Alabama Tax Developments: 2012 Year in Review
State & Local Tax Alert: Alabama Edition
Our final Alabama SALT Bulletin of 2012 summarizes the major legislative, judicial, and administrative developments affecting Alabama taxpayers with respect to income, transaction, and property taxes. The spring 2012 legislative session produced several noteworthy tax bills, many of which expand the scope and improve the operation of Alabama’s existing statutory incentives. In addition, the courts decided several cases of importance during the year, including the application of Alabama’s separate return limitation year to certain net operating losses incurred by members of an Alabama affiliated group. The final section of the bulletin provides a few unofficial predictions regarding legislative tax proposals that we expect to be introduced in the 2013 regular session. Members of our SALT Practice Group are or were involved in several of the cases and items of legislation discussed in this bulletin.
ECONOMIC DEVELOPMENT/TAX INCENTIVES
Act 2012-210 – Alabama Data Processing Center Economic Incentive Act of 2012: In order to encourage large data center projects to locate in Alabama, this act enhances the current TIRA abatements available to these qualifying projects if certain investment thresholds are satisfied during the construction period and either the first 10 or 20 years of operation. The act also makes certain warehousing and storage facilities (NAICS 493) eligible for TIRA abatements and the capital credit, provided that the project also provides logistics services related to the distribution of goods. For more information, please click here.
Act 2012-483 – Alabama New Markets Development Act: This act provides state income, financial institution excise, and insurance premium tax credits to investors in community development entities, which provide funding or invest in businesses located in qualified low-income or impoverished communities, especially central business districts, in Alabama. The act parallels the provisions of the federal New Markets Tax Credit (I.R.C. § 45D) in many ways. The Department of Commerce certified the first allocations under the act in October, and these qualified equity investment must be funded by January 2013. For more information, please click here.
Act 2012-436 – Alabama Tourism Destination Attraction Incentive Act: This act expands Alabama’s primary tax incentives (capital income tax credits and TIRA abatements) to include a “tourism destination attraction,” which is a commercial enterprise designed to attract visitors from inside or outside the State of Alabama, such as a convention hotel and conference center or a spectator venue or arena, provided that the facility is not primarily devoted to the retail sale of goods. For more information, please click here.
Act 2012-54 – Expansion of Capital Credit and TIRA Abatement to Coal Mining Industry: This act expands Alabama’s primary tax incentives (capital income tax credits and TIRA abatements) to projects primarily engaged in the coal mining industry (NAICS 2121). For more information, please click here.
Act 2012-168 – Heroes for Hire Act of 2012: In an effort to assist recently deployed, and now discharged, unemployed veterans in finding jobs and starting their own businesses, the Heroes for Hire Act provides a non-refundable $1,000 income tax credit to employers for each qualified veteran hired. This credit pairs well with similar federal tax credits. For more information, please click here.
Act 2012-385 – Carryforward of Capital Credits for Certain Large Projects: This act allows certain large projects (minimum capital investment of $100 million and the creation of at least 100 new jobs) to carry forward any unused capital credits for a period of up to four years after the normal 20-year period for utilizing the credit expires, depending on the level of capital investment (e.g., $400 million eligible for four years, $300 million eligible for three years, etc.). Additionally, these qualifying projects can also delay the initial utilization of the credit for a period of up to three years after the date the project is placed in service. The act is generally effective for all qualifying projects placed in service after December 31, 2011.
Act 2012-391 – Agricultural Irrigation Systems Tax Credit: This act allows any agricultural business (NAICS Sector 11) to elect to expense the cost of qualified irrigation equipment under the provisions of IRC section 179, as such section existed on January 1, 2011. The Alabama Department of Revenue (“ADOR”) has posted a helpful set of FAQs on its website. For more information, please click here.
Act 2012-185 – Airplane Parts Sales Tax Exemption: This act provides a sales tax exemption for any of the parts, components, or systems used in the conversion, reconfiguration, or maintenance of a transport category airplane. The act does not mention use taxes. For more information, please click here.
Act 2012-212 – Increased Grants for Film Production Incentives: This act increases the aggregate yearly cap for film incentives from $10 million to $15 million for the fiscal years ending September 30, 2013 and September 30, 2014, and to $20 million for the subsequent fiscal years. For more information, please click here.
