Our final Alabama SALT Alert of 2013 summarizes the major legislative, judicial, and administrative developments affecting Alabama taxpayers with respect to income, transactional, and property taxes so far this year. The 2013 regular legislative session produced a number of noteworthy tax bills, several of which improve the operation of Alabama’s existing statutory incentives. In addition, the courts decided several cases of importance, including one that invalidates the exemption from state and local sales and use taxes for private schools and colleges. The final section of this Alert provides some unofficial predictions regarding legislative tax proposals that we expect to be introduced in the 2014 regular session. Note: Members of the SALT Practice Group are or were involved in several of the cases and items of legislation discussed in this Alert.
I. INCOME/BUSINESS PRIVILEGE TAXES
Act 2013-08 – Extension of Capital Credits/Mining Incentives: Alabama’s capital income tax credit and the statutory incentives for coal mining projects (capital credits and TIRA abatements) were scheduled to expire on December 31, 2013, and March 1, 2014, respectively, unless the legislature adopted a joint resolution to extend these incentives. This act extends both the capital credits and the coal mining statutory incentives until December 31, 2018, but does not modify any of the existing qualification requirements or limitations applicable to these statutory incentives. For more information, please click here.
Act 2013-241 – Tax Credit for Preservation of Historic Structures: This act provides a credit against the tax liability of the owner or its partners/members for the rehabilitation, preservation, and development of certain historic structures, similar to the parallel federal income tax credit. The tax credit for the taxable year in which the certified rehabilitation is placed in service shall be equal to 25% of the qualified rehabilitation expenditures for certified historic structures and 10% of the qualified rehabilitation expenditures for qualified pre-1936 nonhistoric structures.
The credit can be applied against the financial institution excise tax and income taxes. The annual aggregate amount of any tax credits that may be reserved by the Alabama Historical Commission is $20 million, and the maximum credit for a commercial project is $5 million. The credits may not be claimed until the 2014 tax year, and the act is scheduled to sunset three years from the date of enactment. Emergency regulations were recently issued by the commission, along with application forms, all of which are available on the commission’s website. For more information, please click here.
Act 2013-34 – Technical Correction to Entertainment Industry Incentive Act of 2009: As a technical correction to the Entertainment Industry Incentive Act of 2009, as amended in 2012 with some “glitches,” this act clarifies that qualifying expenses associated with certified productions can be rebated to the qualifying production companies, retroactively effective to June 14, 2011. For more information, please click here.
Act 2013-64 and Act 2013-265 – Alabama Accountability Act: This landmark legislation authorizes an income tax credit for individual and corporate contributions to qualifying nonprofit organizations that provide educational scholarships to eligible students (bringing the state in line with 12 other states that allow similar credits). It also establishes a refundable income tax credit for families who transfer their children from a failing public school to a nonfailing public school or private school. Both houses rejected Governor Robert Bentley’s request to delay implementation of the tax credits for two years. The Alabama Education Association soon filed a second legal challenge to the act (after the group’s first suit was dismissed by the Alabama Supreme Court); the Southern Poverty Law Center has also recently filed suit. For more information, please click here.
The Alabama Department of Revenue (ADOR) issued helpful guidance for parents desiring to claim the income tax credits established by Section 8 of the act as well as for individuals and corporations seeking to donate to qualified scholarship granting organizations and claim the tax credit established by Section 9 of the act. The guidance states that parents of students who are already enrolled in private schools are not eligible for the Section 8 credits, even if they are zoned for failing public schools. The ADOR has also published a list of qualifying scholarship granting organizations, which can be viewed at http://revenue.alabama.gov/accountability/. For more information, please click here.
Coca-Cola Enterprises Inc. v. Alabama Department of Revenue, Admin. L. Div. Dkt. No. CORP. 09-641 (Final Order on Rehearing February 14, 2013): Chief Administrative Law Judge (ALJ) Bill Thompson held that an Alabama consolidated group was entitled to carry forward certain net operating losses (NOLs) incurred before the group’s election to file an Alabama consolidated return. However, Judge Thompson also held that the group could not deduct any NOLs incurred before 1999, based on Alabama’s version of the federal separate return limitation year (SRLY) rules. Importantly, Judge Thompson partially overruled his prior decision in Weyerhaeuser USA Subsidiaries v. Alabama Department of Revenue, Admin. L. Div. Dkt. No. CORP. 04-511 (Mar. 11, 2005), concluding that an “Alabama affiliated group” could not exist before the term was defined by the original consolidated filing statute enacted in 1999. Both parties appealed to the Montgomery County Circuit Court, where the case is now pending.
