From: Dickey, Michael F (michael_f_dickey@groton.pfizer.com)
Date: Fri Jan 10 2003 - 14:06:39 MST
Tax-Free Speech?
http://www.law.com/jsp/article.jsp?id=1039054470520
Giant Fort Lauderdale software maker Citrix sues state, says First Amendment
bans taxing information companies
Julie Kay
Miami Daily Business Review
12-19-2002
One of Florida's largest public companies has filed a lawsuit against the
Florida Department of Revenue invoking a unique legal theory that it should
be exempt from paying taxes because it is protected under the First
Amendment of the U.S. Constitution.
Fort Lauderdale-based Citrix Systems, a manufacturer of computer software,
is seeking a refund of about $5 million in state corporate income taxes that
it paid over the last five years.
Citrix is relying on an unusual legal theory -- that all companies acting as
purveyors of information and facilitators of communications, including
newspapers, TV stations, telephone companies and computer companies, are
constitutionally exempt from paying taxes of any kind. That, according to
Citrix, includes both the federal and state income taxes corporations pay
and the state sales tax that customers pay every time they buy a newspaper,
magazine or computer.
The class action lawsuit, filed last week in Broward Circuit Court, has
surprised and amused tax watch groups, law professors, tax attorneys and the
Department of Revenue, whose spokesman responded to questions about the
lawsuit with peals of laughter.
But the action, filed by a publicly traded company that posted $378.7
million in revenues for the nine months ended Sept. 30, should not be
dismissed too quickly as the latest in a long line of wacky attempts to
argue that the government has no constitutional right to levy taxes, experts
said.
It was filed by Boca Raton, Fla., tax lawyer Allen Libow, who said he has
won previous lawsuits against the Department of Revenue, including one
brought by a Boca Raton magazine that recently was affirmed by the 4th
District Court of Appeal.
"This is a very substantial corporation in Florida, with substantial
assets," said Dominic Calabro, executive director of the Tallahassee,
Fla.-based TaxWatch, a taxpayer group. "Obviously, they feel serious enough
to file this. I'm surprised. It's a very interesting argument they're
making."
Bob Jarvis, a law professor at Nova Southeastern University, said he also
was surprised that a large company like Citrix would file such a lawsuit.
"Usually it's the crackpots," he said. Still, he predicted the lawsuit would
go nowhere: "This doesn't even pass the laugh test. The government would go
out of business and we would have anarchy if people didn't pay taxes."
In the suit, Citrix is seeking to make all of its computer software
customers plaintiffs in the potential class action. Those customers include
499 of the Fortune 500 companies.
'WHOLE THING IS WRONG'
The lawsuit grows out of a dispute between Citrix and the state tax agency
that began several years ago when the Department of Revenue started auditing
the company. Citrix sought a $90,000 refund because it felt it was entitled
to an exemption for research and development costs. The tax agency
disagreed. Citrix filed a protest, and was denied.
Deciding that the state was "dead wrong" in its decision, David Carls,
manager of corporate taxes for Citrix, said the company started examining
its entire tax liability. Carls and Libow, a partner at Libow & Muskat who
is the company's outside tax lawyer, decided that Citrix should pay no state
or federal taxes, neither income or sales taxes.
"We decided the whole thing is wrong," Carls said. "The government is
practicing discrimination in how it taxes various entities. I think this is
something whose time has come."
On Dec. 9, with the approval of its top executives -- but without a vote by
the board of directors -- Citrix took a step that anti-tax libertarians
would applaud. It sued the state tax agency, seeking a refund of some $5
million -- all the state corporate income tax it paid between 1996 and 2001,
the audited period. Citrix paid Libow between $40,000 and $60,000 to file
the lawsuit. The rest of the case will be on a contingency basis.
The case has been assigned to Judge Robert Lance Andrews. Citrix is in the
process of notifying all its vendors and customers that they are going to be
part of a class action against the Department of Revenue and may opt out if
they wish.
'CHILLING EFFECT'
The reason purveyors of information are exempt from taxation, according to
the suit, is that taxes have a chilling effect on the First Amendment right
to free speech under the U.S. Constitution.
