State & Local Tax Alert: Alabama Edition - December 20th, 2013

by Bradley Arant Boult Cummings LLP

On December 16, 2013, the Council On State Taxation (COST) released its fifth edition of the COST Due Process Scorecard on Tax Appeals and Procedural Requirements. For the second time in as many scorecards, Alabama ranked in the select group of states that scored the worst—a group that includes Arkansas, California, Colorado, Louisiana, and Nevada. Alabama’s “D” score tied for third worst, was unimproved since the 2010 COST scorecard, and related primarily to the state’s lack of an independent prepayment tax appeals tribunal and relatively short appeal periods for both preliminary and final assessments.

There is still hope for Alabama, however. Pennsylvania received the “most improved” award in this edition of the scorecard, having jumped from a D ranking (like Alabama) to an A- and earning a “top states” ranking, mainly through legislative reform to provide an independent tax appeal tribunal. If the Alabama Taxpayers’ Bill of Rights II (TBOR II) passes in the upcoming 2014 legislative session, we see no reason why Alabama cannot follow Pennsylvania’s lead. According to Doug Lindholm, President of COST:

“We’re confident that Alabama in 2014 will join the rank of states with independent tax tribunals. It’s a common sense fix to the State’s tax system, and will go a long way towards improving the perception of Alabama as a balanced, fair and effective place to do business.”

On a related note, the House Republican Caucus of the Alabama Legislature recently endorsed TBOR II and pledged to move the bill quickly through the House of Representatives. During the past three legislative sessions, however, the House has never been the impediment, voting for the bill unanimously last session and nearly unanimously in the previous two sessions. The bill’s lead House sponsor and well-respected attorney, Rep. Paul DeMarco (R-Homewood), pledged to lead the effort again on the House side, calling on the Senate leadership and Governor Robert Bentley (R) to make the bill a priority in the upcoming session. Senator Bryan Taylor (R-Prattville) will again lead the effort on the Senate side.

The COST scorecard evaluates the rules governing the degree of taxpayer access to an independent appeals process and the state’s treatment of selected procedural elements that affect taxpayers’ perceptions of fairness and efficiency. In the former category, COST’s criteria require the following:

  • The appeals forum must be truly independent;
  • Taxpayers must not be forced to pay or post a bond prior to an independent hearing and resolution of a dispute;
  • The record for further appeals must be established before an independent body; and
  • The arbiter at the hearing must be well-versed in the intricacies of state tax laws and concepts.

The COST scorecard also focuses on procedural fairness, including whether the state has adopted:

  • Even-handed statutes of limitations for refunds and assessments (not including an extended statute of limitations for assessments involving 25% understatements);
  • Equalized interest rates on refunds and assessments (not including the typical penalty rate for large corporate underpayments);
  • Due dates for corporate income tax returns that are at least 30 days beyond the federal return due date, with an automatic extension of the state return due date based on the federal extension;
  • Adequate time to file a protest before an independent dispute forum;
  • Reasonable and clearly defined procedures for filing amended state income/franchise tax returns following an adjustment (by the IRS) to a taxpayer’s federal corporate tax liability; and
  • Any additional ineffective, burdensome, or inequitable practices, such as contingent fee audits, duplicative local revenue departments, use of outside counsel to litigate cases, or retroactive penalties, etc.

Applying those criteria to Alabama, COST dinged the state especially hard with respect to the lack of an independent dispute forum, a pay-to-play requirement to gain access to circuit court, a short, 30-day nonextendable appeal period by taxpayers, and “other issues.” Alabama also received a demerit for “lamentably failing to establish an Alabama Tax Appeals Commission again this year, missing multiple opportunities to improve its tax administration and business climate.”

The 2013 legislative session was the third time in as many years in which TBOR II garnered overwhelming support from Alabama legislators yet failed to pass. As readers may recall, TBOR II passed both houses easily in 2012 but was pocket vetoed by Governor Bentley after the session adjourned because of the Legislative Reference Service’s failure to include certain last-minute amendments in the bill. This past legislative session, the Alabama House passed TBOR II unanimously, as did a Senate committee, only to have the bill die on the floor of the Senate without a vote. COST says it hopes “2014 is the year the legislature will finally push this legislation over the top.”

Three out of four of COST’s major concerns and two of its lesser concerns would be addressed by TBOR II. Under the current version of the bill (2013 H.B. 223/S.B. 264), an independent tax tribunal known as the Alabama Tax Appeals Commission (ATAC) would be created 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. TBOR II’s provisions for establishing the ATAC are patterned in large part after the ABA’s Model State Administrative Tax Tribunal Act. In addition, the time period for filing a notice of appeal from a final assessment and a petition for review from a preliminary assessment would both be extended from 30 days to 60 days.

Regarding the creation of the ATAC, Rep. DeMarco characterized TBOR II as an “economic development bill. An independent appeals agency would foster economic development by giving businesses more confidence in the state’s tax system.” He added that “most other states have tax courts that don’t answer to the states’ revenue departments,” pointing to Georgia and Illinois as two of the most recent states to enact pro-taxpayer legislation to that end.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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