Nextel South Corp. v. Alabama Department of Revenue, Admin. Law Div., Dkt. No. BIT. 13-136 (September 23, 2013): In a case of first impression, Chief ALJ Thompson held that the so-called hot interest applicable to large corporate underpayments did not begin to accrue until 30 days after the entry of the notice of preliminary assessment, rejecting the ADOR’s position that hot interest should begin accruing on the due date of the return. Judge Thompson held that “by adopting [I.R.C.] § 6621, the Legislature clearly expressed its intent to follow the federal scheme for computing interest on underpayments. That scheme includes an additional 2% rate of large corporate underpayments, and that rate applies or begins to accrue only after the ‘applicable date,’ not on the due date of the tax.” The ADOR elected not to appeal this ruling to circuit court. For more information, please click here.
Tsitalia LLC v. Alabama Department of Revenue, Admin. Law Div., Dkt. No. BIT. 12-492 (Feb. 1, 2013): Chief ALJ Thompson upheld a final assessment against an Alabama LLC, which had a nonresident member who lived in Greece, because the LLC failed to make a composite payment on behalf of the Greek member. Judge Thompson ruled that Alabama’s composite return regime is constitutional and that the state can require a pass-through entity over which it has jurisdiction “to report and pay Alabama income tax on a nonresident member’s distributive share of the entity’s Alabama-sourced income.” Unfortunately, the taxpayer failed to raise several issues/defenses that could have caused a different result and did not appeal.
Market-Based Sourcing Regulation Finalized: The ADOR finalized Rule 810-27-1-4-.17.01, providing guidance on sourcing sales of services to individuals and unrelated businesses under Alabama’s relatively new market-sourcing regime for determining the sales factor. Ala. Code § 40-27-1, Art. IV.17, as amended. Under Alabama’s somewhat unique market-sourcing regime, a taxpayer’s market for the sale of services is in Alabama “if and to the extent the service is delivered to a location in this state.” Ala. Code § 40-27-1, Art. IV.17(a)(3) (emphasis added). That language essentially tracks the Multistate Tax Commission’s (MTC) draft Model Compact Article IV, Section 17. The final regulation provides different rules for determining the state of delivery, and thus the market, depending on whether the customer is an individual or an “unrelated” business entity. For services provided to individuals, the service generally will be deemed delivered in Alabama if the individual’s billing address is in Alabama. However, if the service is a “direct personal service,” i.e., the service provider and customer are in the same location, such as a patient receiving medical services, the service is deemed delivered to the state in which the individual received the service.
For services provided to an “unrelated” business enterprise, the service generally will be deemed delivered in Alabama if the business enterprise has its principal place of business in Alabama. However, if the service has a “substantial connection to a specific geographic location,” the service will be deemed delivered in Alabama if the geographic location is in Alabama. Importantly, if the location overlaps more than one state, then the sale “shall be reasonably sourced between those states” (whatever that means). The new regulation provides that if the general rules produce a result that is difficult to administer or does not reasonably reflect the taxpayer’s market in Alabama, then either the taxpayer or the ADOR may use an alternative criterion or methodology to determine the taxpayer’s market in this state. It is expected that the ADOR will issue separate guidance with respect to services provided to a related member.
ADOR Hires New Transfer Pricing Firm: Effective October 1, 2013, a new transfer pricing firm, Economists Incorporated (Jonathan Neuberger, principal), assumed the role of the ADOR’s provider of transfer pricing analyses and litigation support services. The firm’s fees are capped at $175,000.
Federal Net Investment Income Tax Eligible for FIT Deduction: According to the ADOR’s 2014 version of the Federal Income Tax Deduction Worksheet, the 3.8% net investment income tax imposed by IRC Section 1411 as part of the Affordable Care Act will qualify as a deductible federal income tax for Alabama income tax purposes.
