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A uthors December 15, 2011 Alabaa Ta Dvlpt:2011 Yar i Rviw By Christopher R. Grissom, James E. Long, Jr. and William T. Thistle, II Our nal Alabama SALT Bulletin o 2011 summarizes the major legislative, judicial, andadministrative developments aecting Alabama taxpayers with respect to income, transactionand property taxes. The Spring 2011 legislative session produced several noteworthy tax bills,including an incentive designed to encourage oreign manuacturers to locate in Alabama,adoption o a double-weighted sales actor coupled with market sourcing or sales o intangiblesand services, and the creation o the Alabama Streamlined Sales & Use Tax Commission. Thecourts decided several cases o importance during the year, including upholding a taxpayer’scalculation o its I.R.C. section 199 deduction on a separate company basis while, unortunately,denying a retailer’s sales tax reund attributable to uncollectible private label credit cardaccounts. The nal section o the Bulletin provides a ew unocial predictions regardinglegislative tax proposals that we expect to be introduced in the 2012 regular session. I. Income/FRAnchIse TAxes At 2011-17 – Rjti Bui Privilg Ta “BPT” Rgulati: sustainedthe Legislative Council’s unanimous decision to reject the Alabama Department o Revenue’s(“ADOR”) controversial regulation that attempted to repeal the statutory BPT deduction or thebook value o a taxpayer’s investments in the equity o another business entity that’s also doingbusiness in Alabama. For more inormation, please click here. At 2011-551 – T Full eplyt At 2011: as promised by Governor Bentley inhis State o the State speech, oers a one-time income or nancial institution excise tax credito $1,000 or each new job created by small businesses (i.e., no more than 50 employees as o January 1, 2011). For more inormation, please click here. At 2011-648 – T Tari crdit At 2011: has a limited ocus and is designed toencourage oreign manuacturers to locate in Alabama by providing an income tax credit tocompanies investing in qualiying projects that meet certain minimum requirements. For moreinormation, please click here.The Alabama Education Association (AEA) is supporting andapparently unding a lawsuit recently led by two teachers against Governor Robert Bentleyand the ADOR, challenging the constitutionality o the Tari Credit Act, along with two otherincentive measures. Gibson v. Bentley , Case No. CV 2011-900998 (Montgomery County Cir. Ct.Aug. 3, 2011). We are awaiting a ruling rom the circuit court on whether the plaintis even hadstanding to le their lawsuit. At 2011-616 – Dubl-Wigtd sal Fatr ad markt-Bad surig: amendsAlabama’s version o the Multistate Tax Compact to double-weight the sales actor in thepreviously equally-weighted three-actor ormula used to apportion business income toAlabama, eective or tax years beginning on or ater December 31, 2010. In addition, thebill amends Alabama’s apportionment methodology by converting Alabama rom a “cost o perormance” state to a “market source” state or receipts rom certain intangibles or services. TheADOR is in the process o developing interpretive regulations. State and Local Tax Alert Alabama Edition Published by Bradley Arant Boult Cummings LLP Ja e. Lg, Jr. 205.521.8626
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[email protected] December 15, 2011 1www.babc.com Caveat: Members o our SALT Practice Group are or were involved in several o the cases and items o legislationdiscussed in this Bulletin. AL SALT Bulletin Bradley Arant Boult Cummings LLPDecember 15, 2011 2www.babc.com At 2011-709 – Trad Rvry Ta ItivPrtti At 2011: provides that the wage andemployment requirements or Alabama’s capital credit aretolled or two years or otherwise qualiying projects that weredamaged by the devastating tornado outbreaks in late April. GKN Westland Aerospace, Inc. v. State Department of Revenue , Admin. Law Div. Dkt. No. BIT. 10-988 (July 25, 2011):In a case o rst impression, Chie Administrative Law Judge Bill Thompson held that a corporate taxpayer properly calculated itsI.R.C. § 199 domestic production activities deduction (“DPAD”)by applying the taxable income limitation on a separatecompany basis or Alabama income tax purposes, voiding the2007 nal assessment entered against the taxpayer. Judge Thompson agreed with the taxpayer, holding that ADOR “Reg.810-3-1.1-.01(4)(a) requires,…that or Alabama