Alabama Tax Developments: 2013 Year In Review

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.

1. 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...