"By assessing and collecting Florida income and emergency excise tax,"
states the lawsuit, "the DOR is restricting the freedom to circulate this
information, in direct violation of established United States and Florida
constitutional principles, as said tax scheme is discriminatory on its face
between not only similarly situated speakers, but to the recipients of such
speech, as well."
Added Carls: "The framers of the Constitution did not have in mind that free
speech should be taxed. If you really think about it, economic restriction
is equivalent to forcible restriction. When CBS or CNN buys a camera for the
studio, for every 10 cameras they buy they could have bought an 11th if they
didn't have to pay taxes."
Various groups over the years have tried to claim that the government has no
constitutional right to levy taxes. Last year, the We the People Foundation,
a tax-exempt educational charity based in Queensbury, N.Y., launched an
advertising campaign to make its case that the 16th Amendment, allowing
income taxes, was fraudulently adopted.
The courts repeatedly have rejected such theories. Three years ago, Congress
increased the penalties for making such arguments against the tax laws in
court to $25,000, up from $5,000. But such challenges continue. Around the
country, various individuals sell tax-evasion schemes, and leaders of
militia and "patriot" organizations, as well as business owners, have
stopped withholding taxes from their workers' paychecks.
One prominent tax lawyer who did not want to be identified called it
foolhardy for Citrix to take this legal tack. He said Citrix should have
sued just to recoup its $90,000 refund, not on the larger issue.
"When you deal with the DOR, you play it by the book," said the lawyer.
"Somebody convinced Citrix to go along with this." He noted that a major
convenience store chain sued the Department of Revenue in the early 1980s
and wound up facing criminal charges for allegedly withholding taxes.
While he calls the First Amendment issue "an interesting question of law
that we will follow," Calabro of TaxWatch said the real test of whether a
tax is constitutional is whether it is applied across the board, in a fair
and even-handed manner. Since media and information companies are not
charged a special tax, the Department of Revenue appears to be fair in its
treatment of them, he said.
The agency "reviewed the issues raised by [Citrix] and finds them not to be
meritorious," said agency spokesman Dave Bruns with a laugh. "We're looking
forward to our day in court."
Bruns said "the constitutionality of income tax is well-settled law that has
been in place for many years. There have been challenges in other states and
with the federal government, but rarely by software producers. Usually they
are by taxpayer protest groups."
When informed that the Department of Revenue spokesman laughed about the
lawsuit, Libow responded, "We'll see how funny this is when it winds up in
court." He noted the case is before Judge Andrews, an unpredictable jurist
who has taken on government in the past and made controversial rulings.
Libow previously has sued the Department of Revenue successfully, though on
much narrower grounds. He was victorious in a lawsuit he brought on behalf
of Soap Opera Magazine, which is owned by Boca Raton-based American Media.
The department wanted to tax photos the magazine bought from free-lancers,
but did not similarly tax newspapers, such as its sister paper, the Weekly
World News. Libow sued for discriminatory practices, among other grounds,
and won the suit. It was affirmed by the 4th District Court of Appeal.
MIAMI HERALD SAID NO
Libow said Citrix's customers may opt out of the lawsuit if they wish, but
are automatically included if class certification is granted. He said he
likely will expand the lawsuit to name the Internal Revenue Service as a
defendant -- but first wants to gain support from other tech companies in
Silicon Valley. "Citrix doesn't want to be singled out," he said. "They
don't want this to be seen as big business trying to save money."
Libow has also been contacting newspapers and magazines around the country
to solicit their participation in the lawsuit. He met with officials of the
Miami Herald to discuss the matter, but the Herald ultimately decided not to
join in, said Herald general manager Jesus Diaz, who declined to say why.
American Media, of Delray Beach, Fla., was also contacted by Libow. But the
company declined to comment on the issue.
Carl said his company is not afraid of taking on the state Revenue
Department. "They've got all the power in the world to audit you," he said.
"I hope they're not picking and choosing who they're going to audit by these
things. The bottom line is, the Department of Revenue has been less than
fair to us."
Will Citrix drop its lawsuit if the DOR simply capitulates and gives the
company the requested $90,000 refund? "No way," said Libow, insisting that
the lawsuit is not a negotiating ploy. "This is going all the way. I'm sure
it will end up in the U.S. Supreme Court. This is a very, very serious
matter."
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