Instructions to 2013 Form 20C Requesting Federal Schedule UTP and Reportable Transactions: The ADOR’s instructions to the 2013 Forms 20C and 20C-C require copies of all supporting schedules to the federal return to be included with the Alabama return, including Schedule D, Schedule UTP, Form 8886, Form 4797, a balance sheet, and supporting statements for other income and other deductions. The instructions caution that failing to attach these schedules may result in an imposition of delinquency and/or frivolous filing penalties.
Amendment 774 – Sanctity of Marriage Amendment: The Alabama Sanctity of Marriage constitutional amendment was ratified. The amendment defines marriage as between a man and a woman and prohibits the state or local governments from issuing marriage licenses for same-sex marriages or recognizing same-sex marriages and unions from other states. The ADOR has confirmed in an informal ruling that this amendment will prevent it from recognizing same-sex marriage for purposes of state tax filings.
II. TRANSACTIONAL TAXES
Act 2013-205 – Government Contractor Exemption: This act provides for the ADOR to grant certificates of exemption from sales and use taxes to contractors and subcontractors licensed by the State Licensing Board for General Contractors for the purchase of building materials and construction materials to be used in the construction of a building or other project for a governmental entity that is exempt from the payment of sales and use taxes. Exemption certificates will not be issued for highway, bridge, or road projects. In essence, the act reinstates a law (Ala. Code § 40-9-33) repealed in 2004 but imposes severe penalties for abuse. The bill was amended in the Senate to delay its effective date so that it applies only to contracts entered into on or after January 1, 2014. The ADOR has issued proposed regulations. Our firm filed comments on and suggested changes to those proposals on behalf of several interested parties. For a copy of our comment letter, please click here. For more information, please click here.
Act 2013-443 – Durable Medical Equipment: This act specifies that the sale of durable medical equipment, prosthetics and orthotics devices, and medical supplies are exempt from all state, county, and municipal sales and use taxes. The qualifying products are defined under the Medicare program and must be sold pursuant to a valid prescription and billed to a third-party payer. Although the bill was initially retroactive in effect, it was amended to delay the effective date until October 1, 2014.
Columbia Southern Education Group v. Baldwin County, Admin. L. Div. (Aug. 15, 2013) (on appeal): In a ruling that could have widespread impact, Chief ALJ Thompson held that private schools and colleges in Alabama are not exempt from state or local sales and use taxes and that a 1961 ADOR regulation to the contrary is invalid. The regulation was found to be invalid because it lacked statutory support, at least since 1977, and was “a wrongful usurpation of legislative authority by the Department.” Clarifying legislation is expected to be introduced this month. For more information, please click here.
Beauty & More, Inc. v. Alabama Department of Revenue, Admin. Law Div. Dkt. No. S. 12-336 (June 10, 2013): Chief ALJ Thompson held that the sale of prepaid cell phone services is not subject to sales tax under Alabama Code § 40-23-1(a)(13), which imposes tax on the sale of “a prepaid telephone calling card or a prepaid authorization number.” Judge Thompson looked to the intent of the Alabama Legislature when the statute was enacted in 1997. When the legislature amended the sales tax statute in 1997 to add calling cards and authorization numbers, the only type of prepaid calling services available were physical cards with authorization numbers, and thus, the amendment did not levy a sales tax on prepaid cell phone services. The legislature, Judge Thompson concluded, “could not have intended to levy a tax on an activity, event, or item that did not exist at the time of the levy.”
Chester’s Int’l, LLC v. Alabama Department of Revenue, Admin. Law Div. Dkt. No. S. 12-364 (April 10, 2013): Chief ALJ Thompson held that menu boards, counter graphics, and other various items of tangible personal property used in promoting and advertising chicken for sale were withdrawn from inventory pursuant to Alabama Code § 40-23-1(a)(10) when they were given to franchisees. Thus, the items were subject to Alabama sales tax.
Pacific Rim Capital, Inc. v. Tuscaloosa County Special Tax Board (TCSTB), CV-2012-901336 (April 15, 2013): The Montgomery County Circuit Court ruled for the taxpayer in response to a novel theory asserted by the TCSTB: If a county does not levy a rental tax, then all equipment and other tangible personal property brought into that county for use or indefinite storage should be immediately taxable under the county’s consumer use tax levy. The taxpayer argued (successfully) that state law requires the local sales and use tax rules to parallel the state levy, which provides an exemption from the use tax if the equipment or other personal property is subject to the state rental tax—as it was in this case. Moreover, a Tuscaloosa County local act contained similar conformity language. The TCSTB did not appeal. For more information, please click here.
