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R ECENT A LABAMA T AX D EVELOPMENTS :
L EGISLATIVE , J UDICIAL , AND A DMINISTRATIVE
SOUTHEAST REGIONAL STATE TAX SEMINAR
COUNCIL ON STATE TAXATION
REGIONS CENTER
BIRMINGHAM, ALABAMA
APRIL 28, 2015
Bruce P. Ely
[email protected]
Christopher R. Grissom
[email protected]
James E. Long, Jr.
[email protected]
William T. Thistle II
[email protected]
Bradley Arant Boult Cummings LLP
One Federal Place
1819 Fifth Avenue North
Birmingham, Alabama 35203
205.521.8000
www.babc.com
RECENT ALABAMA TAX DEVELOPMENTS:
LEGISLATIVE, JUDICIAL, AND ADMINISTRATIVE
Bruce P. Ely
Christopher R. Grissom
James E. Long, Jr.
William T. Thistle *
Bradley Arant Boult Cummings LLP
Birmingham, Alabama
www.babc.com
I.
INCOME/BUSINESS PRIVILEGE TAXES
A.
LEGISLATIVE DEVELOPMENTS
Alabama Jobs Act of 2015 – Act 2015-27 (H.B. 58): This Act establishes a jobs tax
credit, putting Alabama in line with its neighboring states, and also creates a partially
transferable capital investment credit to replace the existing capital credit. H.B. 58 was the
second of a five bill package to pass this session, which constitute what has been described as the
most significant overhaul of Alabama economic development incentives since Mercedes-Benz
came to the state.
The Act creates two distinct credits which are available to qualifying projects on a
discretionary basis: The first is a jobs credit in the amount of up to 3 percent of the previous
year’s annual wages of eligible employees. The second is a capital investment credit in the
amount of up to 1.5 percent of qualified capital investment. Each credit is available for up to the
first 10 years of a project. Qualifying projects can claim one or both of the credits if both are
offered to the project by the Governor upon the recommendation of the Department of
Commerce.
The jobs credit may be claimed against the company’s utility taxes paid, and includes a
five-year carryforward of unused credit. Alternatively, the company may elect to have the credit
paid out of utility taxes paid to the state generally (without regard to how much utility tax the
company has actually incurred and paid). The capital investment credit can be claimed against
the income tax (or as a credit toward estimated payments of the tax), financial institution excise
tax, insurance premium tax (or as a credit toward estimated payments of the tax), utility tax, or
some combination thereof.
Importantly, the investment credit is transferable for the first three years of a project. The
credit must be sold at a minimum of 85 percent of face value. Unlike Alabama’s historic tax
*
Note: The authors and other members of Bradley Arant Boult Cummings LLP are or were involved in many of the
cases and items of legislation discussed herein. The opinions expressed herein are those of the authors and not
necessarily those of their law firm, clients, or organizations in which they are involved.
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credit, the transferee is free of recapture obligations unless the transfer was fraudulent. The
credits created by the Act replace the existing capital income tax credit, the Made in Alabama
Act of 2012 credits, and the tariff credit. Companies that wish to seek the existing capital credit
can file Form INT-1 by January 2, 2016 (within six months of the effective date of the Act) to
preserve their right to that credit. However, a project electing to proceed under the existing
capital credit must forgo incentives under the Act.
Alabama Veterans and Targeted Counties Act – Act 2015-41 (H.B. 57): This Act
provides enhanced incentives under the Alabama Jobs Act for qualifying projects located in rural
counties or that created jobs for veterans. With respect to projects located in counties with less
than 25,000 people, the jobs credit is increased to 4 percent of the previous year’s wages paid to
eligible employees and the annual investment credit period is extend to 15 years if the project
will provide goods or services to another qualifying activity within 50 miles of the project site.
Importantly, the Governor has the discretion to provide these enhanced incentives to up to two
projects per year that are not located in a qualifying rural county. With respect to projects
employing veterans who received an honorable or general discharge that accounted for at least
12 percent of its eligible employees, 0.5 percent of the wages paid to such veterans are eligible
for an additional job credit. Finally, the Act also establishes the Accelerate Alabama Fund that
can fund a loan in an amount up to $2 million per project to provide additional financing for
projects that will locate in targeted counties.
B.
JUDICIAL DEVELOPMENTS
Magee v. Boyd, Dkt. No. 1130987 (Ala. S. Ct. Mar. 2, 2015): In an 8-1 decision, the
Alabama Supreme Court upheld the constitutionality of the Alabama Accountability Act of 2013
(the “Act”), which established an income tax credit for contributions by individuals and “C”
corporations to certain scholarship granting organizations. The Court’s ruling affirmed in part,
but largely reversed and remanded the Montgomery County Circuit Court’s May 28, 2014,
ruling, which had struck down the Act as violating several provisions of the Alabama
Constitution. The Court’s ruling preserves both the scholarships and income tax credits earned
during the first two years of the program.
After addressing several procedural issues related to whether subsequent acts of the
Legislature and the “political question” doctrine rendered the plaintiffs’ arguments moot, the
Court found that the legislature did not violate any of the sections of the Alabama Constitution
cited in the lower court ruling.