tax purposes,the Taxpayer’s DPAD, and specically the income limitationin issue, must be calculated on a separate entity basis. The[taxable income] limitation thus did not apply or Alabamapurposes in the subject years because, unlike the Group,which had consolidated losses in those years, the Taxpayer hadincome as a separate company in those years greater than theallowable DPADs.” The ADOR did not appeal the ruling. Tprary mdifati Gr I Rgulatir 2011: Under prior ADOR regulations, income earned bya pass-through entity in another state was apportioned toand taxable by that state—assuming it levied an individualincome tax. I it did not (e.g., Florida, Texas or Tennessee), thenthe income escaped taxation by Alabama, but the Alabamaresident owner was entitled to a deduction or ederal incometaxes paid on his or her entire, pre-apportioned distributiveshare o income due to a provision o the Alabama Constitution.For all tax years beginning ater December 31, 2010, the ADORproposed to amend three regulations, including its so-called“gross income regulation,” which provided or this result. Theproposed regulations became nal on September 7, 2011,but with two ADOR amendments. First, they added a sunsetprovision that limits the regulation to the 2011 tax year andwill allow the compromise legislation that died on the last dayo the 2011 legislative session to be reintroduced (and likelypassed) next session. Secondly, the ADOR included a provisionthat prevents any amendments to these regulations romapplying to certain asset sales or which negotiations began in2010 but that closed in 2011. II. TRAnsAcTIon (sALes/Use/RenTAL) TAxes At 2011-709 – Trad Rvry Ta ItivPrtti At 2011: provides that any tax abatementthat was granted pursuant to the Tax Incentives Reorm Acto 1992 (“TIRA”) shall not be oreited solely because o delayscaused by repairs to or replacement o property damaged inthe devastating tornado outbreaks this April. This expansiono TIRA is eective or any property acquired or transactionsentered into beore December 31, 2012. At 2011-563 – stralid sal Ta cii: establishes the Alabama Streamlined Sales and Use TaxCommission to develop, implement, and administer theprograms necessary or Alabama to come into compliancewith the Streamlined Sales and Use Tax Agreement, in theevent that ederal legislation implementing the agreement,or similar principles, becomes law. For more inormation,including details o the Commission’s preliminary report andrecommendations, please click here. Logan’s Roadhouse, Inc. v. State Dep’t of Revenue , __So. 3d __, Dkt. No. 2090753 (Ala. Civ. App. May 13, 2011): TheAlabama Court o Civil Appeals held that a taxpayer is not liableor Alabama use tax on the wholesale cost o complimentarypeanuts that it buys and provides to its customers, armingthe decision o the Jeerson County Circuit Court (that hadreversed the decision o the Administrative Law Division). TheCourt o Civil Appeals agreed with the Circuit Court’s reasoning,holding “all that is required or purposes o classiying a bulk sale to a retailer, such as the taxpayer's purchases o quantitieso peanuts, as a nontaxable ‘wholesale sale’ is that a subsequentretail ‘resale’ o tangible personal property occur; there is nostatutory requirement or purposes o classiying a sale as aretail sale that a separate price be overtly stated and paid. Totreat the taxpayer, a restaurant operator, as liable or use taxbased upon its purchase o peanuts in bulk or its customers toconsume as a part o their lunch and dinner meals, as the ADORsuggests be done in this case, would disregard the evidencepresented at trial indicating that the taxpayer charges itscustomers or the average incremental cost o peanuts theyaggregately consume.” The ADOR’s application or rehearingwas overruled by the Court o Civil Appeals. Magee v. The Home Depot USA, Inc. , __ So. 3d __, Dkt.No. 2100715 (Nov. 4, 2011) (on appeal): The Alabama Court o Civil Appeals held that the taxpayer was not entitled to a salestax reund under the ADOR’s bad debt regulation or certainuncollectible private label credit card accounts, therebyreversing the decision o the Montgomery County CircuitCourt that granted the taxpayer’s reund claim. The Court heldthat the bad debt regulation did not apply when a third partynance company, instead o the retailer, administered thecredit card program and charged o the worthless accounts. The taxpayer has led a petition or certiorari with