SALT Alert: Alabama Edition
On Tuesday night, May 28, Gov. Kay Ivey signed into law House Bill 419, the Alabama Financial Institution Excise Tax Reform Act of 2019 (FIETRA), which resulted from a collaborative effort between the banking community, represented by the Alabama Bankers Association (ABA), several tax practitioners who advise banks regularly, and Alabama Department of Revenue (ADOR) staff. Several provisions of the act are retroactively effective as simply clarifying existing law, while most provisions become effective for tax years beginning after December 31, 2019 (see Acts of Alabama 2019-284).
ABA President and CEO Scott Latham thanked Gov. Ivey for signing HB 419 into law, adding “a group of nearly two dozen bankers, CPAs, and tax attorneys worked for over a year with the Alabama Bankers Association staff and Department of Revenue officials to draft this legislation, which was the most substantial revision to the FIET statutes since they were enacted in the 1930s. The new law clarifies and modernizes every facet of the FIET – computing liability, filing paperwork, distributing proceeds, and enforcing the law – while remaining revenue-neutral overall. Thanks to the hard work of Rep. Kyle South (R-Fayette), the bill’s sponsor, as well as Sen. Shay Shelnutt (R-Trussville) and Sen. Steve Livingston (R-Scottsboro), who shepherded the legislation through the Senate, the bill unanimously passed the House (98-0) and Senate (28-0) earlier this month.”
The FIET’s current definition of net income (roughly equivalent to taxable income) is both antiquated and incomplete, crafted in the late 1930s with subsequent amendments from time to time. The statutes failed to address the modern financial system or to tie to the federal income tax code, which was only exacerbated by the passage of the Tax Cuts and Jobs Act in December 2017. It was already difficult for the ADOR and taxpayers to interpret and administer these statutes, but a thorough analysis of the impact of the TCJA on the FIET statutes convinced officials at the ADOR to approach the ABA to form a working group.
The bill is a product of an almost year-long effort involving numerous meetings, exchanges of draft proposals, and dozens of emails and conference calls between ADOR representatives and stakeholders from the banking industry. Congratulations go out to Commissioner of Revenue Vernon Barnett, Deputy Commissioner Joe Garrett, their staff, and the ABA’s Scott Latham and Jason Isbell.
In short, the act clarifies the calculation of taxable income by, for the first time, tying it to federal taxable income as the starting point, with certain specified additions and subtractions. The act brings the FIET much closer to its Alabama corporate income tax counterpart, as well as the Internal Revenue Code provisions, thus making the interpretation and administration of the statutes easier for all parties. “The bill is revenue neutral in terms of recurring revenue. The change to the calculation of taxable income was mechanical and not substantive. Through the specified additions to and the subtractions from federal taxable income, taxpayers should arrive at the same taxable income number that would have been produced under prior law,” according to Deputy Commissioner Joe Garrett, one of the leaders of the effort.
The bill was a compromise product. For example, banks will now be required to pay estimated quarterly tax payments rather than one lump sum each year, tied to the due dates for the corporate income tax. On the other hand, members of the working group requested confirmation regarding the parties’ interpretation that the FIET statute did not conform with new IRC §163(j) or §965A, otherwise known as GILTI. As Deputy Commissioner Garrett points out, “the bill does not ‘decouple’ the FIET from those provisions. The fact that those provisions appear in the bill’s additions to and subtractions from federal taxable income is a codification of prior law, not a change.” The bill also clarifies that the new limitations on deductions for FDIC premiums are also not a part of the FIET statutes.
An ongoing issue between the ADOR and the financial institutions is the use of so-called “Captive REITs” in their organizational structures. It was commonly understood that a well-organized and maintained REIT could deduct the dividends it pays to its parent company while, on the other hand, the parent company could exclude or deduct those dividends from its income. However, the antiquated FIET statute literally required the REIT to be incorporated in Alabama in order to achieve this result -- a likely violation of the Commerce Clause. The taxpayers won at least a partial victory on the use of Captive REITs in the Ameris Bank case in the Alabama Tax Tribunal (see Ameris Bank v. Alabama Department of Revenue, Ala. Tax Tribunal Dkt. No. BIT. 16-255 (Final Order Feb. 9, 2017)). The working group was willing to concede the dividends received deduction on the parent company side in return for a five-year phase out of the deduction for Captive REITs, more certainty, and vastly enhanced administrability of the tax as a whole.
The co-authors of this alert were members of the ABA working group. If you have any questions regarding this SALT Alert, please contact the co-authors ([email protected]; [email protected]) or any other Alabama member of our firm’s SALT Practice Team.
Alabama Legislature Establishes Task Force to Thoroughly Study the Impact of TCJA on the State Corporate Income Tax
Partially due to the debate over FIETRA and its clarification that financial institutions are not subject to the new IRC §163(j) interest deduction limitations or IRC §951A, taxing certain foreign source income commonly referred to as “GILTI,” and a parallel debate over whether the Alabama corporate income tax should be de-coupled from these federal provisions, the Legislature also passed Senate Joint Resolution 87 and sent that to Gov. Ivey for approval. Her signature is expected.
SJR 87, sponsored by Sen. Dan Roberts and co-sponsored by the other 34 members of the Senate, would create a six-person task force consisting of three senators, appointed by President Pro Tem Del Marsh, and three members of the House of Representatives, appointed by Speaker of the House Mac McCutcheon, to be known as the Joint Legislative Task Force on the Tax Cuts and Jobs Act. The stated purpose of the task force is to:
Evaluate and analyze the effects of the Tax Cuts and Jobs Act on Alabama corporate income taxes including…. Research, compilation of information, and preparation of fiscal analyses of the effects of (TCJA) on [the] Alabama Corporate Income Tax. The fiscal analyses shall include the various deductions and adjustments that are made to federal taxable income for purposes of the Alabama corporate income tax.
The task force is directed to consult with the Legislative Services Agency, formerly known as the Legislative Fiscal Office (LFO), and with other governmental and private sector subject matter experts. The first meeting must be held before September 30, and the final report shall be delivered to the Legislature “not later than the 5th legislative day of the 2020 Regular Session.” We will keep our readers apprised of material developments relating to this much-needed task force.