The Court next addressed whether the Act improperly appropriated public funds to a
charitable or educational institution not under the control of the state. Finding that tax credits, as
the term is generally understood, are not “appropriations” within the meaning of Section 73 of
the Constitution, the Court rejected that argument. Thus, the Act and the tax credit programs it
created were not improper uses of public funds. The Court also held that the tax credit programs
created by the Act did not violate the Constitution’s requirement that all income tax revenues are
to be deposited into the Education Trust Fund, because the tax-creditable donations made to
scholarship granting organizations under the Act are never paid over to or collected by the State
as income tax revenue. Regarding whether the refundable parent/guardian tax credits under the
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Act created prohibited new public debt, the Court held that no new debt was created because
refunds were contingent upon the taxpayer owing less in tax than the amount of the credit, and
refunds were determined annually and paid from the amount of sales tax revenue necessary to
cover the income tax credits for the taxable year.
Finally, even though the trial court declined to rule on whether the Act violated the
doctrine of separation of church and state, the Court chose to address this issue for the sake of
judicial efficiency by holding that the Act as a whole has a secular purpose, i.e., educational
reform and accountability. The fact that funds may ultimately flow in part to religious schools is
a result of a private decision by a parent or a scholarship granting organization, not the state.
There was simply no evidence, the Court concluded, that the legislature, in authorizing the tax
credits, deliberately skewed incentives towards religious schools.
Coca-Cola Enterprises Inc. v. Alabama Department of Revenue, Admin. L. Div., Dkt.
No. CORP. 09-641 (Final Order on Rehearing February 14, 2013)(on appeal): Chief
Administrative Law Judge Bill Thompson held that an Alabama consolidated group was entitled
to carryforward certain net operating losses (“NOLs”) incurred before the group’s election to file
an Alabama consolidated return; however, Judge Thompson also held that the group could not
deduct any NOLs incurred before 1999 based on Alabama’s version of the federal separate return
limitation year (“SRLY”) rules. Importantly, Judge Thompson partially overruled his prior
decision in Weyerhaeuser USA Subsidiaries v. Alabama Department of Revenue, Admin. L. Div.,
Dkt. No. CORP. 04-511 (Mar. 11, 2005), concluding that an “Alabama affiliated group” could
not exist before the term was defined by the original consolidated filing statute in 1999.
The Alabama Department of Revenue (“ADOR”) filed an application for rehearing,
arguing that the Taxpayer’s pre-2007 NOLs were subject to the Ala. Code § 40-18-39(h)
limitation (the “Alabama SRLY rule”) because the group did not elect to file an Alabama
consolidated return until 2007. Specifically, the definition of an “Alabama affiliated group”
provides several requirements, including that each member “[c]ombines and reports taxable
income or loss … on a single return for the Alabama affiliated group.” Ala. Code § 40-1839(b)(1)f. Citing this requirement, the ADOR argued that the filing of an Alabama consolidated
return is a prerequisite to the existence of an Alabama affiliated group. Because the Taxpayer
did not file an Alabama consolidated return until 2007, the ADOR contended that the Taxpayer’s
pre-2007 separate company NOLs were not incurred while it was a member of an Alabama
affiliated group, and were thus limited by the Alabama SRLY rule.
The Administrative Law Division rejected the ADOR’s argument: “[b]y itself, §40-1839(b)(1)f. can arguably be construed as supporting the ADOR’s position. But various other
provisions in §40-18-39, when read together, show that the actual filing of an Alabama
consolidated return is not a prerequisite to the existence of an Alabama affiliated group.” Judge
Thompson also noted that Alabama’s provision that allows an affiliated group the option to elect
a consolidated return was consistent with the federal consolidated return regime. See I.R.C. §
1501 (providing that “[a]n affiliated group of corporations shall . . . have the privilege of making
a consolidated return . . . in lieu of separate returns”).
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Judge Thompson held that “[t]he purpose for the SRLY rule limitation is to prevent an
affiliated group of corporations from purchasing another corporation that has amassed large
NOLs in prior years, and then using those NOLs to offset the income of the other group members
in subsequent years. That is, the SRLY rules prevent an affiliated group from ‘buying’ tax losses
by limiting an acquired corporation’s pre-acquisition NOLs to only offset the current year and
future income of the acquired corporation. The SRLY rules do not apply, however, to NOLs
incurred by a corporation that filed separate returns in the loss years but was also a member of
the same affiliated group during the loss years … Allowing the affiliated group to deduct the
NOLs incurred by the Taxpayer since 1999 is clearly authorized under Alabama law.”
Both parties filed notices of appeal with the Montgomery County Circuit Court and the
appeals were subsequently consolidated. Briefing was completed by the parties and an oral
argument was held by the Court-appointed special master in Fall 2014. No ruling yet.
American Equity Investment Life Insurance Company v. Alabama Department of
Revenue, Case No. 2130933 (Ala. Civ. App. Jan. 16, 2015): The Court of Civil Appeals affirmed
the Circuit Court’s summary judgment order in favor of the taxpayer, holding that the taxpayer
property included its gross receipts from both life insurance and annuity products in calculating
the ratio of premium income received from Alabama residents as compared to nationwide
sources for purposes of calculating its net worth subject to the Alabama business privilege tax.
The taxpayer is a leader in the development and sale of fixed index and fixed rate annuity
products. A minor portion of the taxpayer’s business involves the sale of life insurance products.
The ADOR recalculated the taxpayer’s apportion factor by excluding its gross receipts from
annuity products, arguing that insurance premium tax exclusion applicable to annuity products
also applied to exclude these proceeds from the business privilege tax apportionment factor. The
Court of Civil Appeals rejected this argument, holding that “[n]either the insurance premium-tax
statutes nor any of the references in the [business privilege tax] statutes to the insurancepremium tax suggests that the definition of ‘premiums’ from § 27-4A-2(8) should be imported
into the statutes applicable to the [business privilege tax] … Because the apportionment factor is
designed to reflect the taxpayer's net worth in Alabama and because the word “apportion” is
defined as ‘to divide and share out according to a plan; esp[ecially]: to make a proportionate
division or distribution of,’ it seems illogical to determine the apportionment factor based on
only insurance premiums while completely ignoring the annuity considerations that form the
other component of the taxpayer's net worth.”
