As with many states, Alabama provides an exemption from its sales and use tax if tangible personal property is purchased for the purpose of leasing or renting it to a third party. Alabama Code sections 40-23-1 and 40-23-63(4) term this a “wholesale sale.” Because county and municipal sales and use tax rules must parallel the state levy, cities and counties must respect that exemption. In a case of first impression, the Montgomery County Circuit Court so ruled in Pacific Rim Capital, Inc. v. Tuscaloosa County Special Tax Board, Case No. CV-2012-901336 (Montg. Co. Cir. Ct. Apr. 15, 2013).
In this case, an equipment leasing company headquartered in California, Pacific Rim Capital, Inc., leased a myriad of equipment, photocopy machines, etc. to various customers located in Tuscaloosa County, Alabama, and remitted rental tax to the Alabama Department of Revenue (ADOR), to the Tuscaloosa County Special Tax Board and, in instances where the equipment was located within the city limits of Tuscaloosa, to the City of Tuscaloosa Revenue Department. Pacific Rim learned that Tuscaloosa County did not levy a rental tax and applied for a refund of the rental tax it erroneously paid. In response, the County’s Special Tax Board audited Pacific Rim and assessed a large amount of County use tax on that same equipment. The County’s theory went as follows: because the County doesn’t levy a rental tax, the state-level sales/use tax exemption did not apply since, in the Tax Board’s opinion, the exemption is tied to the fact that the lessor will instead remit rental tax to the various taxing jurisdictions on a monthly basis.
Pacific Rim filed suit in Montgomery County Circuit Court seeking both a refund of the rental tax it had mistakenly paid as well as the cancellation of the Tuscaloosa County use tax assessment. Following briefs and oral argument, Circuit Judge Tracy McCooey ruled from the bench, and subsequently in a final order dated April 15, that Pacific Rim was entitled to summary judgment on both counts. In the final order, the court pointed out that since Tuscaloosa County – like approximately 58 other Alabama counties – does not impose a rental tax, any amounts paid by Pacific Rim to the Special Tax Board as rental tax were necessarily paid in error. Therefore, the court ordered the County to issue Pacific Rim its requested refund.
Addressing the use tax assessment, the court found that the final assessment was “contrary to law” on two grounds. First, the assessment violated the terms of Tuscaloosa County’s own local act authorizing the County to levy a sales and use tax, because the local act’s definition of a “wholesale sale” is tied to the state’s definition, which excludes tangible personal property purchased for rental. The court also found the assessment violated state law since local governments are required to parallel the state levy, including exemptions such as the wholesale sale exemption. The taxpayer produced an informal letter ruling from the ADOR to that effect. As Pacific Rim pointed out, Tuscaloosa County’s failure to levy a rental tax should not be foisted on the taxpayers, and if the County convinced its local legislative delegation to enact such a tax, Pacific Rim would dutifully comply.
The appeal time has now expired. The ruling will have at least an indirect effect on the other 58 or so Alabama counties that likewise do not levy a rental tax, as well as the handful of Alabama municipalities that don’t levy such a tax.
Note: The authors’ firm represented the taxpayer in this case.