Coca-Cola Enterprises Inc. v. Alabama Department of Revenue, Admin. L. Div. Dkt. No. CORP. 09-641 (Op. & Prelim. Order August 15, 2012): The ADOR’s Chief Administrative Law Judge (“ALJ”) Bill Thompson held that an Alabama consolidated group was entitled to carry forward 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. In a surprising move, 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 parties have filed applications for rehearing, which are still pending as of the date of this alert.
Act 2012-427 – Gross Income Regulation Compromise: Retroactively effective January 1, 2011, this act amends the definition of “gross income” and overrides the inconsistent ADOR regulations – that were temporarily modified by the ADOR for the 2011 tax year – so that resident individuals who are owners of partnerships, LLCs, or S corporations must include their proportionate share of income from the pass-through entity, regardless of where the income is earned. Additionally, this act allows an income tax credit for certain taxes paid by the entities to other states either directly or on the owners’ behalf. The credit is available when the other state imposes an income tax withholding/composite return obligation or levies certain entity-level taxes on the pass-through entity. Resident owners can also claim a 50% credit for non-U.S. taxes paid on foreign source income. For more information, please click here.
ADOR Withdraws Controversial Change to Schedule CR: As discussed above, Act 2012-427 clarified that Alabama residents who are owners of pass-through entities doing business in two or more states may claim an Alabama income tax credit for certain taxes paid by their company to other states on behalf of the individual owners when the other state imposes an income tax withholding obligation or an entity-level tax on the company. This statutory change did not, however, address how the tax credit should be calculated.
Prior to the passage of Act 2012-427, however, the ADOR revised its Schedule CR, the form on which the credit for taxes paid to other jurisdictions is calculated, to change the credit calculation. The change resulted in a substantial new limitation on the amount of credit available for taxes paid to other states. Because the tax credit had been calculated in the same manner for many years, and because there was no statutory or regulatory change that provided for the form change, this revision to Schedule CR created concern among a large number of Alabama taxpayers and their advisers. Many tax practitioners and their clients considered the form change to constitute an unauthorized rule change, in violation of the Alabama Administrative Procedure Act.
In September 2012, the ADOR announced that it would withdraw the revised Schedule CR for the 2011 and 2012 tax years. Accordingly, for the 2011 and 2012 tax years, taxpayers may calculate the credit for taxes paid to other states using the pre-2011 methodology. For more information, please click here.
ADOR Proposes Regulation on Calculation of Credit for Taxes Paid to Other States: On September 30, the ADOR issued a proposed regulation that addresses how the credit for taxes paid to other states and to foreign jurisdictions will be calculated for tax years beginning on or after January 1, 2013. Prop. Ala. Admin. Code r. 810-3-21-.03. According to the proposed regulation, the credit for taxes paid to other states (or foreign countries) “shall only be utilized against that portion of the taxpayer’s income tax liability which is attributable to income from other jurisdictions.” For more information, please click here.
Act 2012-474 – Partial Conformity to Federal Innocent Spouse Relief: This act provides that a husband or wife may be eligible for relief from the joint and several liability that attached to a jointly filed Alabama income tax return to the same extent as allowed by I.R.C. § 6015(c) and 6015(f). Curiously, the act did not specifically incorporate I.R.C. §§ 6015(a) or 6015(b), and thus it is unclear whether an innocent spouse may be eligible for relief simply because the spouse can establish they did not know, or had no reason to know, that there was an understatement of tax on the joint return. The Alabama Taxpayers’ Bill of Rights (“TBOR") II proposal, which we expect to be re-introduced next session, would have allowed innocent spouse relief to the maximum extent allowed under federal law.
Act 2012-378 – Elimination of $50 Failure-to-File Penalty for Certain Individuals: This act excludes individuals who are either due a refund of or who do not owe any Alabama income tax from the $50 penalty that otherwise could be assessed at the time of filing if the individual failed to timely file their income tax return. It does not, however, cover sales, use, and other tax returns as does the TBOR II proposal.
Alabama Department of Revenue v. HealthSouth Corporation et al., Case No. 2100330 (Ala. Civ. App. Mar. 2, 2012), cert. quashed (Ala. S. Ct. Nov. 21, 2012): the Alabama Court of Civil Appeals unanimously affirmed the trial court’s ruling, without opinion, granting income tax refunds and NOL adjustments requested by HealthSouth Corporation and its subsidiaries as a result of Internal Revenue Service audit changes. While the Alabama Supreme Court initially granted the ADOR’s petition for certiorari, the taxpayer withdrew its claim for pre-judgment interest prior to oral argument. After oral argument and briefs, the Court promptly quashed the writ, effectively upholding the refund claims granted by all three lower courts.