Due to its resolution of the statutory argument in favor of the taxpayer, the Court noted
that it did not need to reach the taxpayer’s constitutional arguments. Interestingly, the Circuit
Court also held that if the ADOR’s method of calculating the taxpayer’s apportionment factor
was accepted, “it would present serious issues under the United State Constitution, specifically
the Due Process and Commerce Clauses, with respect to the imposition of the [business privilege
tax] as to this particular company. American Equity has presented evidence that that application
of the [ADOR’s] methodology would significantly overstate the portion of the company’s
operations and net worth attributable to Alabama.” The evidence referred to by the Circuit Court
included evidence that the ADOR’s apportionment methodology distorted its net worth by a
factor of 16 and 23 for the tax years in question, greatly exceeding the degree of distortion struck
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down by Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123, 133-34 (U.S. 1931) and its
progeny.
C.
ADMINISTRATIVE DEVELOPMENTS
Proposed Rules Implementing Transferability of Alabama Historic Tax Credit: On
January 30, the ADOR proposed three new regulations regarding the Alabama Historic
Rehabilitation Tax Credit (the “AL HTC”). Prop. Admin. Ala. Code r. 810-3-136-.01, -.02 and .03. Act No. 2013-241 provided a credit against the income or financial institution excise tax
(FIET) liability of the owner or its partners/members for the rehabilitation, preservation, and
development of certain historic structures. Act No. 2014-452 contained several technical
corrections, such as clarifying that the annual $20 million of credit reservations are awarded on a
calendar-year basis and removing any restrictions on changes in ownership of the qualified
structure prior to placing the rehabilitation in service. Notably, the 2014 act permitted a onetime transfer of the tax credit, but provides that the owner, allocatee, or transferee of the credit
will be liable for any credit recapture.
Specifically, the proposed rules address the transferability mechanics permitted by the
2014 amendment. These rules are of particular significance because the AL HTC is the first
income tax credit that may be transferred under Alabama law, and it may serve as a paradigm for
future tax credit legislation. In addition, the new regulation is also clarifies the circumstances
when a recapture is deemed to occur, as many projects that are eligible for the AL HTC may also
qualify for the federal historic rehabilitation credits under Section 47 of the Internal Revenue
Code. A public hearing was held on March 11, 2015.
D.
LIKELY TRENDS/OUTLOOK
Regular Session †
FOR
2015: Legislative Proposals – Spring 2015
The 2015 regular session has used one-half of its maximum of 30 legislative days, and
several proposals to make Alabama’s statutory tax incentives package more competitive have
already crossed the finish line. To date, however, the Legislature has not addressed many of
Governor Bentley’s proposed tax increases to address the significant budget shortfall, estimated
to be in the range of $700 million. Specifically, the Governor’s proposal includes enacting
mandatory unitary combined reporting for corporate income taxes (H.B. 142, summarized
below); repealing the sales and use credit for financial institutions (H.B. 201); removing an
exemption from utility gross receipts taxes that applied to municipal utilities; increasing taxes on
cigarettes; and doubling the state sales, use, and rental tax rates applicable to automobiles.
The proposals to revamp Alabama’s statutory tax incentives could include some or all of
the following (bill number and status as of the date of this outline is also provided below):
•
†
Phase-out of the capital income tax credit and creation of an investment income tax credit
equal to 1.5 percent of the qualified capital investment each year for 10 years, with the
As of April 21, there are 15 remaining legislative days and the session must adjourn by June 8, 2015.
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•
•
•
•
•
first three years of credits being transferable in order to raise additional equity for the
project (H.B. 58 – passed both houses and signed by the Governor, Act 2015-27).
Creation of a jobs credit, providing an annual cash rebate to the employer for up to 3
percent of its previous year’s gross payroll for new jobs directly created by the project
(H.B. 58 – passed both houses and signed by the Governor, Act 2015-27).
Enhanced investment tax credit and jobs tax credit for projects that employ veterans or
are located in less developed counties (H.B. 57 – passed both houses and signed by the
Governor, Act 2015-41)).
Creation of a new tax credit equal to 30 percent of the qualified investment in certain
small-business and start-up companies (H.B. 414 – pending before House)
Creation of research and development income and financial institution excise tax credits
modeled after the federal R&D credit, but with an enhanced credit for research conducted
by Alabama-based academic or nonprofit research institutions (H.B. 304 – pending
before House).
Expansion of sales, use, and property tax abatements to qualifying businesses that invest
at least $2 million in refurbishing, upgrading, or placing a preexisting facility in Alabama
back in service (H.B. 59 – passed both houses and signed by Governor, Act 2015-24)
H.B. 214 – Extension of Alabama HTC: The Alabama HTC program currently
authorizes $20 million of tax credits for three years and is scheduled to sunset in 2016. This bill
would extend the program by authorizing seven additional allocations of $20 million through
2022, and likewise extend the sunset date through May 16, 2023. A public hearing was held by
the House Ways & Means – Education Committee on April 1, 2015, and the bill was approved
by the Committee and is pending before the full House..
S.B. 36 and S.B. 163 – Extension of Alabama New Markets Tax Credit: These bills
would authorize the Governor, by executive order, to establish an additional allocation of
Qualified Equity Investment authority in an amount up to of $60,000,000 under the Alabama
New Markets Development program, which is the Alabama counterpart to the federal New
Markets Tax Credit program. S.B. 36 would also allow qualified community development
entities that are based in Alabama, but have not received an allocation of federal credits, to
qualify for this additional allocation.
