Business and Industry
  Resource Departments
 

 

 

Montgomery Circuit Court Orders State to Refund Franchise Tax

MONTGOMERY CIRCUIT COURT ORDERS STATE TO REFUND FRANCHISE TAX

            On October 16, 2009, Presiding Montgomery Circuit Judge Charles Price ruled that the State of Alabama must refund $30,211, plus interest, in foreign corporation franchise tax to Vulcan Lands, Inc., for tax year 1999.  The ruling signifies a turning point in litigation that, for Vulcan Lands, began in 2001, but that dates back to the 1990s concerning the overall challenge to the state’s franchise tax.

Background – South Central Bell and Gladwin

            In 1999, the Supreme Court of the United States held that Alabama’s franchise “tax therefore facially discriminates against interstate commerce and is unconstitutional ….”  South Central Bell Telephone Co. v. Alabama, 526 U.S. 160, 169 (1999).[1]  The Supreme Court remanded the case to the Alabama Supreme Court for further proceedings, i.e., for a consideration of the appropriate remedy to be given to South Central Bell.  Id. at 171.[2]  However, before the Alabama Supreme Court could decide the question, the parties settled the case, and the appeal was dismissed.  South Central Bell Telephone Co. v. State, 789 So.2d 147, 151 (Ala. 2000).

            Upon the dismissal of South Central Bell, a class-action challenge to Alabama’s franchise tax came to the forefront – Patterson v. Gladwin Corp., 835 So.2d 137 (Ala. 2002).  Gladwin filed its class action in the Montgomery Circuit Court in 1996, while South Central Bell was pending, but the Gladwin case was held in abeyance until the resolution of South Central Bell.  Importantly, the Gladwin class sought a refund of foreign corporation franchise tax directly in the circuit court, without first pursuing the administrative remedies found in the Taxpayers’ Bill of Rights, Ala. Code § 40-2A-1, et seq.  (According to the reported decision, the Gladwin class included approximately 18,000 members contesting as much as $1 billion in tax.  Gladwin Corp., 835 So.2d at 140-41.)

            The Alabama Supreme Court held that the Gladwin class’s failure to follow the statutory procedures for requesting a refund deprived the circuit court of jurisdiction.  Thus, the Supreme Court dismissed the class action.  Gladwin Corp., 835 So.2d at 154.  The court acknowledged, however, that individual companies could pursue franchise tax refunds in their own actions, if those companies had complied with proper statutory procedures.  Id.  One such claim was that of Vulcan Lands, Inc.

Vulcan Lands

            In the Vulcan Lands case, the trial court originally ruled against the company, stating that a “taxpayer's injury, that is, its refund amount, is the difference between what it actually paid and what a similarly situated domestic competitor would have paid.”  Vulcan Lands, Inc. v. Surtees (Montgomery Circuit Court Order, filed March 12, 2007, page 2).  Thus, according to the trial court, Vulcan Lands was required to prove the actual existence of a domestic competitor that had been favored over Vulcan Lands, as to the payment of franchise tax.  Because Vulcan Lands failed to do so, and because the state offered evidence that Vulcan Lands was insulated from normal competitive pressures, the trial court ruled that Vulcan Lands failed to prove that it suffered an injury.  Vulcan Lands, Inc. v. Surtees.  The company appealed.

            The Court of Civil Appeals reversed the trial court on the question of proving a domestic competitor, but the appeals court refused to hold for Vulcan Lands on the state’s reliance-hardship defense.  Vulcan Lands, Inc. v. Surtees, 6 So.3d 1148 (Ala. Civ. App. 2007).  Subsequently, however, the Alabama Supreme Court held in favor of Vulcan Lands on both questions.  Ex parte Surtees, 6 So.3d 1157 (Ala. 2008). 

            Concerning the domestic-competitor issue, the Alabama Supreme Court stated that the use of the term “competitors” was not “intended to confine the class of litigants receiving refunds, as the Department proposes, to those that could actually name certain domestic entities that mirrored them in corporate structure and operation.”  Ex parte Surtees, 6 So.3d at 1163.  So, the Supreme Court affirmed the Court of Civil Appeals on this issue, which had reversed the trial court.  In so doing, the Supreme Court remanded the case for the trial court to consider legal and factual issues that had yet to be addressed.  “Chief among those issues is the amount of franchise taxes Vulcan actually would have paid in 1999 had it been assessed as a domestic corporation.”  Id. at 1164 (emphasis in original).

            On remand, the trial court found that Vulcan Lands would have paid the $50 minimum tax if it had filed as a domestic corporation.  Vulcan Lands, Inc. v. Russell (Montgomery Circuit Court Final Order, filed October 19, 2009).  Therefore, the trial court ordered a refund of what Vulcan Lands actually paid as a foreign corporation – $30,261 – minus $50.  Ironically, the trial court also found that the state failed to prove that Vulcan Lands passed on the payment of the franchise tax to its customers, because “the evidence showed that Vulcan was not a traditional competitive entity and thus did not have the opportunity to pass the economic burden of the tax onto its customers.”  Id. at 2. 

            The reader may want to consider whether the facts of his or her company (or of his or her client’s company) are similar enough to those of the Vulcan Lands case to warrant further inquiry.

By Jeff Patterson

Copyright © 2009, Jeff Patterson, LLC – All rights reserved