Regulations on Double-Weighted Sales Factor / Market-Based Sourcing: the ADOR finalized two regulations, 810-27-1-4-.17 and 810-27-1-4-.09.01, implementing 2011 legislation that (retroactively) double-weights the sales factor for income tax apportionment purposes and also converts Alabama from a cost-of-performance state to a market-based sourcing state. The ADOR also recently proposed regulation 810-27-1-4-.17.01, which provides guidance for sourcing sales of services to individuals and unrelated businesses under the market-based regime. A public hearing on the proposed regulation was held on December 6, 2012.
TRANSACTION (SALES / USE / RENTAL) TAXES
Act 2012-279 – Single Point of Filing Option: ONE SPOT stands for “Optional Network Election for Single Point Online Transactions.” Under the landmark legislation, businesses will have the option to file all of their sales, use, and rental (lease) tax returns and make the accompanying payments online, and all local taxing jurisdictions will be required to use the ONE SPOT system. The system must be in place no later than September 30, 2013. For more information, please click here.
City of Birmingham v. Orbitz, Inc. et al., __ So. 3d. __, Case No. 1100874 (Ala. S. Ct. April 13, 2012): the Alabama Supreme Court unanimously affirmed the Jefferson County Circuit Court’s order holding that Orbitz, Inc. and fifteen other online travel service companies (“OTCs”) were not subject to the local lodgings taxes levied by the plaintiff-municipalities. The Supreme Court “agree[d] with the views expressed by Judge Vowell in his thorough and well reasoned summary-judgment order” and “adopt[ed] Judge Vowell’s order in its entirety as the opinion of th[e] Court.”
CSX Transportation, Inc. v. Alabama Department of Revenue, No. 2:08-CV-655-AKK (N.D. Ala., Aug. 24, 2012): The U.S. District Court for the Northern District of Alabama issued an important ruling in the ongoing battle between the railroad companies and the State of Alabama regarding whether the differing taxes and exemptions applied to diesel fuel purchased by railroads versus interstate trucking companies and interstate water carriers violates the Railroad Revitalization and Regulatory Reform Act (“4-R Act”), 49 U.S.C. §11501. The district court ruled that they do not; CSX has appealed to the 11th Circuit Court of Appeals. For more information, please click here.
Seller’s Use Tax / Remote Entity Nexus Regulation Finalized: The ADOR has finalized a rule regarding two statutory presumptions of instances where an out-of-state seller may be required to collect the so-called seller’s use tax on sales to Alabama residents. Ala. Admin. Code r. 810-6-2-.90.01, effective Aug. 24, 2012. In addition to the statutory presumptions, the rule provides that substantial nexus exists for purposes of the seller’s use tax if an out-of-state vendor delivers “within the State of Alabama by means of a vehicle owned by the selling entity.” Oddly, the rule does not provide any threshold for the number of deliveries or value of goods delivered before supposedly creating nexus with the state.
AD VALOREM PROPERTY TAXES
Act 2012-494 - Proof of Actual Purchase Price Required for Mortgage Recording Tax: This act requires that a person presenting a real property or personal property instrument to the judge of probate for recording must present proof of the actual purchase price of the subject property or the actual value of the property, and directs the ADOR to promulgate rules establishing what constitutes adequate documentation. If the required documentation is not presented, the privilege or license tax will be based upon the assessed value of the property and the person failing to submit the required proof shall be subject to monetary penalties for failure to comply with the law.
Act 2012-313 – Increased Income Threshold for Homestead Exemption: This act increases the net income eligibility (from $7,500 to $12,000) for claiming an ad valorem homestead tax exemption for persons who are retired due to permanent disabilities or are over the age of 65. The act also clarifies the procedures for claiming the exemption and directs the ADOR to establish certain criteria and proof required to substantiate a person’s eligibility.