CSX Transportation, Inc. v. Alabama Department of Revenue, No. 12-14611, Doc. No. 2:08-cv-00655-AKK (11th Cir. 2013): The Eleventh Circuit U.S. Court of Appeals ruled that Alabama’s imposition of sales tax on diesel fuel purchases by railroads but not on diesel fuel used by interstate motor carriers or barge lines is discriminatory and violates the Railroad Revitalization and Regulatory Reform Act, 49 U.S.C. § 11501. The appellate court reversed the district court’s decision in favor of the ADOR. The ADOR has filed a petition seeking a writ of certiorari by the U.S. Supreme Court. For more information, please click here.
Washer & Refrigeration Supply Co. v. PRA Government Services, LLC, Jefferson Co. Cir. Ct. CV 2010-903417 (Oct. 19, 2011): Two Alabama taxpayers filed a very detailed class action suit against the largest private auditing firm in Alabama, PRA Government Services, LLC, which does business as Revenue Discovery Systems and AlaTax and its affiliates (collectively, AlaTax). The suit requested damages for prior assessments as well as declaratory and injunctive relief. The complaint alleges several violations of the Alabama Taxpayers’ Bill of Rights (TBOR) by AlaTax or its auditors.
The plaintiffs allege that AlaTax violated several aspects of the TBOR, including (1) failing to notify taxpayers who overpaid taxes of the procedures for filing a refund claim, (2) failing to notify taxpayers of the right to an administrative appeal (in lieu of filing an appeal in circuit court), (3) failing to comply with auditor surety bonding requirements, (4) entering into contingency fee auditing contracts, and (5) rewarding its employees and independent contractors with incentive bonuses based on tax collections or assessments.
The circuit court partially granted AlaTax’s motion to dismiss certain claims that were predicated on the proceeds of past assessments, requiring the plaintiffs to follow the assessment review procedure prescribed by the TBOR. However, the court denied AlaTax’s motion to dismiss with respect to the plaintiffs’ claims for declaratory and injunctive relief and held that the taxing authorities that employ AlaTax’s services must be added as parties to the litigation. The court-ordered mediation the parties had been involved in for over a year recently fell through, and the parties began proceeding with discovery. However, the parties are apparently back in mediation attempting to resolve their dispute.
City of Birmingham v. Leaf River Energy Center, LLC, Ala. S. Ct., Case No. 1120132 (May 10, 2013): In a case of first impression, the Alabama Supreme Court affirmed, without opinion, the decision of the Jefferson County Circuit Court that the City of Birmingham owed interest on a refund of sales tax that had been erroneously paid to the City. The key issue concerned the proper interpretation of Ala. Code § 11-51-208(f) and City of Birmingham Ordinance No. 97-185, § 10.4, which govern whether interest is due on the refund of an overpayment of sales tax paid to the City.
ONE SPOT E-Filing Program Rolled Out: The landmark single point of filing and payment system created by legislation during the 2012 regular session officially went online October 1. While taxpayers have the option of using the system, all local governments are obligated to accept filings and payments from taxpayers through the program. Sales, use, and rental taxes are covered. Compliments go to Commissioner of Revenue Julie Magee and Assistant Commissioner Mike Mason for their leadership on this critical issue.
Expansive Local Nexus Regulation Withdrawn; Replacement Rule Finalized: The ADOR announced on July 31 that it had withdrawn its controversial proposed local nexus rule, Ala. Admin. Code prop. r. 810-6-5-.04.02, and replaced it with a much narrower version. The replacement local nexus rule essentially parallels the ADOR’s interstate nexus rule, 810-6-5-.90.01. The withdrawal and replacement of the ADOR’s proposed local nexus rule came after several industry groups and professional organizations filed comments and met with the ADOR expressing concern over the broad scope of and inherent ambiguities in the proposed rule.
The replacement local nexus rule will be effective and apply to all transactions occurring on or after January 1, 2014, instead of the initial September 1, 2013 date. Perhaps of most importance is the change in the long-standing rule for delivery sales. Unless the vendor uses a common carrier or the USPS, it generally will be obligated to collect the destination city and county sales tax, even if its only nexus with those localities is mere delivery. For more information, please click here.
