At Long Last, Alabama Legislature Establishes Independent Tax Tribunal

State & Local Tax Alert: Alabama Edition

Client Alert

Author(s) , , , ,

Today, Governor Robert Bentley signed into law the landmark Substitute House Bill 105, the “Alabama Taxpayer Fairness Act,” establishing an independent tax tribunal and providing Alabama taxpayers with additional procedural protections. On Thursday, February 27, the Senate passed Substitute HB 105 by a vote of 26-0, and the House concurred by a vote of 94-1 on Tuesday, March 4. The changes made by the Act go into effect October 1, 2014.

Most importantly, Substitute HB 105 establishes the Alabama Tax Tribunal (ATT) by abolishing the current Administrative Law Division (ALD) of the Alabama Department of Revenue (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. The annual appropriation earmarked for the ALD within the ADOR is carved out and assigned to the ATT, so there is no additional cost to Alabama taxpayers for creating the tribunal. Alabama was in the distinct minority of states that lacked an independent tax appeals tribunal, recently receiving a “D” grade on the latest State Tax Due Process Scorecard issued by the Council On State Taxation primarily for this reason.

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 insures both the appearance and the reality of due process and fundamental fairness.

As mentioned below, perhaps of equal importance will be the ability of taxpayers, for the first time, to appeal most assessments issued by localities or their contract auditing firms to the new ATT. Current Chief Administrative Law Judge Bill Thompson is set to become the first Chief Judge of the ATT.

There are five 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 lodgings 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. The initial judge will be ADOR Chief Administrative Law Judge Bill Thompson.
  5. ATT judges may be removed from office by the Governor for “neglect, inability to perform duties, or malfeasance in office,” subject to the dismissal provisions applicable to state employees. The Judge(s) may also be disciplined or removed by the Judicial Inquiry Commission on the same grounds as apply to state circuit judges.

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 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 includes several important 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 current 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. A bill passed in 2012 only partially conformed Alabama law to the pro-taxpayer 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 current 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 bill, the current bill contains no increases to existing penalties, no new penalties for filing frivolous returns or appeals or failing to file certain pass-through entity information returns, and no changes to the one-year time period for reporting IRS audit adjustments to the ADOR.

A last minute amendment affords 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 lodgings 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.

Notably, the assessment is limited to the same disputed adjustments 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 Alabama Commissioner of Revenue.

The enactment of Substitute HB 105 is a significant change for Alabama taxpayers, and is attributable to the hard work of many individuals over the past decade, especially Rep. Paul DeMarco and Sen. Bryan Taylor who sponsored this bill in its various forms over the last few years, and Sen. Paul Sanford who provided the framework for passing Substitute HB 105 this session. Others deserving thanks are the Business Council of Alabama and the Alabama Retail Association and the many co-authors of the bill, including Judge Bill Thompson (on earlier drafts), Will Sellers, Hank Hutchinson, Courtney Williams, Blake Madison, Bruce Ely and Jimmy Long.

© March 10, 2014. Bruce P. Ely/James E. Long, Jr./J. Sims Rhyne III/Bradley Arant Boult Cummings LLP. All rights reserved.