that statute must be read to exempt widgets from taxation. Courts should not presume the term “widgets” must be interpreted more narrowly than the term is commonly understood; nor should courts add limits or procedural requirements that do not appear in the statute in order for a taxpayer to be entitled to the widget exemption.
A presumption against tax exemptions in a statute that provides for an exemption is therefore antithetical to textualism. By enacting an exemption, the legislature expresses its intent for an exemption to apply. To presume against the expressly stated exemption undermines the plainly stated intent. Instead, the presumption imports a “purposive” reading of the law—it requires courts to presume a broader legislative purpose (in this case, the imposition of taxes) and necessitates reading exemption statutes so as not to interfere with that purpose. Textualist courts should thus be skeptical of the presumption.
Justice Antonin Scalia long argued against applying any presumption, explaining that a tax statute, like any other statute, should be read based on its fair meaning.1 A fair reading of a statute means not favoring one position over another, and reading all of the statute, including any exemptions within it.
The Ohio Supreme Court recently abandoned its precedent construing tax exemptions against the taxpayer and expressly adopted Justice Scalia’s reasoning. In its Stingray Pressure Pumping decision, the court held that: “[t]ax statutes must be read through a clear lens, not one favoring tax collection. Thus, we make clear today that henceforth we will apply the same rules of construction to tax statutes that we apply to all other statutes.”2 The Stingray court explained that the justification for the rule was good tax policy, not statutory interpretation. And “what is and what is not wise tax policy is a matter to be determined by the legislature.”
Other textualist state courts may, like the Ohio Supreme Court, be primed to reevaluate their presumptions against tax exemptions. Stingray disavowed precedent that read the statutes not through a clear or neutral lens, but rather through one favoring tax collection. Further supporting the argument against the presumption is whether state law applies the same presumption against all exemptions or just tax exemptions. The US Supreme Court jettisoned the idea of “tax exceptionalism,” or subjecting tax laws to special rules because of their specialized and complex nature for purposes of administrative law.3 If exceptions are read fairly as written, there is no reason to treat tax statutes any differently.
Significantly, the US Supreme Court also rejected a narrow construction of exemptions to the overtime provisions in the Fair Labor Standards Act, where the statute gave no indication that the exemption should be construed narrowly.4 Citing Justice Scalia’s reasoning above, the Supreme Court rejected narrowly construing the exemptions to the Act, because the exemptions were part of the Act itself. The Supreme Court explained that the narrow construction of the exemptions elevates the primary purpose of the Act over the exemptions that are also part of the law. A narrow construction is warranted only where the statute gives a “textual indication” that such an intent is required.
The Supreme Court’s reasoning maps onto tax exemption cases equally. If the tax exemption statute contains no explicit signal that it should be construed narrowly, courts have no warrant to read it that way.
Anti-Deference
Deference is the doctrine by which courts give greater weight to an administrative agency’s analysis of the statutes it interprets. Although the narrow interpretation of tax statutes is not traditionally referred to as “administrative agency deference,” in practice, narrowly interpreting statutes against the taxpayers means a preference for the taxing agency’s position. In other words, if courts construe exemption statutes narrowly against the taxpayer, they, by definition, give more favor to the taxing agency’s position. Thus, courts defer to the position of the taxing agency, rather than independently determining the statute’s meaning.
Deference to the agency’s position against the taxpayer operates as an invitation for taxing agencies to find or invent reasons to deny tax exemptions. With the deck stacked in favor of the agency, taxing agencies are more likely to litigate exemption cases. For example, the taxing agency may deny exemptions because of the agency’s own procedural or administrative requirements. If a tax exemption statute expressly exempts purple widgets, with no other conditions stated, can the Department of Revenue deny the exemption to a taxpayer who undisputedly purchased exempt purple widgets because the taxpayer did not fill out the department’s specified form? The deferential view—or one that requires construing exemptions narrowly—would side with the department that the specified form is a prerequisite to the exemption regardless of whether the form is required by statute. The balanced view, with no presumption in favor of either side, would look to the purple widget exemption statute and the other exemption statutes to determine whether the legislature, through the statutes, required filling out a form as a prerequisite to getting the exemption or whether all purple widgets are automatically exempt from tax. If the statute simply says all purple widgets are exempt from tax in the state, the taxing agency should have no ability to deny the exemption based on the taxpayer’s failure to submit a form. But deferring to the agency’s interpretation would allow the taxing agency to deny the exemption because the taxpayer did not fill out the specified form, on the grounds that doing so is a statutory requirement.