Jim Walter Resources, Inc. v. Tuscaloosa County Probate Judge, __ So. 3d __, Dkt. No. 1110067 (Ala. Jan. 6, 2012), reh. den. (Ala. Mar. 9, 2012): In a matter of first impression, but consistent with a 1978 Attorney General Opinion, the Supreme Court ruled that an instrument styled a “mortgage,” but issued to secure the contingent guaranty of the mortgagor in favor of its parent company’s debt to a consortium of lenders, was not subject to the mortgage recording tax. The debt evidenced by the mortgage was not fixed and determinable and the obligation would be triggered, and could be calculated, only upon a default of the parent company to its lenders. In a 5-0 opinion, the Supreme Court agreed with the taxpayer, citing both the ADOR rulings and the 1978 Attorney General Opinion and agreeing with their conclusion that a mortgage to secure someone’s guaranty is not a fixed and determinable debt, nor does it evidence the debt of the guarantor. Instead, the real debt at issue is the debt of the parent company, which was not evidenced by a mortgage since the parent company did not directly own any land.
ANTICIPATED TAX LEGISLATION IN 2013 REGULAR SESSION
The 2013 regular session, which begins February 5, is expected to focus on several important tax and economic development proposals. We expect the following tax-related bills of statewide application to be introduced or re-introduced.
“Alabama Taxpayers’ Bill of Rights II” / Alabama Tax Appeals Commission Act: H.B. 105 and its Senate counterpart, S.B. 549, would have created an independent tax tribunal, known as the Alabama Tax Appeals Commission (“ATAC”), by abolishing the current Administrative Law Division and transferring both the personnel (including its only ALJ) to a newly formed state agency under the executive branch. This bill also contains several important changes and updates to the Alabama Taxpayers’ Bill of Rights Act of 1992, such as extending the time period for filing an appeal or petition for review from 30 to 60 days and eliminating the $50 failure-to-file penalty for any income, sales, use, or other tax return showing no liability owed and requiring a 30-day notice from the ADOR. Since the enactment of the TBOR, its federal counterpart has been amended several times, and numerous Administrative Law Division and ADOR rulings interpreting the act have been issued. Also, the bi-annual Council On State Taxation (COST) “Due Process Scorecard” gave Alabama a “D” grade, pointing out several deficiencies or taxpayer inequities that should be remedied.
SB 549 was passed by both the House (95-1) and Senate (33-0) on the final day of the legislative session, but unfortunately was pocket-vetoed by Governor Bentley due to a technical error in the Conference Committee Substitute, which failed to include certain agreed changes to the ATAC judge appointment process that were adopted by the House on the final day. The Alabama State Bar and the Alabama Society of CPAs were strong advocates for the bill; special thanks are due to former President Jim Pratt, and of course, the lead sponsors, Rep. Paul DeMarco and Sen. Ben Brooks (and Sen. Bryan Taylor). The sponsors have already initiated talks with the Governor’s Office regarding the necessary amendments for next session.
R&D Tax Credit: S.B. 368 would provide a nonrefundable research and development (“R&D”) income or financial institution excise tax credit to businesses that incur qualified research expenses within Alabama. S.B. 368 parallels the federal income tax credit provided by I.R.C. § 41, which most states have adopted in whole or in part. Currently, Alabama is in the distinct minority of states levying an income tax that doesn’t offer some form of incentive for conducting qualified R&D in their state.
Historic Structures Tax Credit: In order to stimulate private investment in renovation of older buildings and historic structures by providing income tax credits for renovation, H.B. 271 provides a 10 percent tax credit for renovation of buildings built before 1939 and a 25 percent tax credit for renovation of owner-occupied homes and businesses in historic districts or designated historic structures.
Increased TIF Incentives: the “Major 21st Century Manufacturing Zone Act” (S.B. 470) died on the last day of the regular session, but its proponents were quoted recently as promising that the bill will “blow through” the Legislature early in the 2013 regular session. The bill is designed to allow municipalities to create tax increment financing (TIF) zones for automotive, aviation, pharmaceutical, medial, semiconductor, computer, electronics, and other companies that commit to invest at least $100 million on a site larger than 500 acres. Although the bill was initially designed for the cities of Huntsville and Montgomery, its sponsors agreed to amend it to include all Alabama municipalities.
For a more detailed analysis of likely 2013 tax legislation, please look for our upcoming SALT Alert summarizing the legislative agendas of the state’s leading business and professional organizations.
If you have any questions regarding the contents of this bulletin, feel free to contact any of the Alabama members of our SALT Practice Group.