III. AD VALOREM PROPERTY TAXES
Act 2013-295 – Homestead Exemption Clarified: Prior to the enactment of Alabama Act 2012-313, persons age 65 or over were exempt from all state ad valorem taxes. In addition, if the person age 65 or over had net taxable income of $7,500 or less for federal income tax purposes, the homestead was exempt from all ad valorem taxes. Persons who were permanently or totally disabled were exempt from all state and local ad valorem taxes. Act 2012-313 established a threshold requirement that only persons over age 65 or persons who are permanently and totally disabled and residing in a household with taxable income of less than $12,000 qualify for certain homestead exemptions. Act 2013-295 restores the homestead exemptions to their pre-Act 2012-313 status, except that the federal income tax limitation for persons age 65 or over would remain at $12,000. This act is retroactive to August 1, 2012, the effective date of Act 2012-313. For more information, please click here.
Act 2013-370 – Allocation of Foreclosure Sale Proceeds: This act provides that if property is sold to pay delinquent property taxes and the purchase price exceeds the amount of taxes owed (plus costs and expenses), the excess from the sale must be paid to the county treasury and held in escrow until it is applied to the redemption of the property or the three-year redemption period lapses. In addition, the act provides that after the three-year redemption period has lapsed, the excess must be paid to any person who proves that he or she was the rightful property owner at the time of the sale or paid to any person who, since the sale, has obtained title to the property from the owner. If the excess is not claimed within 10 years of the sale, the county may retain the excess for general fund expenses. For more information, please click here.
Acts 2013-51 and 2013-424 – Major 21st Century Manufacturing Zone Act: Existing law provides for the creation of tax increment districts by counties and municipalities as a means of financing public improvements to develop blighted and economically distressed areas. Provided that appropriate constitutional authority is otherwise applicable, this act expands the use of tax increment district financing to include certain facilities located within a “Major 21st Century Manufacturing Zone.”
To qualify as a Major 21st Century Manufacturing Zone, the area must be at least 250 contiguous acres and designated by a municipality to be (a) located in whole or in part within its boundaries or corporate limits, (b) suitable for the site of an automotive, automotive industry-related, aviation, aviation industry-related, medical, pharmaceutical, semiconductor, computer, electronics, energy conservation, cyber technology, or biomedical industry manufacturing facility or facilities, and (c) an area within which an anticipated capital investment of at least $100 million for such project will be made. As amended by Act 2013-424, the Major 21st Century Manufacturing Zone Act became effective March 6, 2013. For more information, please click here.
IV. MISCELLANEOUS TAXES & PROCEDURAL MATTERS
Act 2013-91 – Unclaimed Property: Act 2013-91 amends certain provisions of Alabama’s Uniform Disposition of Unclaimed Property Act of 2004. Specifically, it includes provisions that (1) allow banks to treat all deposit products equally regarding abandonment, (2) allow all payment instruments issued by the state to be remitted to unclaimed property for the benefit of the payee upon expiration, (3) clarify reporting guidelines to protect the state when receiving property and the holder when remitting property, (4) allow a surviving parent to claim abandoned property from a child who died intestate, (5) clarify the treatment of property received by early reporting, and (6) protect consumers when claiming their property through a third-party source. For more information, please click here.
Act 2013-372 – Technical Corrections Bill to Terminal Excise Tax Act: This act clarified and made certain technical corrections to the Terminal Excise Tax Act of 2011, which changed the point of taxation from the distributor level to the terminal rack including excluding transmix and exports from the Wholesale Oil License Fee. For more information, please click here.
Act 2013-88 – The Red Tape Reduction Act: Act 2013-88 amends the Alabama Administrative Procedure Act to require state agencies, including the ADOR, to prepare a “business economic impact statement” prior to implementation of new, amended, or repealed regulations that could have an adverse impact on business. Agencies must file the statement with the Legislative Reference Service at the same time the proposed action is certified. More importantly for the ADOR, under the act, each agency must review all its rules and regulations within the next five years and decide which rules should remain and which rules should be amended or repealed. For more information, please click here.
