Alabama Tax Developments – 2015 Year in Review
State & Local Tax Alert: Alabama Edition
This SALT Alert summarizes many of the major legislative, judicial, and administrative developments affecting Alabama business taxpayers with respect to income, transactional, and property taxes. The Spring 2015 legislative session and two special sessions during late summer and early fall produced a number of noteworthy tax bills, including the Alabama Jobs Act and Alabama Reinvestment and Abatement Act. In addition, the Alabama Department of Revenue (the “ADOR”) proposed to define “significant” economic activity to purportedly require certain retailers that lack a physical presence to collect and remit the seller’s use tax and provide important guidance to out-of-state retailers that elect to participate in the Simplified Seller’s Use Tax Remittance Program.
I. INCOME/BUSINESS PRIVILEGE TAXES
Act 2015-27 (H.B. 58) – Alabama Jobs Act of 2015: 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.
Act 2015-41 (H.B. 57) – Alabama Veterans and Targeted Counties Act: This Act provides enhanced incentives under the Alabama Jobs Act for qualifying projects located in rural counties or projects that created jobs for veterans. For projects located in counties with less than 25,000 people, the jobs credit is increased to 4 percent 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 percent of its eligible employees, 0.5 percent 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.
Act 2015-505 (H.B. 49, 1st Spec. Sess.) – Factor Presence Nexus: The Act establishes broad “factor presence” nexus standards for nonresident individuals and business entities with various business activities in Alabama, thereby subjecting those taxpayers to Alabama income or financial institution excise tax (FIET) as well as business privilege tax. A nonresident taxpayer has "substantial nexus" with Alabama if, during any tax period, one of the following thresholds is exceeded: $50,000 or more in property; $50,000 or more in payroll; $500,000 or more in sales into Alabama; or 25 percent of its total property, payroll, or sales. These threshold amounts are applied at the entity level; consequently, non-resident owners of a pass-through entity that exceeds any of the nexus thresholds are deemed subject to state income tax or FIET on their allocable share of the entity's Alabama income. Notably, the Act is retroactive and, as such, applies to all tax years beginning after December 31, 2014.
Act 2015-434 (S.B. 71) – Enhancements to Alabama Accountability Act: This act makes a number of changes to Alabama’s tax credit scholarship program, created by the Alabama Accountability Act of 2013. Effective January 1, 2015, the $7,500 cap on individual donations is increased to $50,000, and tax credits generated by donations from pass-through entities, such as S corporations and LLCs, flow through to the entity’s owners. Under prior law, tax credits were only available to individual and C corporation donors. The Act also increases the annual amount of tax credits available from $25 million to $30 million. 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 (SGO) with no strings attached, and the SGO 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 SGOs, granting the ADOR authority to audit those organizations, and requiring all reports filed by SGOs with the ADOR to be posted on the department’s website.
Act 2015-442 (S.B. 226) – Alabama ABLE Act: The Alabama Achieving a Better Life Experience (ABLE) Act authorizes Section 529-like savings accounts for disability-related expenses and allows state tax-free growth and tax-free withdrawals if funds are used for qualified disability expenses. The Act will allow individuals and families to save private funds to support individuals with qualified disability expenses, including education, housing, transportation, employment training and support, assistive technology and personal support services, health, financial management and administrative services, legal fees, burial expenses, and other expenses. Beneficiaries of these accounts must be disabled prior to age 26. The program will be launched in 2016 by the State Treasurer’s Office.
New ADOR Rules Implement Transferability of Alabama Historic Tax Credits: This year the ADOR finalized three new regulations, Admin. Ala. Code r. 810-3-136-.01, -.02 and -.03, that set forth guidelines and procedures to be used in administering the Alabama Historic Rehabilitation Tax Credit, created by Act 2013-241 as a credit against income tax or FIET for the rehabilitation, preservation, and development of certain historic structures in the state. Act 2014-452 contained several technical corrections to the 2013 law as well as provided for a one-time transfer of the tax credit. The ADOR’s regulations implement these acts but also clarify the credit allocation requirements, the procedure for transferring the credit, the circumstances when a recapture is deemed to occur, and the limitation on the amount of the credit that financial institution taxpayers may claim.
Proposed Amendments to FIET Apportionment Rule Based on MTC Model Statute: The ADOR recently proposed various amendments to Rule 810-9-1-.05, which governs apportionment and allocation of income for FIET purposes, to comply with the latest Multistate Tax Commission Model Statute that was adopted earlier this year. The proposed amendment eliminates loans and credit card receivables from the property factor and makes several changes/clarifications to the receipts factor, including that receipts from other services are now governed by Alabama’s market-sourcing provisions. The effective date of the proposed rule is tax years beginning on or after January 1, 2015, even though a public hearing is not scheduled until January 13, 2016.
