Alabama Tax Legislative Summary: 2015 Regular Session; Some Unofficial Predictions For Upcoming Session(s)
State & Local Tax Alert: Alabama Edition
The Alabama Senate adjourned late Thursday afternoon, June 4, leaving a number of pending bills on the table. Although the legislature passed a record-setting $6 billion Education Trust Fund budget, the issue that pervaded the entire session was the always anemic General Fund budget, which funds almost all of the state’s non–education-related activities. Increased strains on that budget came from the loss of onetime revenue, the need for increased prison funding, increased state employee healthcare and Medicaid costs, and the need to repay previous loans from certain rainy day funds.
The lawmakers passed a General Fund budget that would have made substantial cuts to all state agencies, but as promised, Governor Robert Bentley quickly vetoed it. The House then voted to override the veto, but the Senate had already adjourned. As a result, a special session must be called by the governor before the October 1 start of the next fiscal year.
Recall that Governor Bentley began the session by proposing a $541 million tax package, including higher taxes on tobacco and vehicle sales and leases, repealing a longstanding sales/use tax credit for financial institutions, and adopting mandatory unitary combined reporting, among other things. A scaled-down revenue package was approved by the House Ways & Means General Fund Committee but was never considered by the full House in light of a strong antitax sentiment in both houses of the legislature. Governor Bentley, Senate President Pro Tem Del Marsh, and Speaker of the House Mike Hubbard have vowed to work together to deal with the General Fund budget by consulting with the business community, legislators, and other stakeholders to find common ground. It is anticipated that a special session will be called for either mid-August or early September.
The following discussion focuses on bills of statewide importance that passed and were signed into law by the governor, or that we expect to see again soon.
I. INCOME TAXES/ECONOMIC DEVELOPMENT INCENTIVES
A. Bills That Were Signed Into Law
- 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 creates a partially transferable capital investment credit to replace the existing capital credit. Please see the Economic Development Practice Group's client alert on "House Bill 58, Alabama Jobs Act, Gives State Jobs Tax Credit and Capital Investment Credit" for further information.
- 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. For projects located in counties with less than 25,000 people, the jobs credit is increased to 4% of the previous year’s wages paid to eligible employees, and the annual investment credit period is extended 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 can, at his discretion, provide these enhanced incentives to up to two projects per year that are not located in a qualifying rural county. For projects employing veterans who received an honorable or general discharge and who accounted for at least 12% of its eligible employees, 0.5% of the wages paid to those veterans is eligible for an additional jobs credit. Finally, the act also establishes the Accelerate Alabama Fund, which can fund a loan of up to $2 million per project for projects that will be located in targeted counties.
- Enhancements to Alabama Accountability Act – Act 2015-434 (S.B. 71): This act makes a number of changes to Alabama’s tax credit scholarship program, created by the Alabama Accountability Act of 2013. Act 2015-434 increases the $7,500 cap on individual donations to $50,000 and allows tax credits generated by donations from pass-through entities, such as S corporations and LLCs, to flow through to the entity’s owners. Under prior law, tax credits were only available to individual and C corporation donors. The act increases the annual amount of tax credits available from $25 million to $30 million. All these changes are retroactive to January 1, 2015. Act 2015-434 also allows taxpayers to make tax-creditable donations in 2015 but reserve credits against the unused portion of the 2014 credit allocation (approximately $12 million) to offset their 2014 income tax liability. Finally, the act restricts a donor’s ability to earmark a donation for a particular school or for a particular student or group of students. Thus, qualifying donations must be made to a scholarship-granting organization with no strings attached, and the scholarship-granting organization must determine which students receive scholarships. In addition to the changes to the donor provisions of the law, Act 2015-434 enhances the transparency and accountability of the tax credit scholarship program by requiring additional reporting by scholarship-granting organizations, granting the Alabama Department of Revenue authority to audit those organizations, and requiring all reports filed by scholarship-granting organizations with the Alabama Department of Revenue to be posted on the department’s website.
- ABLE (Achieving a Better Life Experience) Act – Act 2015-442 (S.B. 226): Allows parents or guardians of developmentally disabled children to establish a savings account, the income from which is now exempt from both federal and Alabama income tax. This bill parallels recent federal legislation that enacted I.R.C. section 529A.