The narrow construction of a tax exemption against the taxpayer has a counterpart: that taxing statutes are to be construed narrowly against the government. However, the latter doctrine is not nearly as outcome-determinative as the former. In exemption cases, courts often apply not just narrow but also “strict” statutory constructions against the taxpayer. Such strict constructions often all but determine the outcome, and the taxpayer is at an inherent disadvantage. On the other hand, in cases challenging the imposition of tax, there is certainly no presumption against the government; at best, the playing field is even with no preference for either side.
The lack of parity between these two rules of construction illustrates the unfairness of the presumption against tax exemption contained within the practice of deference. The rise of the second legal trend, anti-deference, recognizes that both the taxpayer and the government are entitled to have the statute applied as the legislature wrote it. And no policy justification exists to put a thumb on the scale in favor of the taxing agency.
Now is the ideal time to challenge the unfairly deferential presumption against taxpayers. In 2024, in its decision in the Loper Bright case, the US Supreme Court overturned long-standing Chevron deference, which required courts to accept the agency’s reasonable interpretation of an ambiguous statute the agency administered.5 The “reasonable” bar is a particularly low one: essentially, an agency only needed to provide any justification for its interpretation. Since Loper Bright, there have been numerous challenges to federal and state agency interpretations. Before Loper Bright, states such as Arizona, Florida, Mississippi, and Wisconsin had either judicially or legislatively eliminated deference. After Loper Bright, even more states have followed that lead.
As a result, challenges to the narrow interpretation of taxing statutes can invoke Loper Bright to urge courts to follow the Supreme Court’s logic there: that courts may consider the taxing agency’s preferred reading of a statute, but should give no preference to it. Loper Bright clarified that the interpretation of statutes is the competence of the courts, not administrative agencies. Taxing agencies may well have expertise in tax administration, but they have no special expertise in interpreting legislative intent in enacting tax exemptions. Tax exemption statutes are creatures of politics—and the lines drawn by the legislature should govern a court’s reading. The taxing agency’s expertise thus adds nothing to that statutory interpretation. Loper Bright further rejected the very problem of the narrow (or strict) constructionism that results from the presumption against tax exemptions: that the agency will nearly always win. Where a state has abandoned deference to state agencies, it must consistently also abandon the presumption against tax exemptions.
Avoid Presumptions Altogether
Short of disrupting long-standing precedent about statutory construction, taxpayers have one important option for sidestepping the harsh results of the presumption against tax exemptions: to avoid raising the issue of presumption altogether. The presumption against tax exemptions is a canon of construction that is only invoked when a statute is genuinely ambiguous. The textualist court will generally avoid such rules at any time where it can answer the question of statutory interpretation based on the plain language in the statutes. Only in cases of genuine ambiguity will any presumptions of statutory construction be necessary. As the US Supreme Court has repeatedly stated, when the words of a statute are unambiguous, then no further canons of construction are necessary.6
Taxpayers should make the argument that ambiguity does not exist, and no canon of constructions apply, before raising the above arguments disrupting the presumptions altogether. Tax courts and other trial courts generally will be bound by precedent adopting the narrow construction of tax exemption statutes, no matter how much the particular judge dislikes it. Thus, arguing that the presumptions simply do not apply gives the lower court a means of avoiding the presumptions altogether.