V. ANTICIPATED TAX LEGISLATION IN 2014 REGULAR SESSION
When Alabama lawmakers return to Montgomery for the 2014 regular session in mid-January, their chief problem will be the dismal outlook of the General Fund. Senate President Pro Tem Del Marsh (R-Anniston) remarked, “It looks worse than last year, so it’s bad. The budgets will be the primary issue of the session.” Senator Arthur Orr (R-Limestone, Madison, Morgan) added that the General Fund is “[n]ow … a hundred million in the hole.” While the outlook of the General Fund may be bleak, lawmakers are unlikely to approve new sources of revenue. “The governor made it very clear he is not going to approve any new tax measures and I think basically the legislature is not in the mood, in these economic times, to do it either,” Marsh said. “The only place you’ve got is to cut. The question is where…” Given these restraints, the following paragraphs discuss various pieces of tax legislation that are likely to be introduced or have already been pre-filed for the upcoming 2014 regular session.
Alabama Taxpayers’ Bill of Rights II/Alabama Tax Appeals Commission Act: This act would create an independent tax tribunal known as the Alabama Tax Appeals Commission (ATAC) by abolishing the current Administrative Law Division and transferring both the personnel (including its only administrative law judge) and equipment to a newly formed state agency under the executive branch.
Since the enactment of the TBOR, its federal counterpart has been amended several times, and numerous Administrative Law Division and ADOR rulings interpreting the act have been issued. Also, the biannual Council On State Taxation (COST) Due Process Scorecard gave Alabama a “D” grade, pointing out several deficiencies and taxpayer inequities that should be remedied. Notable differences between the 2013 proposal and the 2012 version that passed almost unanimously but was pocket-vetoed by the Governor, include:
The expansion of the seven-member nominating committee to include a representative from the ASCPA and direct representation by county and municipal government associations;
The appointment of judges to six-year terms by the Governor, who must select from a list of five candidates vetted by the nominating committee (no Senate confirmation is required);
Technical clarifications to the third-party intervention provision and certain motor vehicle title appeals; and
Installment payment agreements by private examining firms require city/county consent.
The bill also contains several important changes and updates to the TBOR, such as generally extending the time period for filing an appeal or petition for review from 30 to 60 days and expanding the scope of Alabama’s “innocent spouse” defense to conform to federal law. The Alabama State Bar, ASCPA, ABA, AICPA, COST, and TEI as well as a number of state business associations and regional chambers of commerce support this bill. For more information, please click here.
Alabama Business License Reform Act of 2014: Under current law, only certain businesses must obtain annual state and county business licenses. Many of the existing licenses are for antiquated/nonexistent businesses (e.g., operators of dog-and-pony shows or flying jenny salesmen), whereas certain other businesses (e.g., IT firms) may not even be required to obtain a state/county business license. Also, the existing business license classifications overlap and often require a retailer to purchase numerous licenses each year.
This bill is designed to simplify Alabama’s antiquated business license laws by eliminating more than 140 existing state and county business licenses and instead requiring all businesses with a location in the state to obtain a single statewide business license. Similar to last year’s optional network election for single point online transactions (ONE SPOT) legislation, this bill calls for the ADOR to create an online filing portal through which businesses can (if they choose) purchase their state and all county business licenses. Certain counties with separate business license tax levies authorized by local act (e.g., Jefferson, Russell, and Mobile Counties) could continue to levy those taxes. As with ONE SPOT, the ADOR and all counties would be required to allow online renewals/payments. Thanks are due to House Speaker Mike Hubbard, Senate President Pro Tem Del Marsh and Senator Slade Blackwell for their leadership on this issue.
Business Privilege Tax (BPT) Exemption for Dormant Entities: This bill would exempt from the Alabama business privilege tax any legal entity that becomes dormant, even if the entity fails to dissolve or withdraw its qualification to do business with the secretary of state. For purposes of the bill, an entity is deemed to be dormant if for two consecutive years prior to the taxable year the entity has not owned property, produced income, or carried out any business activity or function of any type. Prior to passing out of committee in the 2013 regular session, the bill was amended to, among other things, provide for an amnesty program for businesses that have not filed their BPT returns for the past two years.
