Before 2014, Alabama sales tax applied only to the sale of prepaid calling cards or authorization numbers, pursuant to Ala. Code §40-23-1(a)(13). In 2014, the Alabama Legislature amended the above statute to “clarify” that it also applied to prepaid wireless services.
In Atheer Wireless, LLC v. Alabama Dep't. of Rev., Dkt. S. 13-851 (A.T.T. 6/4/2015), the taxpayer appealed to the Alabama Tax Tribunal, arguing that the 2014 amendment did not apply to its prepaid wireless services, and also that the 2014 amendment was unconstitutional. The Tribunal held that the taxpayer’s services were taxable under the amended language of the statute. It also held that it was without jurisdiction to rule on the taxpayer’s constitutional arguments.
The taxpayer appealed to the Montgomery County Circuit Court. While the appeal was pending, the taxpayer’s attorney apparently discovered that the Alabama Department of Revenue (ADOR) had previously decided internally that the sale of prepaid wireless services was not taxable under the pre-2014 statute. The attorney petitioned the circuit court for leave to amend the complaint to assert that the ADOR had violated the Alabama Administrative Procedures Act, Ala. Code §40-22-1, et. seq., by changing its position on the taxability of prepaid wireless services. The court subsequently granted the ADOR’s motion for summary judgment (on unspecified grounds), and also denied the taxpayer’s motion to amend its complaint.
On the taxpayer’s appeal, the Alabama Court of Civil Appeals affirmed the circuit court. See Atheer Wireless, LLC v. State Dep't. of Rev., Al. Ct. Civ. App., Dkt. No. 2150645 (11/10/2016). Importantly, the Court also held that while an appeal of a Tribunal order to circuit court is a trial de novo, the circuit court can only address the issue or issues raised before the Tribunal. Id.
The taxpayer could appeal this ruling to the Alabama Supreme Court, but assuming the ruling is upheld, it should be a wake-up call to CPAs and attorneys who handle appeals before the Tax Tribunal. Previously, tax practitioners could take some comfort in the “trial de novo” standard that applies to appeals from the ATT to circuit court, but that’s no longer the case if new arguments or issues cannot be raised at the circuit court level. On the other hand, that limitation can be a two-edged sword -- the same standard should also prevent the ADOR from raising new issues in circuit court. In light of this ruling, taxpayers would be well advised to engage an experienced tax litigator at the ATT level, rather than waiting until one of the parties appeals to circuit court. Additionally, those representing taxpayers before the ATT should raise all possible arguments at that level, even if (at that time) the argument may not appear to be very strong.
If you have any questions regarding this case or its potential impact on future appeals, please contact any of the Alabama members of our firm’s SALT Practice Team.