H.B. 142 – Mandatory Unitary Combined Reporting: As part of Governor Robert
Bentley’s eight bill revenue package, Representative Mike Hill (R-Columbiana) introduced a
mandatory unitary combined reporting proposal that would be immediately effective for tax
years beginning after December 31, 2014. This bill would repeal the existing consolidated return
filing option for corporate income taxpayers and require a taxpayer engaged in a unitary business
with one or more other corporations or flow-through entities to file a combined report, which
includes the income and apportionment factors of all the “members of the unitary business and
such other information as required by the Commissioner.”
The bill essentially adopts the Multistate Tax Commission’s (“MTC”) Proposed Model
Statute of Combined Reporting, except that it does not provide any common ownership threshold
in determining whether an entity is included in the unitary group. Almost all other states that
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impose MUCR (and the MTC’s model regulations) require at least 50% common ownership.
Unlike prior MUCR proposals, this bill specifically restricts the use of tax credits, net operating
losses (“NOLs”) and other post-apportionment deductions solely to the member that generated
the attribute. In other words and despite the label “combined” report, all NOLs and other
enumerated tax attributes can only be used by the individual member that generated such
attribute and cannot be used to offset the income or liability of other members of the unitary
group.
The bill does not repeal either (a) Alabama’s add-back statute that disallows certain
intangible and interest expenses incurred between related parties, which will severely increase
the risk of double taxation on these transactions, nor (b) the relatively unproven restrictions on
transfer pricing that largely parallel I.R.C. Section 482.
COST submitted very thoughtful written testimony in opposition to H.B. 142 to the bill’s
sponsor and others. As of this writing, a public hearing has not yet been scheduled before the
House Ways & Means-Education Committee. A second MUCR proposal was also introduced as
H.B. 455 that is similar to previous versions.
S.B. 171 – Enhancements to Alabama Accountability Act: This bill would make a
number of changes to Alabama’s tax credit scholarship program, which was created by the
Alabama Accountability Act of 2013. S.B. 71 would remove the $7,500 cap on individual
donations, allowing individual taxpayers to take an income tax credit equal to 100% of their
donation to a scholarship granting organization, up to 50% of which may be used to offset their
income tax liability. S.B. 71 would also allow the tax credits generated by donations made by
pass-through entities, such as S corporations and limited liability companies, to flow-through to
the owners. Currently, tax credits are only available to individual and C corporation donors.
S.B. 71 would increase the annual amount of tax credits available from $25,000,000 to
$30,000,000. S.B. 71 would also allow taxpayers to make tax creditable donations in 2015 but
claim and use credits from the 2014 allocation year to offset their 2014 income tax liability.
Finally, S.B. 71 would restrict a donor’s ability to assign or earmark a donation for use at a
particular school or for a particular student. Tax creditable donations would be required to be
made to a scholarship granting organization with no strings attached and the scholarship granting
organization would make the determination as to which student receives a scholarship.
H.B. 466 – Factor Presence Nexus Standards: This bill, which is retroactively effective
for tax years after December 31, 2014, would establish broad “factor presence” nexus standards
for taxpayers with business activities in Alabama. Under the bill, a nonresident individual or
business entity is deemed to have a substantial nexus with Alabama, and thus an Alabama
business privilege tax and income tax or financial institution excise tax filing obligation, if in any
tax period, the taxpayer’s property, payroll, or sales in Alabama exceed any of the following
thresholds: $50,000 of property; $50,000 of payroll; $500,000 of sales; or 25% of total property,
total payroll, or total sales. The bill also provides that pass-through entities (e.g., partnerships,
LLCs, S corporations, and trusts) shall determine their threshold amounts at the entity level, but
if the property, payroll, or sales of an entity in Alabama exceeds the nexus threshold, the owners
of the pass-through entity are automatically subject to income tax or FIET on their allocable
share of the entity’s Alabama income.
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Notably, the bill also provides that if the aggregate property, payroll, or sales of the
entities of any unitary business meets one of the nexus thresholds, then each entity that’s part of
that unitary business is deemed to have nexus and would be required to file and pay Alabama
income tax or FIET. This bill is based on a model statute drafted by the Multistate Tax
Commission, of which Alabama is a member.
II.
TRANSACTIONAL TAXES
A.
LEGISLATIVE DEVELOPMENTS
Alabama Reinvestment and Abatements Act – Act No. 2015-24 (H.B. 59): This act
expands the list of projects that may qualify for sales, property and mortgage recording tax
abatements under the Tax Incentive Reform Act of 1992 and provides several significant
enhancements to these incentives. New industries that can qualify for these incentives include:
aircraft support, flight training, rail transportation, motion picture and video production, record
production, wireless and satellite telecommunications, internet publishing and broadcasting,
financial transaction processing and logistic consulting services. The act also removes the
logistic and additional job requirement that previously applied to warehousing and storage
facilities and clarifies that the abatements can be granted to one or more users of a co-location
data processing center.
In addition, the act also provides certain abatements for any qualifying project that
proposes to invest at least $2 million “as part of any addition, expansion, improvement,
renovation, re-opening, or rehabilitation of a facility, or replacement of any existing equipment
or tangible personal property,” provided that a project agreement has not been previously entered
into with the State. In addition to other qualifying costs under TIRA, capitalized repairs,
rebuilds, maintenance and replacement equipment can also qualify for sales tax abatements.
