Recent Alabama Tax Developments

State & Local Tax Alert: Alabama Edition

Client Alert

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The Alabama Legislature adjourned sine die on May 4 bringing the 2016 Regular Session to an end. The 2017 Regular Session is scheduled to begin in February and there have been reports of a potential special session later in the year to address the Governor’s prison plan, increased Medicaid funding and the BP settlement funds awarded to the state. Legislators introduced over 1000 bills in the House and Senate combined this session. Below are the noteworthy SALT and incentives bills that passed and have been signed by the Governor.

Income/Business Privilege Taxes

H.B. 34 (Act #2016-102) – Alabama Renewal Act: Establishes two new state income tax credits: (1) the “Port Credit” that can be awarded to a company engaged in manufacturing, warehousing or distribution based on increased cargo volume through a public port; and (2) the “Growing Alabama Credit” that allows taxpayers to receive a dollar-for-dollar credit against up to 50 percent of their income tax liability for cash contributions to certain local economic development organizations. The recipient local development organizations must use the funds generated by the credits for site improvements or public infrastructure for a business or industry that qualifies for the Jobs Act credits. The Growing Alabama Credit is capped at $5 million for fiscal year 2016 and $10 million per year thereafter until it expires in fiscal year 2020. H.B. 34 was signed into law by the Governor on April 4 and takes effect July 3.

H.B. 36 (Act #2016-188) – Small Business and Agribusiness Jobs Act: Provides a non-refundable, one-time credit against both the individual and corporate income tax as well as the financial institution excise tax (FIET) for qualifying small business employers that hire new employees in the state. The employer must be headquartered in Alabama and have 75 or fewer employees, not counting the new hires who qualify for the tax credit. The credit is equal to $1,500 for each new qualified employee who earns at least $40,000 in annual wages and is an Alabama resident, but cannot be claimed by the employer until the year in which the new employee has completed 12 months of consecutive full-time employment with the employer. H.B. 36 was signed into law by the Governor on April 29 and is effective for employees hired after July 25, 2016. The credit sunsets on January 1, 2019.

S.B. 312 (Act #2016-321) – Amendments to Alabama Jobs Act of 2015: Amends the Alabama Jobs Act to provide additional tax credits to companies that hire eligible employees for a qualifying project located within a “former active duty military installation” closed by the Congressional Base Realignment and Closure (BRAC) process. The add-on credit is equal to 0.5 percent of the qualifying employee’s wages paid during the previous tax year. The act was effective upon the Governor’s signature May 10.

S.B. 90 (Act #2016-314) – Apprenticeship Tax Credit Act of 2016: Establishes an income and financial institution excise tax credit of up to $1,000 for each “apprentice” employed for at least seven months during the prior taxable year. The annual amount of credits are capped at $3 million and are available for tax years beginning on or after January 1, 2017 and through the 2021 tax year (unless extended by an act of the Legislature).

S.B. 208 (Act #2016-389) – Annual Reporting Requirement for Economic Tax Incentives: Requires state agencies to submit an annual report, beginning with the 2018 Regular Session (second legislative day), providing an assessment of any economic tax incentive administered by that agency. The House Ways and Means Committee and the Senate Finance and Taxation Committee are directed to conduct hearings on the reports every odd-numbered year and provide a recommendation to modify, discontinue or take no action with respect to each incentive.

H.B. 451 (Act #2016-283) – FIET Apportionment Rules Decoupled from MTC Uniformity Rules: The Legislative Council recently requested that the ADOR delay the effective date of its proposed rule that substantially adopted recent amendments to the Multistate Tax Commission’s uniformity rule dealing with a multistate financial institution’s net income apportionment. The ADOR did so, making it effective for tax years beginning after December 31, 2016. This act deletes the language in Alabama Code section 40-16-4(a)(2) that requires the ADOR to adopt in substantially the same form the MTC allocation/apportionment uniformity rules in effect from time to time.

S.B. 263 (Act #2016-412) – Federal/State Filing Date Conformity Bill: Conforms 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 last year. The Alabama Society of CPAs spearheaded this effort, with the assistance of the ADOR and BCA .

H.B 109 (Act #2016-345) – HSA Conformity Bill Finally Passes: Generally conforms the state income tax rules for creating a health savings account to the federal rules, but not until tax year 2018. Beginning that year, taxpayers can claim a state income tax deduction for contributions to HSAs, limited to the annual cap imposed by federal tax law (currently $3,350 for individuals and $6,750 for families).