- Flat Tax Study Commission Formed (S.J.R. 81): Senate Joint Resolution 81 creates the Alabama Simplified Flat Tax Study Commission “to evaluate and make recommendations for simplifying and lowering Alabama’s statutory and corporate income tax rates, by implementation of a Flat Tax.” The commission is directed to publish its findings and proposals for amending the laws of Alabama and the Constitution by the first day of the 2016 regular session next spring, “or as soon as practicable thereafter.”
B. Bills That Didn’t Pass but We Will Likely See Again
- H.B. 368 – Alabama Small Business Investment Act: This bill would provide for a third round of insurance premium tax credits based on the Certified Capital Company Program (CAPCO).
- H.B. 304 – Alabama Innovation Act: This bill would create research-and-development income and financial institution excise tax credits modeled after the federal R&D credit but with an enhanced credit if the research is conducted by Alabama-based academic or nonprofit research institutions.
- H.B. 416 – Alabama Renewal Act: This bill would create the Growing Alabama Credit for donations of cash and certain property to approved economic development organizations in Alabama. The bill would also establish a new income tax credit that could be awarded to certain users based on increased cargo volume through any publicly-owned facility located within the Port of Mobile.
- S.B. 409 – Simplified Flat Tax Act of 2015: This bill proposed a constitutional amendment to repeal the existing corporate and personal income taxes (and the federal income tax deduction) and to enact a flat tax – 2.75% of an individual’s federal adjusted gross income and 4.59% of a corporation’s federal taxable income, effective January 1, 2017. An outgrowth of the death of this bill is the Simplified Flat Tax Study Commission, summarized above.
- H.B. 214 – Extension of Alabama Historic Tax Credit: The Alabama HTC program currently authorizes $20 million in 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 would extend the sunset date through May 16, 2023.
- S.B. 36 and S.B. 163 – Extension of Alabama New Markets Tax Credit: These bills would authorize the governor to establish, by executive order, an additional allocation of Qualified Equity Investment authority in an amount of up to $60 million under the Alabama New Markets Development program, which is the Alabama counterpart to the federal New Markets Tax Credit program.
- H.B. 142 – Mandatory Unitary Combined Reporting (MUCR): As part of Governor Bentley’s eight-bill revenue package, Rep. Mike Hill (R-Columbiana) introduced a mandatory unitary combined reporting proposal that would be retroactively 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 return. Unlike prior MUCR proposals, this bill would restrict the use of tax credits, net operating losses (NOLs), and other post-apportionment deductions to the member that generated the attribute.
- H.B. 466/S.B. 497 – Factor Presence Nexus: These bills would establish broad “factor presence” nexus standards for out-of-state 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.
- S.B. 9, H.B. 70, and H.B. 215 – HSA Conformity Bills: Efforts to conform Alabama income tax law to its federal counterpart in the area of health savings accounts (HSAs) died again this session, but its supporters are growing.
II. TRANSACTIONAL TAXES
A. Bills That Were Signed into Law
- 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. Please see the Economic Development Practice Group's client alert on "House Bill 59, Alabama Reinvestment and Abatements Act, Expands Alabama Abatements Significantly" for further information.
- Lodgings Taxes Added to ONE SPOT – Act 2015-52 (S.B. 130): Effective September 30, 2013, taxpayers were 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 act added local lodgings taxes to the list of available local taxes that may be filed and remitted through ONE SPOT.
- Voluntary Non-Nexus Use Tax Remittance Bill – Act 2015-448 (S.B. 437): This act essentially replicates the current sales and use tax code, except that it establishes a single tax rate (8%) applicable to non-nexus sellers and a single, simplified tax base. It also provides a 2% vendor allowance for non-nexus sellers collecting/remitting under the program.
- Amendments to Alabama Terminal Excise Tax Act – Act 2015-54 (S.B. 133): Effective October 1, 2016, the agricultural inspection fee will be added to the gasoline excise tax, and the administration of the inspection fee will be transferred to the Department of Revenue. The new gasoline tax rate will be $0.18 per gallon, effective October 1, 2016. In addition, importers of motor fuel products from a bulk plant or from any other nonterminal storage facility will report the import of all motor fuel products on the importer return and remit payment by the 22nd of the month (instead of the third business day after importation) beginning with the filing period of June 2015, which is due July 22, 2015.