the AlabamaSupreme Court. Box Family Restaurants, LLC v. State Department of Revenue , Admin. Law Div. Dkt. No. S. 11-375 (Prelim. Order on Taxpayer’s Appl. or Reh’g June 28, 2011): Chie AdministrativeLaw Judge Bill Thompson recently armed his ruling that theindividual members o a multi-member LLC are not personallyliable or withholding (payroll) or sales taxes owed by theLLC, unless they qualiy as “responsible persons” under thestate’s 100% penalty statute. That issue is critically importantto investors in LLCs that operate in Alabama. For moreinormation, please click here. Warning: The ADOR indicates that it will continue to assert personal (joint and several) liability against LLC members or non-income taxes until an appellate court rules otherwise or the Alabama LLC Act is amended. City of Birmingham v. Orbitz, Inc. et al. , CV 09-3607(Jeerson Co. Cir. Ct. Mar. 24, 2011) (on appeal): Presiding JudgeScott Vowell issued a nal order in the ongoing battle between AL SALT Bulletin Bradley Arant Boult Cummings LLPDecember 15, 2011 3www.babc.com nine Alabama municipalities and Orbitz, Inc., and 15 otheronline travel service companies (OTCs), holding that Alabama’slodgings tax did not apply to the OTCs’ compensation or theironline travel services and ruling against the municipalities.Judge Vowell concluded that “[t]he plain language o thestatute and the plaintis’ ordinances compel the Court tothe conclusion that the deendants . . . are not engaged inthe business o renting or urnishing any room or rooms,”again citing the ADOR regulation. “These deendants are nothoteliers. These deendants do not operate a hotel . . . Theyprovide a service to the public or which they are compensatedby their customers. The compensation is not subject to thelodging tax.” The municipalities appealed to the AlabamaSupreme Court. We expect a ruling soon. Washer & Refrigeration Supply Co. v. PRA Government Services, LLC , Jeerson Co. Cir. Ct. CV 2010-903417 (Oct. 19,2011): Two Alabama taxpayers led a very detailed class actionsuit against the largest private auditing rm in Alabama, PRAGovernment Services, LLC, which does business as “RevenueDiscovery Systems” or “AlaTax,” and its aliates, requestingdamages or prior assessments, as well as declaratory andinjunctive relie. The complaint alleges multiple violations byAlaTax or its auditors o the Alabama Taxpayers’ Bill o Rights(“TBOR”). The Circuit Court ruled in avor o the taxpayer-plaintis recently and allowed the case to proceed to the classcertication phase. For more inormation, please click here. III. AD VALoRem PRoPeRTY TAxes Dunn v. Sequa Corp. , ___ So. 3d ___, Dkt. No.2100299(Ala. Civ. App. Jun. 24, 2011): The Alabama Court o CivilAppeals awarded a reund o property taxes that Sequa Corp.erroneously paid on abated property in 2007, 2008, and2009. In May 2005, the Industrial Development Board o theCity o Hueytown and Sequa entered into a tax abatementagreement under which Sequa was granted an abatemento certain noneducational property taxes. In 2007 and 2008,Sequa did not reerence its tax abatements on its personalproperty tax returns and overpaid its taxes. The Court heldthat while a taxpayer is generally required to notiy the taxassessor o an exemption, an exception to that general ruleexists when the taxpayer’s ailure was a mistake or error. TheCourt granted Sequa’s reund petition because nothing in therecord indicated that Sequa intentionally chose to reject thetax exemptions to which it was entitled by virtue o the taxabatement agreement and TIRA. Sustainable Forests, LLC v. Ala. Dep’t of Revenue , __So. 3d __, Dkt. No. 2091149 (Ala. Civ. App. June 10, 2011),cert. denied Case No. 1101088 (Ala. S. Ct. Sept. 30, 2011): TheAlabama Court o Civil Appeals held that the recording o deeds evidencing the transer o property rom the owner o three single-member limited liability companies to the LLCsdid not all within any o the exceptions provided under Ala.Code § 40-22-1 and was thereore subject to recordation tax. The taxpayer claimed that a reund o recordation tax paid onthe transaction was due because an LLC is a disregarded entityor tax purposes and thereore the deeds did not actuallyconvey property or any interest in property or purposes o the recordation tax. See Ala. Code § 10-12-8(b). However, theAlabama Supreme Court held in Hawkins v. Pure Oil Co. , 232 Ala660, 169 So. 307 (1936), that the purpose o the recordation taxis not the perection