The Michigan Supreme Court explained that the presumption is really a “canon of last resort”:
We take this opportunity to clarify that because the canon requiring strict construction of tax exemptions does not help reveal the semantic content of a statute, it is a canon of last resort. That is, courts should employ it only “when an act’s language, after analysis and subjection to the ordinary rules of interpretation, presents ambiguity.” In the present case, the canon is inapplicable because, as we explain below, the statutes are unambiguous: their ordinary meaning is discernible by reading the text in its immediate context and with the aid of appropriate canons of interpretation.7
Similarly, the Georgia Supreme Court, in Funvestment Group v. Crittenden, while reiterating the general maxim of interpreting tax imposition statutes against the government and tax exemption statutes against the taxpayer, nonetheless refused to rely on these “interpretive standards” because the exemption statute at issue was not ambiguous.⁸ The Funvestment court ultimately ruled that the taxpayer was entitled to the exemption, reversing the lower court.
So, when does ambiguity exist? The short answer is almost never. In the words of the Georgia Supreme Court, “After using all tools of construction, there are few statutes or regulations that are truly ambiguous.”9 The tools of construction include reading the statutory text and its surrounding text, the statute’s surrounding acts, and finally linguistic canons of construction that define how to read words.10 Only if the term is still unclear is there ambiguity. And ambiguity does not exist merely because the parties take different positions.11
The position that actual statutory ambiguity is required for any presumptions to apply should generally be uncontroversial. Nonetheless, taxing agencies will generally argue for a presumption against an exemption without first identifying any statutory ambiguity. But even Chevron deference, now overturned, deferred to agency positions only when there was actual ambiguity. Thus, taxing agencies may rely on the presumption against exemptions for even stronger deference than now obsolete and disfavored Chevron deference.
Practical Considerations
The reflex to disfavor tax exemptions is increasingly out of step with modern statutory interpretation. State and federal courts have begun to recognize that the presumption against tax exemptions does too much work: it lets courts cut corners on textual analysis, and it disfavors one party for no reason connected to the legislature’s actual choice. Recent decisions have either confined the canon to cases of true ambiguity (where the presumption operates only as a tiebreaker), demoted it to a rule of last resort, or rejected it altogether. Thus, taxpayers should reevaluate their chances of prevailing in tax exemption controversies.
Raising the argument against the presumption of narrow construction does not necessarily require a trip to the state’s highest court to make new law. First, taxpayers should evaluate whether exemption qualifications are statutory, regulatory, or simply a matter of administrative preference. If a qualification is not statutory, failure to satisfy it is not fatal to an exemption claim and can provide an opportunity to challenge that requirement.
Second, do not concede that there is ambiguity in the statute. Be sure to isolate any purported ambiguities. Then, to resolve any ambiguities, use all other statutory rules of construction, such as looking to other taxing or exemption statutes. Often, an agency’s “narrow” construction of an exemption may be so narrow as to obviate the exemption entirely. Obviously, the legislature could not have intended to enact an inapplicable exemption. Without ambiguity, there should be no presumption against an exemption, and thus no tipping of the scales against the taxpayer.
Third, and only if ambiguity exists, taxpayers can argue for eliminating any presumption against the exemption. This article provides examples of modern courts moving away from construing exemptions narrowly. Additionally, strong policy arguments compel courts to treat both sides fairly and equally, rather than deferring to the position of the taxing agency.
Alla Raykin is a partner at Asbury Gardner whose practice focuses on SALT controversy.
Endnotes
- Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 362 (2012).
- Stingray Pressure Pumping, LLC v. Harris, 172 Ohio St. 3d 130, 135 (2023).
- Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011).
- Encino Motorcars, LLC v. Navarro, 584 U.S. 79, 88–89 (2018).
- Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) overturning Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).
- Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992).
- TOMRA of N. Am., Inc. v. Dep’t of Treasury, 505 Mich. 333, 343–44 (2020).
- Funvestment Grp., LLC v. Crittenden, 317 Ga. 288, 295–96 (2023).
- City of Guyton v. Barrow, 305 Ga. 799, 804 (2019). The US Supreme Court has expressed the same idea. Kisor v. Wilkie, 588 U.S. 558, 575 (2019).
- The presumption against tax exemptions is a “substantive” canon, meaning that it has some constitutional value. For example, the “rule of lenity” is another substantive canon in criminal law that incorporates the constitutional principle of due process.
- Brown v. Gardner, 513 U.S. 115, 118 (1994) (“Ambiguity is a creature not of definitional possibilities but of statutory context”).