- Notice Requirements for Municipal Taxes Levied in a Police Jurisdiction – Act 2015-361 (H.B 377): This act provides that municipal business license tax, sales, use, lodging, and rental taxes that are imposed in a police jurisdiction shall not be effective until 30 days after the levying municipality provides notice in accordance with the act. In addition, a municipality that levies a business license tax in the police jurisdiction must prepare an annual report detailing business license revenues, costs of services, and providers of services in the police jurisdiction.
- Limited Sales/Use Tax Exemption for the Birmingham Zoo, Inc. – Act 2015-384 (S.B. 310): One of the few tax exemption bills that passed this session. The exemption from sales and use tax is limited to capital projects and will sunset after four years.
B. Bills That Didn’t Pass but We Will Likely See Again
- Reliance on ADOR’s Website for Correct Local Tax Rate: Beginning March 1, 2016, S.B. 322 would relieve taxpayers of any liability for collecting and charging the incorrect sales, use, rental, or lodgings tax rate based on the rate published on the ADOR’s website, including relief from any penalties or interest as under current law.
- Penalty for Using or Selling Sales Tax Suppression Software
- Increase Sales Tax and Rental Tax on Automobiles
- Increase Tobacco Tax
III. AD VALOREM PROPERTY TAXES
Alabama Reinvestment and Abatements Act – Act 2015-24 (H.B. 59): As mentioned above, this act includes several significant enhancements to the Tax Incentive Reform Act of 1992, such as extending the maximum property tax abatement period from 10 to 20 years. Please see the Economic Development Practice Group's client alert on "House Bill 59, Alabama Reinvestment and Abatements Act, Expands Alabama Abatements Significantly" for further information.
IV. MISCELLANEOUS TAXES/PROCEDURAL MATTERS
A. Bills That Were Signed into Law
- Technical Corrections to Alabama Limited Liability Company Law of 2014 – Act 2015-165 (H.B. 54): This act provides for several technical corrections to the Alabama Limited Liability Company Law of 2014 (Act 2014-144), which substantially amended Alabama’s LLC laws (including allowing the formation of and recognizing series LLCs) and was generally effective January 1, 2015. Act 2014-144 also updated the federal conformity provision by providing that LLCs are treated as partnerships for state tax purposes unless classified otherwise for federal tax purposes. While the intent was to align the tax classification of LLCs with relatively recent changes to the U.S. Treasury Department’s check-the-box regulations in the area of single member LLCs and excise and payroll taxes, the deletion of the word “income” created uncertainty with respect to the tax classification of SMLLCs for other state taxes (particularly sales, use, and rental taxes). Thus, the act removes this uncertainty by changing the tax classification language back to the law in effect prior to Act 2014-144, i.e., federal income tax purpose.
- Compliance Certificate for All ADOR-Administered Taxes – Act 2015-382 (S.B. 243): Effective October 1, 2015, this act allows the ADOR to issue a compliance certificate (formerly known as a good standing certificate) to verify an entity’s compliance with all “state taxes administered by the [ADOR],” in addition to the business privilege tax that was previously covered under the good standing certificate. The compliance certificate may only be issued if the entity in question “has filed all state tax returns and paid the taxes shown as payable in accordance with those returns.” The Department may now charge a $10 fee for each compliance certificate issued.
B. Bills That Didn’t Pass but We Will Likely See Again
- Tax Reportable Transactions Disclosure: H.B. 427 would require disclosure of a defined list of reportable transactions (and others to be added) and provide for several new penalties related to this requirement, including penalties for failure to file the required disclosures, understatement of tax resulting from a reportable transaction, and engaging in certain tax shelters.
- Business Privilege Tax Increase/Base Modifications
- Contractor’s Gross Receipts Tax Exemptions for Municipal and County Road/Bridge Projects Repealed
- Lottery Bill/Constitutional Amendment
- Gaming Compact with Poarch Creek Indians
*Note: The authors and other members of Bradley Arant Boult Cummings LLP were involved in many of the items of legislation discussed above. Any opinions expressed herein are those of the authors and not necessarily those of their law firm, clients, or organizations with which they are involved.