These projects are also eligible for a refund of utility taxes for up to ten years, equal to the
amount of taxes paid in excess of the average three year amount paid prior to placing the project
in service.
Local Lodgings Taxes Added to ONE SPOT – Act 2015-52 (S.B. 130): Effective
September 30, 2013, taxpayers are able to file and remit ALL local sales, use and rental taxes
through the ADOR’s Optional Network Election for Single Point Online Transactions (ONE
SPOT). This bill would add local lodgings taxes to the list of available local taxes that may be
filed and remitted through ONE SPOT. This bill has passed both houses and is expected to be
signed by the Governor.
B.
JUDICIAL DEVELOPMENTS
Stone Bridge Farms, LLC v. State of Alabama Department of Revenue, Ala. Tax
Tribunal Docket No. S. 14-510 (January 27, 2015) (on appeal): Chief Judge Bill Thompson of
the newly-established Alabama Tax Tribunal issued his first, and a key, ruling involving the
scope of his authority when a taxpayer does not specifically raise a viable argument or defense in
its notice of appeal. This raises the question, whether a Tax Tribunal Judge may invalidate an
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Alabama Department of Revenue (the “Department”) regulation, even though the taxpayer
challenging the underlying assessment did not attack the regulation in its pleadings or at the
hearing.
The case involves a taxpayer that owns and rents facilities for special events, such as
weddings, rehearsal dinners, and receptions in rural Cullman County. Initially, the facility
included only a wedding chapel, a banquet room, and other buildings. It was undisputed that the
rental proceeds from these specific facilities were not subject to the lodgings tax. However,
beginning in January 2013, the taxpayer began renting three nearby chalets on the property to
overnight guests--typically those involved with a wedding at the adjacent facility. At that point,
the taxpayer began filing lodgings tax returns and paying lodgings tax on the chalet rentals.
The Department audited the taxpayer and assessed it for additional lodgings tax on the
proceeds from the rental of the wedding chapel, banquet room, and any other facility on the
property used by the guests that previously had not been subject to lodgings tax. The
Department relied on its Regulation 810-6-5-.13, which requires the collection of lodgings tax on
all rented facilities “where rooms or other accommodations are offered for the use of travelers,
tourists or other transients . . .” That is, pursuant to the regulation, once any part of the
taxpayer’s facilities became subject to lodgings tax, the rentals from all facilities became subject
to the tax.
Unfortunately, the taxpayer’s CEO, who had appealed the final assessment pro se, did not
attend the hearing or file a brief. Nevertheless, Chief Judge Thompson ruled that the regulation
was invalid because it expanded the scope of the lodgings tax beyond the levy permitted by the
statute, and he therefore voided the final assessment. Instead of challenging the substance of the
ruling, the Department raised a procedural defense in its application for rehearing, arguing that
the taxpayer’s failure to raise the issue of the overbroad regulation barred the Tax Tribunal from
ruling in favor of the taxpayer on that ground.
This procedural challenge has broad implications to taxpayers and tax practitioners and,
of course, to the authority of the new Alabama Tax Tribunal. If the Department’s position is
correct, then the burden would presumably be on both the taxpayer and the Department to raise
every argument in their pleadings or at the hearing before the Tribunal; otherwise, the Tribunal
would lack jurisdiction to even consider these questions of law. This would create a heavy
burden for any taxpayer, and especially pro se taxpayers (including in-house counsel or tax
managers of corporate taxpayers) who frequently appear before the Tribunal, and would deliver a
significant blow to the new tribunal as a “user-friendly” forum to resolve tax disputes.
Fortunately, Chief Judge Thompson rejected the Department’s attempt to limit the
Tribunal’s scope of authority and ability to review questions of law. The Chief Judge ruled that
by appealing in a timely manner, the taxpayer had invoked the jurisdiction of the Tribunal, and
that the validity of the regulation was also before the Tribunal because the Department cited the
regulation in its Answer as the basis for the assessment. As additional support for the distinction
between questions of law versus fact, Chief Judge Thompson also cited new Tax Tribunal
Regulation 887-X-1-.6, which provides that the Tribunal’s final order may “grant such relief and
invoke such remedies as deemed necessary by the Tribunal Judge for a fair and complete
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resolution” of the case. He added: “[f]undamental fairness mandates that a taxpayer should not
be required to pay a tax that is not due under Alabama law.”
The Department’s attorneys argued that the Tribunal was in essence placing the burden of
proof on the Department to justify the validity of its assessments, and that the Tribunal had
“effectively become an advocate for the [t]axpayer.” The Judge flatly rejected both arguments,
referring to the fundamental premise for the establishment of the Tribunal last year: “By
establishing an independent Alabama Tax Tribunal . . . this chapter provides taxpayers with a
means of resolving controversies that ensures both the appearance and the reality of due process
and fundamental fairness.” Ala. Code § 40-2B-1(a). The Department has appealed this decision
to Circuit Court.
CSX Transportation, Inc. v. Alabama Department of Revenue, No. 13-553 (U.S. Mar.
4, 2015): In the State of Alabama’s and CSX Transportation’s second trip to the U.S. Supreme
Court, the Court held in a 7-2 decision that Alabama’s sales tax on diesel fuel purchased and
used by rail carriers—where motor and water carriers are exempt from the tax—discriminates
against rail carriers only if Alabama cannot justify the differences in tax treatment between those
similarly-situated taxpayers. The Court remanded the case to the Eleventh Circuit, directing it to
consider Alabama’s justifications for the differential tax treatment of rail carriers, motor carriers,
and water carriers.
