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Proposed Alabama Regulation Strikes Business Privilege Tax Deduction
By Bruce P. Ely and James E. Long, Jr.
Bradley Arant Boult Cummings LLP
Birmingham
Alabama’s business privilege tax (“BPT”) is imposed on every business entity doing business or registered to do business in Alabama, but provides for a deduction in computing the taxable base for the taxpayer’s investments in the equity of any other business entity that is also doing business in Alabama. Ala. Code § 40-14A-23. The deduction is designed to avoid the inherent double taxation that would result if the net worth of both the parent/investor and subsidiary/investee are subject to the same tax. The Alabama Department of Revenue, however, recently issued a proposed regulation that would strike this statutory deduction for all tax years beginning after December 31, 2009.
Several interested groups and individuals have filed written comments in opposition to the proposal. The ASCPA submitted a lengthy comment letter, prepared by members of the authors’ firm, urging the Department to withdraw the proposed regulation as being both invalid and against sound principles of tax policy. The Department held two public hearings in October, both of which were well attended. The ASCPA was ably represented by President/CEO Jeannine Birmingham, State Taxation Committee Chair Kim Smith, several other members of the Committee, and numerous other CPAs.
The Department’s curt description of its proposed regulation claims that the BPT deduction for investments in Alabama business entities “will no longer be allowed … per AT&T Corporation v. Surtees, 953 So. 2d 1240 (Ala. Civ. App. 2006),” a case in which the authors’ firm represented the taxpayer, AT&T. In that case, the Alabama Court of Civil Appeals held that because the BPT and the now-repealed corporate shares tax deductions were limited only to entities doing business in Alabama, the deduction scheme constituted a facially discriminatory violation of the Commerce Clause of the U. S. Constitution. The Court, however, never held that the deduction should be stricken; it simply remanded the case to the trial court in order for the Department to offer a permissible justification for the discriminatory scheme (which it later failed to do). It was apparent that the Court thought it best to leave such a decision to the Alabama Legislature.
The parties eventually settled the refund issue. Thus, no Alabama court has ruled that the BPT deduction for Alabama investments should be stricken, or conversely, that the deduction should be broadened to include all equity investments in other business entities (not just those doing business in Alabama) to cure the facial discrimination. The authors believe that a substantive change to the BPT deduction, and the resulting tax increase if other corresponding changes are not made, is an issue that must be decided by our Legislature.
The 2010 BPT return and related instructions were being revised to reflect the proposed regulation although that project may have placed on “hold” pending the Department’s decision whether to proceed with the regulation or to urge the Legislature to take up the matter next Spring. The regular session convenes January 12. Officials at the Department have committed to keep the State Society in the loop. They pledge to make a decision by the end of the year and to so advise us, but reiterated their belief that the Legislature needs to address this issue soon.
Please contact Bruce Ely ((205) 521-8626 / bely@babc.com), Jimmy Long ((205) 521-8626 / jelong@babc.com) or Kim Smith ((334) 874-4455; ksmith@jmf.com) if you have any questions regarding the proposed regulation.