Chief Judge Bill Thompson of the newly-established Alabama Tax Tribunal has issued his first ruling involving the scope of his authority as a judge when the taxpayer did not specifically raise an argument or defense in its notice of appeal. The issue involves whether a Tax Tribunal Judge may invalidate an Alabama Department of Revenue regulation, even though the taxpayer challenging the underlying assessment did not attack the regulation in its pleadings or at the hearing. Stone Bridge Farms, LLC v. State of Alabama Department of Revenue, ATT Docket No. S. 14-510 (January 27, 2015).

The case involves a taxpayer that owns and rents facilities for weddings, rehearsal dinners, receptions, etc. in rural Cullman County. Initially, the facility included only a wedding chapel, a banquet room, and other buildings. It is undisputed that the rental proceeds from those facilities are not subject to the lodgings tax. Beginning in January 2013, however, the taxpayer began renting three nearby chalets on the property to overnight guests—typically those involved with a wedding at the adjacent facility. At that point, the taxpayer began filing lodgings tax returns and paying lodgings tax on the chalet rentals.

The ADOR audited the taxpayer and assessed it for additional lodgings tax on the proceeds from the rental of the wedding chapel, banquet room, etc. The Department relied on Regulation 810-6-5-.13, which requires the collection of lodgings tax on all rented facilities “where rooms or other accommodations are offered for the use of travelers, tourists or other transients.” That is, once any part of the taxpayer’s facilities became subject to lodgings tax, the rentals from all facilities became subject to the tax.

Unfortunately, the taxpayer’s CEO, who had appealed the final assessment, did not attend the hearing. Nevertheless, Chief Judge Thompson ruled that the regulation was invalid and voided the final assessment. The Department took umbrage with that ruling, arguing that the taxpayer’s failure to raise the issue of the overbroad regulation barred the Tax Tribunal from ruling in favor of the taxpayer on that ground.

Chief Judge Thompson responded to the Department’s motion for rehearing:

I agree that if a taxpayer disputes a final assessment on factual grounds, the taxpayer must present evidence that the final assessment is incorrect.…This case can be distinguished, however, because the relevant facts, as stated in the Department’s answer, are not disputed, and the case involves a purely legal issue. That is, the case does not involve a disputed issue of fact.

The Chief Judge ruled that by timely appealing, the taxpayer had invoked the jurisdiction of the Tribunal, and that the validity of the regulation was also before the Tribunal, because the Department cited the regulation as the basis for the assessment in its Answer, adding that “the Alabama Legislature has empowered the Tax Tribunal to increase or decrease a final assessment upon appeal ‘to reflect the correct amount due’.” Ala. Code § 40-2A-7(b)(5)d.1.

Chief Judge Thompson also cited new Tax Tribunal Regulation 887-X-1-.6, which provides that the Tribunal’s final order may “grant such relief and invoke such remedies as deemed necessary by the Tribunal Judge for a fair and complete resolution” of the case. “Fundamental fairness mandates that a taxpayer should not be required to pay a tax that is not due under Alabama law.”

The Department of Revenue attorneys argued that the Tribunal was in essence placing the burden of proof on the Department to prove the validity of its assessments, and that the Tribunal had “effectively become an advocate for the Taxpayer.” The Judge rejected both arguments, referring to the fundamental premise for the establishment of the Tribunal last year: “By establishing an independent Alabama Tax Tribunal…this chapter provides taxpayers with a means of resolving controversies that ensures both the appearance and the reality of due process and fundamental fairness.” Ala. Code § 40-2B-1(a).

The Judge also pointed out the taxpayer was unrepresented and had filed its notice of appeal pro se, which was “clearly envisioned by the Alabama Legislature.” He cited an article in the January 2015 Edition of Business Alabama magazine, “Long Road to Tax Fairness,” in which a primary author of the Act, Senator Paul Sanford from Madison, Alabama, discussed the intent of the Act. Senator Sanford is quoted as saying that the “original version [of the Act] was cumbersome and intimidating for citizens and small business owners because it proposed a more formalized process rather than the casual atmosphere that had always existed for the tax appeal process…Now, people can still represent themselves if that is what they choose.”

The Judge asserted that if the Department’s position was upheld, it would cause the taxpayer to pay “a tax that is not due under Alabama law, because the Taxpayer’s pro se representative may not have properly plead the Taxpayer’s case…If that position is accepted, then small businesses and non-lawyer taxpayers could fall prey to procedural and other legal traps, and would in practical effect be forced to hire an experienced attorney to represent them in an appeal before the Tribunal, which is clearly contrary to the intent of the Legislature.”

Citing the Department’s mission statement to administer Alabama’s revenue laws in an equitable manner, the Judge added a strong personal note:

In my 38-plus years as an employee of the Revenue Department, first as an assistant counsel and then for 31-plus years as the Department’s Chief Administrative Law Judge, I personally observed that the Department’s employees, and especially those in its operating divisions, almost universally applied the proverbial Golden Rule and took the position that a taxpayer should only pay the correct tax due, nothing more or less. Unfortunately, it appears that this case is an exception to that commendable mindset…Rather, the Department’s position is that the Taxpayer should be required to pay lodging tax that isn’t due…based on what most citizens of Alabama would consider a procedural or technical trap.

In concluding, the Chief Judge pointed out the potential waste of resources since the taxpayer could appeal an adverse ruling of the Tribunal to circuit court, raise the validity of the Regulation in question at that level, and have a trial de novo. “Not resolving an issue while it is before the Tribunal would thus cause an unnecessary waste of time and expense for the Taxpayer and the Department and also a waste of the circuit court’s time and resources.”

The Chief Judge denied the Department’s motion for rehearing and affirmed his final order. It is unknown whether the Department will appeal this ruling to circuit court.