Mandatory Unitary Combined Reporting: Similar to the proposals introduced in several previous legislative sessions, this bill would require the Commissioner of the ADOR to mandate unitary combined reporting “when an Alabama taxpayer is part of a unitary business consisting of multiple business entities.” The bill essentially adopts the MTC’s broad definition of a “unitary business” as contained in its Model Combined Reporting Act. In addition, the bill provides that the term “unitary business” shall be interpreted as broadly as possible, limited only by the bounds of the U.S. Constitution, as a backstop to the MTC’s definition.
The combined report must include all members of the unitary group doing business in the United States or commercially domiciled in foreign “tax havens.” The bill does not provide any qualitative requirement for a foreign entity’s activities within the United States as compared to its activities abroad. Apparently, simply maintaining a commercial domicile in a disfavored country will subject the entity’s income to apportionment by Alabama via a combined return, which is a constitutionally suspect provision.
The combined group of business entities would apportion their total income to Alabama using the group’s Alabama “source apportionment data relative to the combined group’s apportionment data from all sources.” The remaining details and mechanics of the unitary report would be fleshed out by the ADOR through regulations. In addition, the 2013 proposal would have repealed subsection 40-18-39(i), which prohibits the filing of unitary combined returns, but would have left the existing consolidated filing regime in place.
Factor Presence Nexus Standards: This bill would establish broad “factor presence” nexus standards for taxpayers with business activities in Alabama. Under the bill, a nonresident individual or business entity is deemed to have a substantial nexus with Alabama, and thus an Alabama business privilege tax and income tax or financial institution excise tax filing obligation, if in any tax period the taxpayer’s property, payroll, or sales in Alabama exceed any of the following thresholds: (1) $50,000 of property, (2) $50,000 of payroll, (3) $500,000 of sales, or (4) 25% of total property, total payroll, or total sales.
The bill also provides that pass-through entities (e.g., partnerships, LLCs, S corporations, and trusts) shall determine their threshold amounts at the entity level, but if the property, payroll, or sales of an entity in Alabama exceeds the nexus threshold, then the owners of the pass-through entity are automatically subject to income tax or FIET on their allocable share of the entity’s Alabama income. Notably, the bill also provides that if the aggregate property, payroll, or sales of the entities of any unitary business meets one of the nexus thresholds, then each entity that’s part of that unitary business is deemed to have nexus and would be required to file and pay Alabama income tax or FIET.
Disclosure of Reportable Tax Avoidance Transactions: This bill would obligate taxpayers to disclose to the ADOR any “reportable tax avoidance transaction” they engaged in during the tax year. Not only would the bill require taxpayers to report those listed transactions that are reportable to the IRS, but it also would allow the ADOR to identify additional state-specific transactions that taxpayers must report. In addition, the bill would impose substantial penalties on taxpayers who failed to comply with the terms of the bill.
LLC State-Federal Tax Conformity: During the 2013 regular session, two counterpart Alabama Law Institute bills (SB 342 and HB 531) proposed to repeal the current Alabama Limited Liability Company Act and substitute the Revised Alabama LLC Act. Although the changes were extensive, the bill would have kept LLCs in conformity with federal tax law for all Title 40 tax purposes. For example, sales or rental transactions between a single-member LLC and its owner-member would be disregarded but not sales or rentals between multimember LLCs or between one of the members and the LLC. The legislation has been prefiled for the 2014 regular session.
Retroactive Clarification of Private School/College Sales/Use Tax Exemption: Legislation likely will be introduced to retroactively clarify the private school and college sales/use tax exemption at issue in the Columbia Southern case (discussed above) and the exemption for school lunches sold by both public and private schools to their students.
Recalculation of Composite Factors: Each year, the ADOR updates its composite factor tables, which are essentially depreciation tables for business personal property tax purposes. Because the ADOR’s tables prevent business personal property from ever being fully depreciated and therefore exempt from property tax, equipment and other business personal property in Alabama often continues to be taxed until it’s disposed of, even though the property’s useful life may have expired long ago. This bill would require the ADOR to recalculate the composite factors used to determine the assessed value of business personal property so that the factor will reach a value of zero in the year immediately following the last year for which a reduction in the composite factor is shown.
For a more detailed analysis of likely 2014 tax legislation, please look for our upcoming Alabama SALT Alert summarizing the legislative agendas of the state’s leading business and professional organizations.