S.B. 51 – Mandatory Unitary Combined Reporting (MUCR): This controversial bill would have repealed portions of the Alabama corporate income tax code that permit separate entity reporting and consolidated tax returns and required all corporate groups with at least one member doing business in Alabama to begin filing a unitary combined return. The bill was introduced one afternoon during the first special session and passed out of the Senate Finance & Taxation Education Committee the next morning in a close vote. The bill did not progress further, as the business community coalesced quickly and convinced both Senate and House leadership to shelve the bill. No other state in the Southeast imposes MUCR. Letters from the influential Economic Developers Association of Alabama and the Business Council of Alabama pointed out that fact and warned of the likelihood of damaging the state’s industrial recruiting efforts as well as efforts to encourage existing businesses to expand their operations in the state. Nevertheless, the bill’s chief sponsor and the Commissioner of Revenue both vow to reintroduce it in 2016.
Federal/State Filing Date Conformity Bill: A bill discussed among the ADOR, the Alabama Society of CPAs and the Business Council of Alabama—but never introduced—would conform the state income tax return filing date for corporations and pass-through entities to the inverted dates established by Congress in the Surface Transportation Reauthorization Act earlier this year. We hope to see this bill introduced early in the 2016 regular session and passed without opposition.
II. TRANSACTIONAL TAXES
Act No. 2015-24 (H.B. 59) - Alabama Reinvestment and Abatements Act: 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.
Act 2015-534 (S.B. 24, 1st Spec. Sess.) – New Annual Exemption Certificate/Information Return Requirements: Beginning January 1, 2016, this Act requires all entities that are exempt from sales/use or lodgings tax under Alabama law, other than certain governmental entities and public universities, to apply for an annual certificate of exemption (COE) with the ADOR. The Act also imposes a mandatory reporting requirement for these entities beginning in 2017. The bill does not impose a deadline by which the ADOR must either issue or deny the COE, or list the grounds for denial, or the appeal process if the application is either denied or simply not acted on for an unspecified period of time. An entity that fails to timely obtain an annual COE or file an annual report forfeits its ability to purchase items tax-free or to rent hotel rooms or other accommodations without lodgings tax, regardless of the clear statutory authority for doing so.
Act 2015-448 (S.B. 437) ¾ Simplified Seller’s Use Tax Remittance Act: This Act allows participating sellers to collect, report, and remit an 8 percent simplified sellers use tax on sales of tangible personal property delivered to Alabama purchasers. Sellers must elect to participate in this program, and sellers that do not currently have an Alabama nexus must apply through the ADOR to participate. If the simplified sellers use tax is collected, the 8 percent covers both state and local sales taxes, regardless of the actual amount of the combined taxes, and the purchaser and seller are not liable for any additional use taxes on the transaction. Participation in this program will allow sellers to retain 2 percent of the use tax collected. Additionally, eligible participants will be granted amnesty for any uncollected remote use taxes due on sales made to Alabama purchasers for the prior 12 months before joining the program. The ADOR has proposed additional changes to Rule 810-6-2-.90.02 to provide guidance to out-of-state sellers that wish to participate in the program; a public hearing is scheduled for Wednesday, January 13, 2016.
New Regulation Defining “Significant” Sales to Require Collection of Sales/Seller’s Use Tax: ADOR Rule 810-6-2-.90.03, also known as the “So Sue Me” economic nexus regulation, purports to require an out-of-state seller to collect and remit seller’s use tax (either under the existing provisions of law or the new Simplified Seller’s Use Tax Remittance Act summarized above) if the seller’s (1) retail sales of tangible personal property into Alabama exceed $250,000 (based on sales from the previous year); and (2) the seller conducts one of the enumerated--and broad--list of activities in Section 40-23-68. The Rule becomes effective January 1, 2016.
Stone Bridge Farms, LLC v. Alabama Department of Revenue , Ala. Tax Tribunal Dkt. No. S. 14-510 (January 27, 2015) (on appeal): In the Alabama Tax Tribunal's first ruling involving the scope of authority of Alabama Tribunal judges, Chief Judge Bill Thompson concluded that a Tax Tribunal judge may invalidate an ADOR regulation, even though the taxpayer challenging the underlying assessment did not attack the regulation in its pleadings or at the hearing. The Chief Judge ruled that by timely appealing, the taxpayer had invoked the jurisdiction of the Tribunal, and that the validity of the regulation was also before the Tribunal because the Department cited the regulation as the basis for the assessment in its answer, adding that “the Alabama Legislature has empowered the Tax Tribunal to increase or decrease a final assessment upon appeal ‘to reflect the correct amount due’.” Ala. Code § 40-2A-7(b)(5)d.1. Additionally, Judge Thompson cited the new Tax Tribunal Regulation 887-X-1-.6, which provides that the Tribunal's final order may grant relief and invoke remedies as the Tribunal judge deems necessary for a fair and complete resolution. Therefore, not resolving an issue while it is before the Tribunal would cause an unnecessary waste of time, expense and resources for all parties involved.