Alabama imposes sales tax on diesel fuel purchased and used by rail carriers, but exempts
motor carriers and water carriers from this tax. Motor carriers, however, are subject to
Alabama’s alternative per gallon diesel fuel-excise tax; water carriers are exempt from both
taxes. CSX is a rail carrier in Alabama and other states and filed suit challenging the sales tax on
diesel fuel imposed against it as a discriminatory tax in violation of the Railroad Revitalization
and Regulation Reform Act of 1976 (the 4-R Act). Under section 11501(b)(4) of the 4-R Act, a
state is prohibited from imposing a “tax that discriminates against a rail carrier” that is subject to
the provisions of the Act. Importantly, the parties stipulated that rail carriers, motor carriers, and
water carriers are competitors.
On the first trip to the U.S. Supreme Court, the Justices unanimously rejected Alabama’s
position that sales and use tax exemptions cannot “discriminate” within the meaning of
subsection (b)(4) of the 4-R Act, and remanded the case for further proceedings (CSX I). On
remand, the district court found that CSX failed to prove discrimination under subsection (b)(4).
But, the Eleventh Circuit reversed. It agreed that CSX could establish discrimination by showing
that Alabama taxed rail carriers differently from their competitors, and rejected Alabama’s
position that the diesel fuel-excise tax on motor carriers is the substantial equivalent to the sales
tax on rail carriers.
On the second trip to the U.S. Supreme Court (CSX II), the Court addressed two issues:
(1) are motor and water carriers properly regarded as an appropriate comparison class for CSX’s
claim of discrimination under subsection (b)(4); and (2) should a court, when resolving a claim
of unlawful tax discrimination, consider aspects of a state’s tax scheme apart from the challenged
provision.
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On the first issue, Justice Scalia, writing for the Court, found that picking an appropriate
comparison class is “extraordinarily easy,” and consists of the rail carrier’s competitors.
Subsection (b)(4) of the 4-R Act, however, demands a more precise analysis than just identifying
a comparison class. In order to make a showing of “discrimination,” the members of the
comparison class must be individuals “similarly situated” to the claimant. The Court rejected
Alabama’s argument that the comparison class should consist of all commercial and industrial
taxpayers, and held that the Eleventh Circuit properly concluded that the appropriate comparison
class—i.e., those that are “similarly situated” in light of CSX’s complaint and the parties’
stipulation—consists of motor and water carriers and that the differential treatment of members
of that class constituted discrimination.
On the second issue, the Court held that a state tax “discriminates only where the State
cannot sufficiently justify differences in tax treatment between similarly situated taxpayers.” The
Court further held that in deciding whether sufficient justification has been shown, other aspects
of a state’s tax scheme may be considered. The latter holding could be crucial to the state’s case
on remand.
For purposes of CSX II, Alabama may be able to justify its decision to exempt motor
carriers from the diesel fuel sales tax by its alternative decision to subject only motor carriers to
the diesel fuel excise tax. In short, the Court concluded that there is no discrimination where
there are “roughly comparable taxes,” and remanded the case to the Eleventh Circuit to consider
whether Alabama’s diesel fuel-excise tax on motor carriers is the rough equivalent to the diesel
fuel sales tax on rail carriers. In the case of water carriers, the Court commented that Alabama
offered no similar justification because water carriers are not subject to either tax; but noted that
Alabama had argued that there are other justifications for the water carrier exemptions. The
Court remanded the case for consideration of the alternative rationale for water carriers as well.
Justice Thomas, joined by Justice Ginsburg, dissented, criticizing the majority’s
interpretation of the requirement of discrimination under subsection (b)(4) and prolongation of
the litigation of “a baseless claim of discrimination that should have been dismissed long ago.”
C. ADMINISTRATIVE DEVELOPMENTS
Proposed Regulation Taxing Digital Streaming Services: On February 27, the ADOR
issued a proposed regulation that, if finalized in its present form, would substantially expand the
scope of the state and local rental tax applied to video-on-demand and other digital streaming
services. Proposed Ala. Admin. r. 810-6-5-.09. The proposed rule accomplishes this goal by
defining “digital transmissions” made available to customers “regardless of the method of
transmission, whether rented by subscription or for a definite or indefinite period, or on an
demand-basis for a definite or indefinite period” as tangible personal property, within the
meaning of the Alabama rental tax statute. Examples of digital transmissions in the proposed
regulation include “on demand” movies, television programs, streaming video, streaming audio,
and other similar programs that are made available to customers.
The expanded rental tax would be imposed on certain “cable or satellite television
providers, online movie and digital music providers, app stores, and other similar providers of
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digital transmissions.” For the purposes of sourcing, a digital transmission would be taxable by
Alabama and those localities that levy a parallel rental tax if it is “used in Alabama.” The
customer’s service address will determine whether the digital transmission is “used in Alabama,”
similar to market-based sourcing for corporate income tax purposes.
The proposed regulation carves out “monthly cable television subscriptions whereby the
customer must view pre-set programming, on the provider’s pre-set schedule.” The proposed
regulation adds, however, that “multi-purpose cable boxes that function as digital video recorders
(DVR) and/or perform other functions in addition to accessing basic cable are subject to the
rental tax.” (emphasis supplied).
The Alabama Administrative Procedure Act (“APA”) requires the Department to submit
an economic impact statement (“EIS”) along with each proposed regulation. The EIS for this
proposed regulation states that the Department anticipates a revenue increase if the regulation is
implemented in its present form, but does not list a specific dollar amount. Nor does the EIS
discuss the likelihood that many, if not most, affected industry members will pass the tax through
to their customers. The EIS also states that the regulation is intended to “clarify” existing law so
streaming services should be taxable “in the same way that hard copies are taxable.”
