Breaking News: Delaware Sued Over VDA/Audit Demand

Philly.com has an article from Randall Chase of the Associated Press with the story of a lawsuit by Select Medical against the State of Delaware arising from a VDA initiated with the Delaware Division of Revenue*.  According to the complaint, which was filed in Delaware federal court on Wednesday, Select Medical entered into a VDA with Delaware in 2006.  As a result of its own review, it attempted to close out the VDA in 2008 with a payment of approximately $20k of Delaware (in addition to some $300k filed in other states).

In response to this payment (again, according to the allegations of the Complaint) Delaware initiated an audit of the company, going back to 1981.  As a result of that audit, Delaware demanded an additional $300k from Select.  The lawsuit raises a number of challenges to the Division of Revenue's normal audit practices including:
  • the use of estimation prior to the enactment of Delaware's statute authorizing estimation;
  • the alleged use of "arbitrary and capricious" estimation methods;
  • the inclusion of non-dormant property in Delaware's estimation procedures; and
  • Delaware's claimed disregard of the Texas v. New Jersey priority rules.
 The Complaint seeks a preliminary injunction preventing Delaware from demanding the $300k audit assessment, or imposing interest and penalties on that assessment, until such time as the court can review the case.  The case is named Select Medical Corp. v. Cook, et al., Case No. 1:13-cv-00694 in the United States District Court for the District of Delaware.

* Note that the VDA program described in the complaint appears to be the Division of Revenue's VDA program, not the temporary VDA program currently being offered by the Delware Secretary of State.

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