o title to real estate, but the perectiono the record o the transaction, and the tax is exacted or theprivilege o recording the evidence o the transaction. Becausethe tax is imposed on the recording o the document and noton the underlying transaction, it must be paid unless a specicexemption applies; thus, the taxpayer was not entitled to areund. Ala. Att’y G. op. n. 2011-065 (May 25, 2011): Similarto prior opinions, the Attorney General advised that residentialreal property owned by an LLC is never entitled to a homesteadexemption in the name o the LLC. An individual occupant o thesubject property, however, may be entitled to the homesteadexemption i their occupancy arises rom a valid, arm's-lengthexecutory sales agreement between the individual occupantand the LLC. When the individual occupant is also an ocer ormember o the owner/LLC, the AG cautioned that the detailso the underlying sales transaction should receive careulscrutiny. Accordingly, special attention must be paid to thereasonableness o the sales price, the length o the contractterm, and any other actors that appear to depart rom a truearm's-length real estate transaction. IV. AnTIcIPATeD TAx LeGIsLATIonIn 2012 ReGULAR sessIon The 2012 regular session, which begins February 7, is expectedto ocus on several important tax and economic developmentproposals, as well as immigration reorm and, o course, thestate budgets. The session promises to be a dicult one or theGeneral Fund budget, with a projected decit o at least $400million (22.6% o the total budget), as well as the Education TrustFund that may also all below revenue projections. GovernorBentley recently stated that he is considering a proposal tounearmark tax revenues dedicated to the Education TrustFund in order to help make up or the General Fund budgetshortall. The recent Jeerson County bankruptcy ling willalso draw the attention o the Legislature and the Governor.Amidst this backdrop, we expect the ollowing tax-related billsto be introduced or re-introduced. We ocus here only on billso statewide application. “Alabaa Tapayr’ Bill Rigt II” / Alabaa TaAppal cii At: H.B. 427 would have created anindependent tax tribunal, known as the Alabama Tax AppealsCommission (“ATAC”), by abolishing the current AdministrativeLaw Division and transerring both the personnel (including itsonly Administrative Law Judge) to a newly-ormed state agencyunder the executive branch. This bill also contains severalimportant changes and updates to the Alabama Taxpayers’ Billo Rights Act o 1992 (“TBOR”), such as extending the time periodor ling an appeal or petition or review rom 30 to 60 days andeliminating the $50 ailure-to-le penalty or any individualincome taxpayer that is owed a reund on the delinquentreturn and otherwise requiring a 30-day notice rom the ADOR.Since the enactment o the TBOR, its ederal counterpart hasbeen amended several times, and numerous AdministrativeLaw Division and ADOR rulings interpreting the Act have AL SALT Bulletin Bradley Arant Boult Cummings LLPDecember 15, 2011 4www.babc.com been issued. For example, the bill conorms state law to themore pro-taxpayer ederal law in the area o “innocent spouse”relie. Also, the bi-annual Council On State Taxation (“COST”)“Due Process Scorecard” gave Alabama a “ D ” grade, pointingout several deciencies or taxpayer inequities that should beremedied.HB 427 was passed unanimously by the House last session andreceived a avorable vote rom the Senate Judiciary Committeebeore stalling in the Senate logjam during the last ew dayso the session. The Alabama State Bar and the 29-memberBusiness Associations’ Tax Coalition were strong advocatesor the bill. Special thanks are due to immediate past StateBar President Alyce Spruell o Tuscaloosa, new President /Legislative Mediator Jim Pratt o Birmingham, and o course,the lead sponsors, Rep. Paul DeMarco (R-Homewood) andSen. Ben Brooks (R-Mobile). Messrs. DeMarco and Brooks havealready indicated that they plan to reintroduce HB 427, withagreed amendments, early next session. Jb crati ad Rtti At: This bill (H.B. 478/S.B.373) would allow companies that undertake certain qualiyingprojects, similar to those listed in TIRA, to also qualiy toreceive “withholding incentives.” I passed, new businesseswould be entitled to retain up to 90% o the state income taxeswithheld rom the wages o its eligible employees and existingbusinesses could retain up to 75%. The incentives are designedto