The APA hearing on the proposed regulation is set for April 8 although we expect
legislative intervention at some point thereafter. Thanks to Fred Nicely for his suggestions on
the comment letter filed by Steve Kranz and Bruce Ely/Will Thistle on behalf of the Digital
Goods and Services Coalition.
D.
LIKELY TRENDS/OUTLOOK
Regular Session
FOR
2015: Legislative Proposals – Spring 2015
S.B. 322 – Reliance on ADOR’s Website for Correct Local Tax Rate: Beginning
March 1, 2016, this bill would relieve taxpayers of any liability for collecting and charging the
incorrect sales, use, rental or lodging tax rate based on the rate published by the ADOR’s
website, including relieve from any penalties or interest as under current law. The bill also
provides additional procedures for local governments to notify the ADOR of rate changes, and
provides that such rate changes do not take effect until the first day of the third month following
the ADOR’s receipt of proper notification. In addition, this bill also clarifies that the ADOR
shall not charge any city or county a fee for the cost of filing, payment processing and remittance
services provided through ONE SPOT. This bill has passed the Senate and has been assigned to
the House Commerce and Small Business Committee.
III.
AD VALOREM PROPERTY TAXES
A.
LEGISLATIVE DEVELOPMENTS
Alabama Reinvestment and Abatements Act – Act No. 2015-24 (H.B. 59): As
mentioned above, this act includes several significant enhancements to the Tax Incentive Reform
Act of 1992. With respect to property taxes, the maximum property tax abatement period is
extended from 10 to 20 years, but requires that each governing body approve the additional 10
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year abatement for their respective taxes. Further, for “any addition, expansion, improvement,
renovation, re-opening, or rehabilitation of a facility, or replacement of any existing equipment
or tangible personal property,” the amount of the available property tax abatement is limited to
the excess amount owed prior to placing the project in service.
B.
JUDICIAL DEVELOPMENTS
Montgomery County Commission, et al. v. Federal Housing Finance Agency, et al.,
2015 WL 223699 (11th Cir. Jan. 16, 2015): In a consolidated appeal from six district court
rulings in Alabama, Georgia and Florida, the Eleventh Circuit U.S. Court of Appeals ruled
consistently with the lower courts and rulings from a number of other circuit courts of appeals
that certain federal mortgage lending agencies are exempt from paying real property transfer
taxes on the recordation of their mortgages or assignments.
Under 12 U.S.C. §§ 1723a(c)(2), 1452(e), and 4617(j)(2), the Federal Housing Finance
Agency, the Federal Home Loan Mortgage Corporation (a/k/a “Freddie Mac”), and the Federal
National Mortgage Association (a/k/a “Fannie Mae”) are granted an exemption from “all
taxation” imposed by any State or county, except that any real property “of the corporations /
Agency shall be subject to State, . . . county, . . . or local taxation to the same extent according to
its value as other real property is taxed.” Alabama, Georgia and Florida each impose a tax upon
the transfer of real property or recordation of an instrument conveying an interest in the property.
In Alabama, the party recording a deed or mortgage does so at the county probate office. The
Alabama mortgage recording tax is 15 cents per $100 of indebtedness, which can become a
rather large sum in the appropriate circumstances or if a large volume of mortgages (as here) are
recorded annually. Ala. Code §40-22-2.
As in a previous federal district court case involving the Randolph County (Alabama)
Commission, and certain others, the county–appellants argued that the exemption from taxation
only exempts direct taxation and that the subject transfer/recordation taxes are “indirect” taxes.
The 11th Circuit disagreed, holding that the clear language of the statute exempts the federal
entities from “all taxation” – and that includes real property transfer taxes.
The county-appellants also challenged the validity of the tax exemption statutes under the
Commerce, Necessary and Proper, and Supremacy Clauses of the U.S. Constitution. The court
held that Congress clearly had the right and authority to regulate local taxes because they have a
“substantial effect on interstate commerce.” Additionally, although Freddie Mac and Freddie
Mae have been privatized, a federal policy is contained in their charters and they can therefore be
exempted by Congress from state taxes if Congress chooses to do so. The court also upheld the
tax exemption under the Supremacy Clause.
The author of the unanimous opinion pointed out that the district court in each case, as
well as several Circuit Courts of Appeal, have each ruled that these federal entities are exempt
from paying these taxes. The opinion cites rulings issued by the DC Circuit, 8th Circuit, 3rd
Circuit, 4th Circuit, 7th Circuit, 6th Circuit, 1st Circuit and 9th Circuit, all within the past year or so.
The plaintiffs did not seek further appellate review.
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IV.
MISCELLANEOUS TAXES / PROCEDURAL MATTERS
“Alabama Taxpayer Fairness Act” – Act No. 2014-146 (Substitute HB 105): The
Alabama Taxpayer Fairness Act (Act No. 2014-146) was signed into law by Governor Bentley
on March 11, 2014, effective October 1, 2014. It represents a modified version of the bill
formerly referred to as “TBOR II.” Most importantly, Substitute HB 105 created the Alabama
Tax Tribunal (ATT) by abolishing the current Administrative Law Division of the ADOR and
transferring both the personnel and equipment to a newly-formed, independent state agency
under the executive branch. The ATT provisions are substantially similar to the American Bar
Association’s Model State Administrative Tax Tribunal Act, except that appeals from the ATT
will continue to be filed with the appropriate circuit court rather than with the Court of Civil
Appeals. Thankfully, COST recently upgraded Alabama’s grade from “D” to “B” in their “Best
and Worst of State Tax Administration” scorecard, otherwise known as the “Due Process
Scorecard,” as a result of the changes implemented by this Act.
