In a Rare Occurrence, Taxpayer Ordered to Pay Auditing Fees and Attorney Fees of Local Governments
SALT Alert: Alabama Edition
In a case of first impression, an Alabama circuit court recently ordered a taxpayer to pay the auditing fees that a private auditing firm normally would charge to its local government clients. Initially, the court ordered the taxpayer to pay “$35,382.66 in hourly audit fees for the examination, appeals, and all other stages of the audit, including travel expenses [of the private auditing firm].” The case, Charles E. Watts, Inc., v. Midfield City Clerk, et al., is to the authors’ knowledge the first instance where an Alabama court has assessed the hourly audit fees of a contract auditing firm against the audited taxpayer.
After this award, RDS-Alatax (now known as Avenu Insights & Analytics), which represented the local taxing authorities in this case, waived the auditing fee award in an apparent effort to resolve the case. The fees were originally awarded to the firm pursuant to Ala. Code § 40-29-20, which generally grants the Alabama Department of Revenue the ability to file a lien against a taxpayer’s property when an assessment has become final and is no longer subject to appeal. This waiver also could have been out of concern that such an award would violate the statutory prohibition against assessing audit costs against a taxpayer unless done so pursuant to the limited circumstances set out in Ala. Code § 40-2A-6(d). In any event, while these fees and costs were waived, the taxpayer was nevertheless ordered to pay the attorneys’ fees incurred by the local governments involved with the taxpayer’s appeals. To our knowledge, that is also a first (see Order, CV-2018-000039.00 (10/30/2018); Joint Notice of Settlement, 31-CV-2018-000039.00 (1/31/2019); Order, CV-2018-000039.00 (2/1/2019)).
At issue was whether the taxpayer was liable for local sales tax on its purchase of materials used in its performance of asphalt paving contracts for governmental entities, and for local use tax on its subsequent use of materials it purchased tax-free. The taxpayer contended that it was entitled to the exemption for sales tax on materials used on construction projects performed for governmental entities under Ala. Code § 40-23-4(a)(11). However, the Alabama Tax Tribunal held that the taxpayer was not entitled to this exemption because it doesn’t extend to a contractor’s purchase of materials for the construction of highways, roads, or bridges in the state. In this instance, the taxpayer performed asphalt paving on state highways and city and county roads (see Final Order, Charles E. Watts, Inc., Taxpayer, v. Various Alabama Cities & Counties, Alabama Tax Tribunal, City/County Dkt. No. 16-103 (1/31/2018)).
Private auditing firms, such as Avenu Insights & Analytics, RiverTree Systems, Inc., and PREMA Corp, have come to represent a number of cities and counties in Alabama for the purpose of examining a taxpayer’s books and records for sales, use, rental, business license, and other local tax compliance. When engaged, these private firms have the statutory authority to conduct these audits and to issue preliminary assessments (see Ala. Code §§ 40-2A-13–15 and 40-2A-6).
This ruling serves as a cautionary reminder to businesses, CPAs, and attorneys not to simply ignore a private auditing firm’s information requests (if proper) or to raise frivolous legal arguments since a court could award both auditing and attorneys’ fees against the taxpayer, as was done in this instance. If you have any questions about this ruling or how to deal with private auditing firms, please contact a member of Bradley’s SALT team.