encourage the retention o existing jobs and create new jobs by increasing development and growth o industry withinthe state. Several competitor states oer these. The StateIndustrial Development Authority, the Governor, the AlabamaDevelopment Oce, and the ADOR would determine whethera project qualies or the withholding incentives. In a recentpress conerence, Governor Bentley touted the bill as “anotherincentives option we can use to give greater fexibility to bringcompanies and keep companies in the State.” Alabaa Data Prig ctr ei Itiveat At 2011: In order to encourage datacenters to locate in Alabama, this bill (H.B. 485/S.B. 223)would extend the time period or TIRA abatements o certainnoneducational sales, use, and property taxes rom the currentten-year maximum to as long as 30 years, depending on thetotal capital investment; and would also allow abatements orrecurring capital investment in a data center project during theabatement period. This bill would also reduce the employmentthreshold to a minimum o 20 new jobs. Gr I Rgulati cpri: As mentionedabove, H.B 548 would amend the denition o “gross income”and override the inconsistent ADOR regulation—that wastemporarily modied by the ADOR or the 2011 tax year—sothat resident individuals who are owners o partnerships, LLCs,or Alabama S corporations must include their entire pro ratashare o income rom the pass-through entity, regardless o where the income is earned. Resident owners o these pass-through entities would receive an income tax credit or certaintaxes paid by the entity to other states or oreign countries onbehal o the individual owner because the other state imposesan income tax withholding obligation or an entity-level tax onthe pass-through entity. Uir Ta claifati Pa-trug etiti: At the request o the ADOR, this legislation would harmonizethe classication o various pass-through business entities( e.g. , LLCs and LPs) or Alabama state and local tax purposes bylimiting conormity with the ederal “check the box” regulationsto only Alabama income and fnancial institution excise taxes ,while preserving the sales, use, and rental tax exclusions orcertain intercompany transactions and the property, businessprivilege, and sales and use tax exemptions or disregardedentities that exist under Alabama’s current classicationregime. The proposal would also clariy that members o a multi-member LLC are not personally liable or the LLC’s sales, use,payroll, and other non-income taxes solely because their LLC isclassied as a partnership or ederal and Alabama tax purposes,thereby codiying the recent ruling by the ALD in Nonna RoseKingsley, LLC , now pending in Jeerson County Circuit Court.One o the authors o this Bulletin is a member o the EntityHarmonization Task Force, which includes representatives o the State Bar Tax Section, the Alabama Society o CPAs, theADOR, the Business Council o Alabama, and the AlabamaLeague o Municipalities. madatry Uitary cbid Rprtig: Similar to theproposals introduced in the 2008 and 2009 regular sessions,this bill would authorize the Commissioner o Revenue toimpose mandatory unitary combined reporting “when anAlabama taxpayer is part o a unitary business consisting o multiple business entities.” For more inormation, please click here. Bui Privilg Ta “BPT” Dduti r equityIvtt: As a result o numerous comments led inopposition to the proposed BPT regulation that was rejectedby the Legislative Council and sustained by Act 2011-17,ADOR ocials began inormal talks with various businessgroups regarding an alternative legislative proposal. The mostrecent legislative proposal includes a deduction or equityinvestments in all entities (to comply with the AT&T ruling), butit is coupled with a ormulaic add-back o certain liabilities as aresult o the deduction. Near the end o the 2010 session, theADOR indicated that it would not push or an increase to the$15,000 BPT cap applicable to most taxpayers as part o thisprocess. While this proposal was never introduced during the2010 or 2011 regular session, we expect the ADOR to renewits push or a legislative x in 2012. We expect the legislationwill also allow taxpayers to e-le their BPT returns or it wouldsimply merge the BPT return with the income tax return. I you have any questions regarding the contents o this Bulletin, eel ree to contact any o the Alabama members o our SALT Practice Group.Their contact inormation is listed in the right hand columnon page 5.
