In recent years, much attention has been paid to state legislatures across the country that attempt to alter their existing tax structures by enacting legislation that not only changes how businesses are taxed prospectively, but which also seeks to back-date the amended laws to generate increased revenue—or to foreclose refund claims. That action, well summarized recently by Michael J. Bologna ( Michigan Calls on U.S. High Court to Bypass State Tax Cases, Daily Tax Report, Bloomberg BNA (March 14, 2017)), has garnered the interest of both taxpayers and tax practitioners alike, with court watchers awaiting the decision of the U.S. Supreme Court and whether the Justices will rule on the petitions filed by several taxpayers against the State of Michigan for the retroactive amendments to its Business Tax Act passed in 2014 (s ee, e.g., Sonoco v. Michigan Department of Treasury, No. 16-687 (2017)). Also unknown is whether the High Court will take the opportunity to address similar retroactive Washington legislation, which has also been challenged and is currently on appeal.
Retroactivity—By the People,For the People
In a landmark decision issued on March 17, 2017, the Alabama Supreme Court placed the State of Alabama on the list of states involved in the morass of retroactive tax legislation. The Court's decision in Jefferson County v. Taxpayers and Citizens of Jefferson County (Case No. 1150326, 2017 BL 84275 (Ala. 2017)), finally put to rest a lingering issue regarding the constitutionality of over 600 local tax and regulatory measures and was welcomed by almost everyone—taxpayers and local government officials alike.
Before delving into the Court's lengthy decision, some background is in order. During 2004 and 2005, Jefferson County, Alabama, issued warrants for the purpose of raising funds for local school construction. Jefferson County at *1. The warrants were to be financed with proceeds accruing from, at that time, a 1% “education sales and use tax.” In 2015, state legislators representing districts within or contiguous to Jefferson County proposed identical 1% sales and use taxes to support the issuance of new warrants, at then-lower market interest rates. Id. at *2. The goal in enacting the new tax was to use the savings on debt service payments to retire the old warrants, and the incremental revenue to fund both educational and non-educational construction projects. And therein was the rub.
H.B. 573, advocated by the Jefferson County Commission and sponsored by several members of the County delegation, passed the 105 member Alabama House of Representatives by a vote of 13-3 on May 21, 2015, with no representatives apart from the local delegation voting on the measure. That was common practice for literally decades. After passing the Senate, Act 2015-226 was signed into law by Governor Robert Bentley on May 27.
Within two months, a handful of individual taxpayers and local legislators filed a class action suit in Jefferson County Circuit Court, claiming among other things that H.B. 573 passed the House of Representatives in violation of Section 71.01(C) of the Alabama Constitution of 1901, which provides that a non-appropriations bill may be passed by the House before passage of a basic annual appropriations bill only if a special “budget isolation resolution” (or “BIR”) is passed by “three-fifths of a quorum present.” Id. at *10.
Notwithstanding Alabama House Rule 36, which defines such a quorum as those “present and voting,” the class plaintiffs claimed that a mere total of 16 legislators voting on H.B. 573 didn't constitute a quorum for purposes of satisfying the Alabama Constitution. Id. Following the trial court's surprising invalidation of Act 2015-226 on that ground, both parties filed appeals to the state Supreme Court. Jefferson County at *11.
While the decision was on appeal, business groups and local elected officials across the state warned of catastrophic consequences—statewide—if an amendment to the Alabama Constitution was not passed to clear up the mess. The state legislature quickly passed, and the state's voters overwhelmingly ratified on the November 2016 ballot, Amendment No. 14 (Act 2016-430). That bill contained a one-line amendment adding Section 71.01(G) to the Constitution of Alabama, retroactively validating all BIRs pertaining to local laws (e.g., those affecting a single county or municipality) passed prior to November 8, 2016.
With this change enacted, the Alabama Supreme Court reviewed the class plaintiffs' appeal. Relying on a narrow exception established by Alabama case law, the Court affirmed the validity of the local sales and use tax act, citing of course Amendment 14. The Court, in delivering its opinion, noted that the constitutional amendment's “clear and express terms” validated the longstanding voting process used by the House of Representatives in passing the BIR at risk, which then cleared the way for the favorable—and constitutionally-blessed– vote on the new county sales and use taxes. Id. (For further discussion, see Jennifer McLoughlin, Alabama High Court OKs Local County Sales Tax Act, Daily Tax Report, Bloomberg BNA (March 21, 2017)).
The case of Jefferson County vs. Taxpayers presents an alternative view on the debate regarding the propriety of retroactive tax legislation. While the underlying law at issue was one concerning local sales and use taxes, and not the Multistate Tax Compact and business income apportionment as seen in Sonoco and related cases, it is nevertheless an important consideration as to how much power state legislatures may wield in enacting retroactive tax legislation. The fact, however, that a statewide referendum approved the retroactive constitutional amendment may be unique among the current retroactivity cases.
While the Michigan legislature's 2014 amendment of the state's Business Tax Act purportedly applies retroactively for something less than ten years, the Alabama Supreme Court's decision in Jefferson County potentially opens the door for tax legislation to be deemed retroactively effective stretching back decades. Granted, Amendment 14 provided a needed answer to a lingering problem – one having the potential to invalidate what some have estimated to be as many as 600 other, uncontested local laws that had been on the books for decades (s ee Chris Marr, Local Sales Tax Saved in Alabama Case that Risked Other Laws, Daily Tax Report, Bloomberg BNA (March 20, 2017)).
As with all landmark decisions, however, a precedent may have been set— one beneficial in this instance, but a potential tool for future state legislatures in reaching into the past to foreclose anticipated refund claims or prevent other “nefarious” taxpayer actions.
Reproduced with permission from ©2017 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. This article, co-authored by Patrick Perry, was first published on Bloomberg BNA on April 5, 2017. (login required)