The stated purpose of the ATT is to:
Increase public confidence in the fairness of the state tax system, [by providing]
an independent agency with tax expertise to resolve disputes between the
[ADOR] and taxpayers, prior to requiring the payment of the amounts in issue or
the posting of a bond, but after the taxpayer has had a full opportunity to attempt
settlement with the [ADOR] based, among other things, on the hazards of
litigation. By establishing an independent tax tribunal within the executive branch
of government, taxpayers [are provided] with a means of resolving controversies
that ensures both the appearance and the reality of due process and fundamental
fairness.
Perhaps of equal importance is the ability of taxpayers, for the first time, to appeal most
assessments issued by localities or their contract auditing firms to the new ATT. Former Chief
Administrative Law Judge Bill Thompson was appointed the Tribunal’s first Chief Judge by
Governor Bentley.
There are four key features of the ATT:
1. ATT judges are appointed by the Governor for six-year terms. There must
be at least one ATT judge, but no more than three in total. In addition, the
Governor may appoint pro tem judges if necessary. Unlike previous
versions of the bill, there is no Senate confirmation or nominating
committee involved in the appointment of ATT judges.
2. Taxpayers may appeal final assessments of sales, use, rental, and lodging
taxes issued by or on behalf of self-administered cities and counties to the
ATT, unless the governing body of the self-administered city or county
opts out.
3. No filing fees will be imposed on taxpayers for appeals to the ATT.
4. At the end of each six-year term, the Governor may reappoint a judge to
serve another term or appoint a new judge.
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Allowing taxpayers to appeal final assessments issued by self-administered cities and
counties or their contract-auditing firms is a major step toward addressing the frustration of the
business community and tax practitioners with differing interpretations of the law and varied
appeals procedures offered by the many self-administered localities and their private auditing
firms. This provision is designed to work hand in hand with the relatively new Optional Network
Election for Single Point Online Transactions (ONE SPOT) e-filing program for local sales, use,
and rental taxes.
Substitute HB 105 also included several updates and changes to the existing procedural
protections contained in the Alabama Taxpayers’ Bill of Rights/Uniform Revenue Procedures
Act of 1992. Those changes include:
•
•
•
•
•
•
•
•
Date of mailing for preliminary and final assessments: A preliminary or final
assessment must be appealed within 30 days from the date of actual mailing to the
taxpayer (or date of personal service, whichever occurred earlier) instead of the date of its
entry under former law.
Option to appeal net operating loss (NOL) adjustments to the ATT: This clarifies
that taxpayers have the option, but are not required, to appeal to the ATT any proposed
adjustments by the ADOR to their NOL deductions or carryovers, even though the
proposed adjustment does not result in an assessment of tax or a denied refund claim.
“Innocent spouse” relief: This conforms to two intervening changes to the “innocent
spouse” rules under the Internal Revenue Code to expand the scope of the defense for
Alabama spouses. An Alabama bill passed in 2012 only partially adhered to the protaxpayer federal changes.
Increased power of the Taxpayer Advocate: The Taxpayer Advocate may correct a
final order issued by the ATT if there is newly discovered evidence that shows the
taxpayer was incorrectly assessed.
Dormant preliminary assessments: Taxpayers have the option of appealing a
preliminary assessment to the ATT or the appropriate circuit court after five years from
the date of entry if the assessment has not been made final or withdrawn by the taxing
authority. Under former law, the issuance of a preliminary assessment suspends the
statute of limitations indefinitely, during which a taxpayer has no appeal rights.
Security exemption for appeals to circuit court: In cases in which a final assessment
is appealed directly to circuit court (or from the ATT to circuit court), a taxpayer who has
a net worth of less than $250,000 need not post an appeal bond or pay the disputed tax
before filing the appeal. Currently, the threshold is $100,000 in net worth.
Consultation with department attorney on revenue rulings: This change requires the
ADOR attorney assigned to a revenue ruling request to consult with the taxpayer and his
or her authorized representative prior to issuing the ruling.
Penalties: Unlike previous versions of the TBOR II bill, the current bill contains no
increases to existing penalties; no new penalties for filing frivolous returns or appeals, or
for failing to file certain pass-through entity information returns; and no changes to the
one-year period for reporting IRS audit adjustments to the ADOR.
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A last-minute amendment afforded self-administered cities and counties a narrow
window of time to enter a preliminary assessment against a taxpayer who was audited by the
ADOR and issued a final assessment for additional sales, use, rental, or lodging tax. These
localities have either six months from the date the ADOR enters the final assessment against the
taxpayer or 60 days from the date of mailing (or email transmission) of a copy of the final
assessment by the ADOR to the self-administered locality, whichever expires first, to enter a
preliminary assessment against the taxpayer.
The assessment is limited to the same disputed adjustment and tax periods. The taxpayer
is encouraged to approach the locality and negotiate a voluntary compliance agreement before
the final assessment is issued. The bill also clarifies that self-administered cities and counties
have the ability to enter into installment agreements with taxpayers, similar to the powers of the
ADOR Commissioner of Revenue.
Judge Thompson authored a set of proposed regulations to govern the procedures to be
followed in appeals filed with the ATT, which were officially published on July 31, 2014. The
regulations, with some amendments dealing with the transition, became final on October 15,
2014.
More
information
is
also
available
through
ATT’s
website,
http://taxtribunal.alabama.gov/.
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