CSX Transportation, Inc. v. Alabama Department of Revenue , No. 13-553 (U.S. Mar. 4, 2015): In the State of Alabama’s and CSX Transportation’s second trip to the U.S. Supreme Court, the Court held in a 7-2 decision that Alabama’s sales tax on diesel fuel purchased and used by rail carriers—where motor and water carriers are exempt from the tax—discriminates against rail carriers but only if Alabama cannot justify the differences in tax treatment between those similarly situated taxpayers. The Court first defined the comparison class, concluding that the appropriate comparison class consists of motor and water carriers and that the differential treatment of members of that class constitutes discrimination. Next, the Court remanded the case to the Eleventh Circuit, directing it to consider Alabama’s justifications for the differential tax treatment among the members in the defined comparison class. The Court also noted that in making this determination, the Circuit Court may consider other aspects of Alabama's tax scheme.
In August 2015, the Eleventh Circuit Court of Appeals vacated its opinion and remanded the case to the district court in Birmingham for proceedings consistent with the Supreme Court's decision. The district court is to consider whether the State had sufficient justification for exempting a railroad's competitors from the sales and use taxes imposed on a railroad's purchase or consumption of diesel fuel, demonstrated by the imposition of an alternative comparable tax or otherwise.
U.S. Xpress Leasing, Inc. v. Alabama Department of Revenue, Ala. Tax Trib., No. S. 14-1013 (June 16, 2015) (on appeal): The taxpayer was engaged in renting truck tractors and trailers and filed joint sales tax refund petitions, arguing that its purchases of parts were exempt from Alabama sales or use tax because the taxpayer was engaged in the business of leasing tangible personal property and that the items it purchased were used in that business. The taxpayer leased truck tractors and trailers to various lessees, including a related company. All vehicles were purchased and delivered to the lessee outside of Alabama. The execution of the lease agreement with the related company also occurred outside of Alabama. Once leased, the vehicles were then used in interstate commerce, including in Alabama, by the related company. The lease agreement required the taxpayer to maintain the vehicles, so the taxpayer was billed for repair and replacement parts in Alabama, and it paid Alabama sales tax on those purchases.
The Tribunal disagreed with the taxpayer’s claim that its purchases of parts were exempt from sales tax, holding that the underlying lease transactions were not subject to Alabama’s rental tax. All the initial events concerning the leasing of the property occurred out of state, and the use of the leased property by the related company in Alabama was not sufficient to subject the taxpayer to Alabama lease tax. Notably, the Tribunal stated that General American Transportation (a previous Administrative Law Division ruling) was wrongly decided, and that the taxable event for rental tax purposes is not the use of property by the lessee in the state but rather the location where the lessor transfers possession to the lessee.
The taxpayer has appealed this ruling to the Montgomery County Circuit Court. If affirmed, this ruling could have a substantial impact on the situs of local rental taxes (although local rental taxes were not an issue in this appeal), which are generally due where the property is used or “garaged” by the lessee.
III. AD VALOREM PROPERTY TAXES
Target Corp. v. Jefferson County Bd. of Equalization, Case No. 2140287 (Ala. Civ. App. Nov. 13, 2015): The Court of Civil Appeals affirmed the ruling of the trial court, holding that the taxpayer’s appeal of final ad valorem tax assessments was not perfected properly under Ala. Code § 40-3-25. While the taxpayer timely filed its appeal of the final assessment to Jefferson County Circuit Court on the last day of the 30-day appeal period, the taxpayer only mailed a copy of its notice of appeal to the Secretary of the Jefferson County Board of Equalization on that same day (and thus it was received after the appeal deadline). Because the Secretary did not receive a copy of the appeal within the 30-day appeal period, the Court held that the appeal was due to be dismissed in accordance with Ex parte Shelby County Board of Equalization, 159 So. 3d 1 (Ala. 2014). The Court further rejected the taxpayer’s argument that provisions of the Alabama Administrative Procedure Act applied to ad valorem tax appeals.
IV. MISCELLANEOUS TAXES & PROCEDURAL MATTERS
Act 2015-555 (S.B. 20) – Alabama Tax Delinquency Amnesty Act of 2016: This legislation directs the ADOR to conduct a tax amnesty program for a period of at least two months prior to September 1, 2016. The amnesty program applies to all taxes administered by the ADOR, except for motor fuel excise taxes, that were due for periods that began before January 1, 2015. Eligible taxpayers can receive a three-year look back period in certain cases and the waiver of all penalties and one-half of the interest. This legislation also authorizes a “post amnesty collection penalty” not to exceed 20 percent of any additional deficiency assessed for a tax period for which amnesty was taken, unless the additional assessment results from an RAR adjustment (and the taxpayer notifies the Department within 60 days of receipt of the RAR adjustment) or if the amnesty application was based on a preliminary or final assessment.
Act 2015-165 (H.B. 54) – Technical Corrections to Alabama Limited Liability Company Law of 2014: This Act provides clarification of and 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). The 2015 act removed this uncertainty by changing the tax classification language back to the law in effect prior to Act 2014-144, i.e., referring to federal income tax purposes.
If you have any questions regarding the contents of this newsletter, feel free to contact any of the Alabama members of our SALT Practice Group.1
1 Members of the BABC SALT Practice Group are or were involved in several of the cases and items of legislation discussed in this SALT Alert.