The Top 5 "Hottest" Alabama Tax Cases in the Past Year

ASCPA Connections - Jan/Feb 2023

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We summarize here what we believe are the top 5 Alabama tax cases decided in the past year that would interest our CPA readers.  Not surprisingly, almost all are Alabama Tax Tribunal rulings, so in those instances we deleted that reference and simply list the date of the latest ruling. If you’d like a copy of or have a question about any of these rulings, please email one of us. Our standard caveat: one or more of us here at Bradley was or continues to be involved in several of these cases, so the explanations below reflect our own personal views and not necessarily those of our law firm, clients, or the ASCPA.

Pfizer Inc. v. ALDOR (Oct. 31, 2022): The Alabama Tax Tribunal held that the taxpayer’s (“TP”) interest payments of approximately $650 million to an Irish affiliate qualified for the subject-to-tax exception to our so-called add-back statute, despite the fact that the Irish affiliate in turn incurred significant interest expense to related parties and deducted those interest payments in computing its Irish taxable income.

The Department argued that the exception for Ireland was not met because essentially all the interest income received was ultimately paid to three affiliates in Luxembourg, and thus the taxpayer “indirectly” paid interest to Luxembourg – not Ireland. 

Alabama’s subject-to-tax exception was amended in 2008 to provide “[t]hat portion of an item of income which is attributed to a taxing jurisdiction having a tax on net income shall be considered subject to a tax even if no actual taxes are paid on such item of income in the taxing jurisdiction by reason of deductions or otherwise.” Ala. Code § 40-18-35(b)(1).  The Tax Tribunal agreed with the taxpayer that the interest payments to the Irish affiliate fit “squarely within” the original language of the subject-to-tax exception and the clarifying amendment in 2008: “The interest payment by the Taxpayer to PTI was attributed to Ireland according to that nation’s sourcing methodology for purposes of Ireland’s net income tax. Therefore, the interest income to PTI “shall be considered subject to a tax” even though no tax was paid by PTI on the income by reason of PTI’s deduction of its own interest expenses.”  The Department has appealed to Montgomery County Circuit Court.

United Launch Alliance, LLC v. ALDOR (Dec. 21, 2021):  here, the Tax Tribunal held that the TP qualified for the reduced “machine rate” on helium and nitrogen gases used for various testing purposes during the manufacturing of rockets for the U.S. Government. The Department argued that the gases used in functional and leak testing do not qualify for the reduced machine rate because they were not used directly in converting the raw materials into a finished product. 

The Tribunal held that the statutory language for the machine rate did not include or require a “direct” connection as argued by the Department, and pointed to the Department’s own regulation that allows machines used in testing to qualify for the machine rate. The Tribunal remanded the question of the amount of the TP’s refund to the Department.

Physical Security, LLC v. City of Bessemer, Jeff. Co. Cir. Ct. (May 18, 2022): Physical Security, LLC, a Bessemer-based contractor, primarily furnishes and installs custom curtain wall on the exterior of buildings for protective purposes.  The job materials in question related to jobs that were performed outside of Alabama, and those materials were purchased by the TP from vendors outside of Alabama who did not collect Alabama sales or use tax.  Each of the TP’s purchase orders and vendor invoices for the materials referred to the specific out-of-state (non-Alabama) job for which the materials were ordered.  Once purchased, the materials were delivered to Physical Security’s facility in Bessemer, where it typically performed some initial assembly or fabrication on the materials.   The materials then were transported from the facility and installed on buildings at out-of-state job sites. 

The case began when the TP filed a refund claim for Bessemer consumer’s use tax on a specific job it performed in Florida.  Both the ALDOR and Jefferson County granted the TP’s refund claims on the same materials.  The City, represented by RDS/Avenu Insights and Analytics, denied the claim, however, and RDS initiated an audit.  Ultimately, the City issued a final assessment of consumer’s use tax against the TP for periods subsequent to the refund period.

The TP appealed to the ATT, which ordered the City to grant the refund claim and void the final assessment.  The ATT ruled that “the materials in question were not purchased by Physical Security for storage, use or other consumption in the City, [thus] the City’s use tax was inapplicable to Physical Security as to these materials.”  The ATT also concluded that Physical Security’s purchase of the materials fit squarely within the ALDOR’s temporary storage rule.

The Jefferson County Circuit Court affirmed the TP victory. The City has appealed to the Alabama Supreme Court.

AT&T Services, Inc. v. ALDOR (June 28, 2022): The TP filed two separate refund petitions for state sales and use taxes paid during 2014 through 2016 (the first petition was filed on February 21, 2017).  The parties executed a series of Department form waivers that extended the statute of limitations for assessment or refund for these periods through June 30, 2020.  The Department issued a confidential refund report regarding both refund petitions that partially denied the refund, and in a subsequent cover letter to the taxpayer enclosing the partial refund check dated February 25, 2020, the Department stated that the taxpayer “may request a formal hearing before the Alabama Tax Tribunal within two years from February 25, 2020.”  The taxpayer filed its notice of appeal with the Tax Tribunal on December 17, 2020.

Under Alabama law, refund petitions are deemed denied [beware!] if they aren’t granted within six months from filing, unless the Department and TP agree in writing to extend this period.  Once denied, the TP has two years to file a notice of appeal with the Tax Tribunal or circuit court.  The Department conceded that it was estopped from asserting that the second refund appeal was untimely because the taxpayer relied on the erroneous information regarding the date of the denial (i.e., Feb. 25, 2020), but argued that estoppel did not apply to the first refund petition because it was deemed denied by operation of law six months from filing (i.e., August 21, 2017) and the two year appeal deadline expired on August 21, 2019.

The TP contended that the waiver agreements should also extend the six-month period from which the Department could grant or deny the first refund petition, while the Department responded that “nothing within the four corners of the extension agreements even implies an extension of the time that the taxpayer has to file an appeal with the Tribunal.”  The Tribunal concluded that “the Department’s examiner assigned to the Taxpayer’s refund petition, made several statements regarding the purpose and effect of the extension agreements. “The excerpts … from emails sent from Ms. Holt to the Taxpayer’s representatives are relevant to show that, in this case, the Revenue Department used the agreements to extend the period in which it was required to act on the refund petition…”  The Tribunal denied the Department’s motion to dismiss and held that the appeal of the first refund petition to the Tribunal was timely filed by the TP.

Nguyen v. ALDOR (Sept. 1, 2022): The TPs were shrimpers based in Panama City, Florida, who harvested shrimp in our coastal waters and sold much of their catch at the Port of Mobile during the audit period. Their business was damaged by the 2010 BP Oil/Deepwater Horizon oil spill so they filed a claim listing Mobile as the port where most of their shrimp was sold between 2009 and 2012. The ALDOR argued that the BP settlement funds were taxable as representing lost revenue and that a portion should be taxable to Alabama as Alabama-sourced income (i.e., income “from business transacted in Alabama”). The ATT Judge agreed on both points, but waived the penalties and ordered the parties to determine the amount due the State.

Republished with permission. This article, "The Top 5 “Hottest” Alabama Tax Cases in the Past Year," was published in the January/February 2023 issue of ASCPA Connections.