State and Local Tax Alert: Alabama Edition
The 2017 legislative session begins February 7th in Montgomery, and we expect several tax-related proposals to be considered during the session. Our readers may recall that the 2016 session ended with no long-term plan in place to solve the state’s persistent General Fund budget shortfalls, infrastructure needs and the need for new state prisons. We think that primary attention will be focused on finding new sources of revenue—or reallocating existing sources. A number of high-priority items for the upcoming session have already been signaled by lawmakers. At the top of this list is the proposed full-scale review of the state’s tax code, including rates, credits and, most importantly, exemptions and incentives.
With the passage of House Joint Resolution 62, introduced by Speaker Mac McCutcheon during the special session last August, the legislature established the Joint Legislative Task Force on Budget Reform. The task force is comprised of 14 key lawmakers, and tasked with holistically examining the state tax code and the budgeting process and submitting recommendations for changes no later than the fifth legislative day of the 2017 session, which could mean sometime in late February.
While uncertainty surrounds the Task Force’s work to date, certain business groups see it as an opportunity to reform and streamline the current tax code in an effort to make the state more competitive and attractive for industry. Simplification proposals could include streamlining sales and use taxes to promote equity while easing the burden of compliance by both in-state and out-of-state retailers; reforming county-state business license statutes into a more state-wide, uniform filing system; and stopping duplicative audits for identical tax issues covering the same tax periods by the Alabama Department of Revenue, counties, cities, and private auditing firms.
One particular credit attracting the attention of many business groups, is the Alabama Historic Tax Credit that was allowed to sunset last year. First enacted in 2013 with overwhelming support from lawmakers, the incentive has been widely credited with spurring redevelopment of numerous aging urban structures across Alabama, most noticeably in downtown Birmingham. Legislation extending the credit through the year 2022 was introduced during the 2016 legislative session, but certain Senate leaders shelved the proposal, pending a new cost-benefit study that is also due out soon and an overall review by the Task Force toward reforming the tax code.
Another study group formed by the Legislature and the Governor, called the Digital Goods Working Group, was tasked last fall with formulating guidance in defining “digital goods” for sales and rental/lease tax purposes. As evidenced by the success of digital content providers such as Amazon, Hulu, and Netflix, sales of digital goods are increasing exponentially, while “traditional” digital goods such as DVDs, CDs and videotapes are shelved. Consequently, states that have lost revenue from the transition, or those in need of additional revenue, are seeking to grapple with how – and in what amount – sales of this content should be taxed. Alabama is no exception.
As recently indicated by the Deputy Commissioner of the Alabama Department of Revenue (ADOR) in an interview with Bloomberg BNA and in testimony before the Task Force, taxing digital goods is an area of untapped potential for revenue generation, at a minimum serving as a replacement for tax revenue previously earned from physical sales or rentals. Whether the Digital Goods Working Group will reach a consensus is anyone’s guess, but if the group reaches a stalemate, most observers expect the ADOR to advocate legislation taxing many of these goods and services under either a sales tax or rental/lease tax model.
Finally, we could see ADOR-supported legislation that requires out-of-state vendors to (1) notify their Alabama customers of certain Alabama use tax obligations, and t(2) submit the names and addresses of their Alabama customers to the ADOR at the end of each calendar year.
Readers may recall the U.S. Supreme Court’s recent decision not to hear the taxpayer’s appeal in Direct Marketing Ass’n v. Brohl, in effect upholding the 10thCircuit Court of Appeals’ ruling that Colorado may constitutionally require out-of-state retailers to notify in-state purchasers of use tax owed to Colorado taxing authorities. As a result, the Multistate Tax Commission (MTC) has begun to promote its model sales and use tax notice and reporting statute again. At a recent MTC meeting, ADOR Commissioner and former MTC Chair Julie Magee announced her plans to introduce legislation similar to the MTC’s model statute in Alabama this legislative session. It is uncertain how this proposal will correlate with the ADOR’s quite successful voluntary compliance program that has induced many “non-nexus” retailers, such as Amazon and Overstock.
If you have any questions regarding this alert, please contact any of the Alabama members of our firm’s SALT Practice Team.