H.B. 270 (Act #2016-191) – Captive Insurance Company Premium Tax Cap, Etc.: Limits the amount of Alabama insurance premium tax owed by a qualified captive insurance company to $100,000 annually. Business privilege taxes paid by a captive are allowed as a (non-refundable) credit against this cap. Also, captives may now be formed as series LLCs, consistent with the 2015 amendments to the Revised Alabama LLC Law or as “protected cell” captive insurance companies. The Governor signed this bill into law on April 29.

Transactional Taxes

S.B. 233 (Act #2016-110) – Clarification of “Eligible Seller” Under Simplified Seller’s Use Tax Remittance Act: Act 2015-448 allowed participating sellers to collect, report and remit an 8 percent “simplified seller’s use tax” on sales of tangible personal property delivered to Alabama purchasers. Sellers without physical presence nexus in Alabama can elect to participate in this program and must apply through the ADOR. This act clarifies that an “eligible seller” can retain its status as an eligible seller if it has participated in the program for at least six months prior to establishing a physical presence in Alabama, which may encourage more vendors to participate in the program. However, this act also clarifies that only federal legislation removing the current physical presence requirement for sales tax collection – and not a decision of the U.S. Supreme Court overturning Quill – would terminate the program. The bill was signed into law by the Governor on March 17.

S.B. 335 ( Act #2016-406) – Additional Restrictions on Private Auditing Firms: Clarifies the ban on contingent fee audits contained in Alabama Code § 40-2A-6 to include unwritten agreements between counties or municipalities and private auditing firms. Any assessment is void if any part of the compensation or other benefits payable to the firm is contingent upon “or in any manner” related to the amount of tax, license fee, interest, court costs, penalty or any other item assessed against or collected from the taxpayer. Contracts or arrangements expressly excluded also now include for the “collection of any tax, interest, court costs, or penalty when the private examining or collecting firm has no authority to determine the amount of tax, interest, court costs, or penalty owed the state, county, or municipal governing authority.”

The bill also allows a city or county to terminate its auditing agreement with a private auditing or collecting firm on 90 days’ written notice (or vice versa) for any contract executed on or after October 1, 2016. Private auditing firms will now be required to furnish to the taxpayer or its representative a signed and dated written authorization of audit from each of its local government clients, as well as a copy of the auditing contract between the firm and the local government client and a statement about whether the local government client has elected-out of the Alabama Tax Tribunal jurisdiction. A final assessment based on an audit conducted by a private auditing or collecting firm must now be signed by a public official or employee designated by the self-administered county or municipality.

Additionally, a self-administered county or municipality that has opted-out of participation in the Alabama Tax Tribunal is required to “retain the services of an independent hearing or appeals officer . . .” to conduct any administrative hearing. Although somewhat redundant, the bill also states that a private auditing or collecting firm is subject to the taxpayer confidentiality rules applicable to the ADOR.

Finally, the Alabama Local Tax Institute on Standards and Training (ALTIST) must offer a course on customer relations and professional courtesy to all examiners and a taxpayer hotline to receive complaints related to the auditing or collection activities of any private auditing or collecting firm. However, a transcript of any of these voicemail complaints can only be delivered to the private auditing or collecting firm that is the subject of the complaint. A self-administered municipality that has hired a private auditing or collecting firm can, at least, request a copy of the report. These changes become effective January 1, 2017.

S.B. 128 (Act #2016-127): This act allows county commissions to engage outside legal counsel to represent the state and county in property tax cases appealed to circuit court. The county may retain counsel or utilize legal counsel provided through a self-insurance fund established by two or more counties. The act is effective October 1, 2016, and is focused on so-called “dark store” valuation litigation.

H.B. 169 (Act #2016-405) – Authority of Municipality to Abate County Taxes: The Attorney General overruled a 2005 opinion to the Town of Vance and held that a municipal industrial development authority could abate county ad valorem taxes, notwithstanding the fact that the municipality did not levy ad valorem taxes (and thus could not abate the municipal tax because it did not exist). Ala. Attorney General Opinion No. 2016-017 (Jan. 4, 2016). As a result, this act amends the abatement rules to require that a municipality may only abate certain county taxes if the municipality has a corresponding tax or, if there is no corresponding tax, then consent of the county governing body must be obtained. The act was effective upon the Governor’s signature May 13.