Annual COEs and Information Returns – A New Requirement for Many Tax-Exempt Entities

State & Local Tax Alert: Alabama Edition

Client Alert

Beginning January 1, 2016, all organizations that have a statutory exemption from the payment of Alabama sales, use or lodgings taxes--other than certain government entities, public universities and healthcare authorities--must obtain an annual certificate of exemption (COE) from the Alabama Department of Revenue (ADOR). This includes organizations such as nonprofit foundations, private schools and colleges, United Way agencies, museums, humane societies, boys and girls ranches, and certain church-sponsored facilities. These COEs (currently known as Form STE-1) will be valid for only one year from the date of issuance, and must be renewed before the end of the month in which the certificate expires.

Governor Bentley signed Act 2015-534 into law on August 19 with the intended purpose of reducing alleged abuses of the tax-exempt privilege by nonprofit organizations that are exempt from state and local sales and use or lodging taxes. The Act requires each organization to obtain an annual COE from the ADOR and to file an annual return containing yet to be delineated information.

Despite long-standing statutory exemptions for many of these organizations, each organization must hold a current COE or it will not be authorized to make tax-exempt purchases or hotel accommodations without paying a lodging tax. Retailers and hospital operators will be required to police this. A notice issued by the ADOR on September 30 created some confusion by warning that the failure to “obtain” (not “apply for”) a COE before January 1, 2016 will permanently bar an organization from making tax-exempt purchases. The Act does not contain this language, nor do the proposed regulations, but we urge these nonprofits to promptly apply for their COE.

Additionally, the Act requires all these organizations, beginning in 2017, to file an annual information return with the ADOR in a manner and with information to be prescribed by the Tax Exemption Advisory Council established by the Governor’s Executive Order Number 12. The filing of an annual informational return will be a condition for the renewal of a COE, but apparently every tax-exempt organization covered by the Act will be required to file an information return whether or not it applied for a COE or renewed an existing COE.

The Act remains controversial with the nonprofit community; many see it as imposing an additional layer of costly paperwork on smaller or struggling nonprofits without the normal taxpayer due process protections. Thankfully, the ADOR has issued proposed regulations and will hold a public hearing on November 12 at its headquarters in Montgomery, where all interested parties may present their views. The authors expect a large crowd at the hearing, as well as the introduction of a technical corrections bill early in the 2016 regular session, which begins February 2, 2016. If you have any questions regarding the new rules, please contact Bruce Ely or Will Thistle.

Unclaimed Property Reports Due November 1

We remind our readers who hold unclaimed property with a situs in Alabama that the annual unclaimed property report is due to the Alabama Treasurer’s Office by November 1, 2015. This annual report is mandatory in Alabama and will allow businesses to avoid possible penalties and interest for failing to report unclaimed property within the time prescribed. However, Alabama does not require “negative reporting,” such that any individual or organization that does not hold unclaimed property as of June 30, 2015, need not file a report. For more information regarding unclaimed property and Alabama’s unclaimed property reporting rules, please contact Chris Grissom or Jimmy Long.