The Alabama Senate adjourned sine die on Thursday, June 4, and the Alabama House of Representatives met for their last day on Thursday, June 11. Although the legislature passed a record-setting, $6 billion Education Trust Fund budget, the issue that pervaded the entire session was the always anemic General Fund budget, which funds almost all non–education-related activities of the state. Increased strains on that budget came from the loss of onetime revenue, the need for prison funding, increased state-employee healthcare and Medicaid costs, and the need to repay previous loans from certain rainy day funds.
The lawmakers passed a General Fund budget that would have made substantial cuts to many state agencies, but as promised, Governor Robert Bentley quickly vetoed it. The House then voted to override the veto, but the Senate had already adjourned. As a result, a special session must be called by the governor before the October 1 start of the next fiscal year.
Recall that Governor Bentley began the session by proposing a $541 million tax package, which sought to raise taxes on vehicle sales and leases, repeal a longstanding sales/use tax credit for financial institutions, increase taxes on municipal utilities, and adopt mandatory unitary combined reporting, among other things. A scaled-down revenue package was approved by the House Ways and Means General Fund Committee but was never considered by the full House in light of a strong antitax sentiment in both houses of the Legislature. Governor Bentley, Senate President Pro Tem Del Marsh, and Speaker of the House Mike Hubbard have indicated that they will work together to address the General Fund budget by consulting with the business community, legislators, and other stakeholders to find common ground.
Some believe that an additional $250 million to $500 million in revenue must be generated to adequately fund the General Fund agencies, while others believe reducing the size of government and reallocating existing funding is the appropriate path forward. A number of items will likely be on the table for discussion prior to the special session, including a range of tax increases, un-earmarking of state funds, transfers from the Education Trust Fund to the General Fund, a lottery, a compact with the Poarch Band of Creek Indians, and the legalization of gaming, among other things. It is anticipated that the special session will be called for either mid-August or early September.
The following discussion focuses on bills of statewide importance that either passed or were signed into law by the governor or that we expect to see again soon.
I. EDUCATION REFORM BILLS THAT PASSED AND WERE SIGNED INTO LAW
School Choice and Student Opportunity Act – Act 2015-3 (S.B. 45): This act authorizes the creation of public charter schools in Alabama. Public charter schools are public schools that are given flexibility in staffing, curriculum, and budget to allow for innovation and creativity at the school level. In exchange for that flexibility, public charter schools agree to great performance. Specifically, the law authorizes two types of public charter schools, conversion public charter schools and start-up public charter schools. Conversion public charter schools are traditional public schools that are converted to public charter schools by the local school system. For conversion charters, students currently enrolled in the school are given an enrollment preference. Start-up public charter schools are new public schools. There can be no more than 10 start-up public charter schools in a fiscal year.
All local school boards can authorize public charter schools. In addition to local school boards, the Alabama Public Charter School Commission can hear appeals from applicants who were denied by the local school system.
Enhancements to Alabama Accountability Act – Act 2015-434 (S.B. 71): This act makes a number of changes to Alabama's tax-credit scholarship program, created by the Alabama Accountability Act of 2013. Act 2015-434 increases the $7,500 cap on individual donations to $50,000 and allows tax credits generated by donations made by pass-through entities, such as S corporations and LLCs, to flow-through to the entity's owners. Under prior law, tax credits were available only to individual and C corporation donors. The act increases the annual amount of tax credits available from $25 million to $30 million. All these changes are retroactive to January 1, 2015. Act 2015-434 also allows taxpayers to make tax-creditable donations in 2015 but reserve credits against the unused portion of the 2014 credit allocation to offset their 2014 income tax liability. Finally, the act restricts a donor's ability to earmark a donation for use at a particular school or for a particular student or group of students.
In addition to the changes to the donor provisions of the law, Act 2015-434 enhances the transparency and accountability of the tax-credit scholarship program by requiring additional reporting by scholarship-granting organizations, giving the Alabama Department of Revenue authority to audit scholarship-granting organizations, and requiring all reports filed by scholarship-granting organizations with the Alabama Department of Revenue to be posted on the department's website.
Act to Establish a State Board of Postsecondary Education – Act 2015-125 (S.B. 191): This act establishes a new independent Alabama Community College System in lieu of the Department of Postsecondary Education and transfers the governance of the system to a newly appointed board of trustees. Under previous law, the system was governed by the elected State Board of Education.
II. GENERAL BUSINESS AND STATE GOVERNMENT BILLS
A. Bills That Passed and Were Signed Into Law
Innovator Liability Reform – Act 2015-106 (S.B. 80): This act essentially overturns the Alabama Supreme Court's decision in Wyeth Inc. v. Weeks, No. 1101397, which adopted a new theory of tort liability called "innovator liability." Under the innovator-liability theory, a brand-name manufacturer can be held liable—seemingly indefinitely—for physical injuries resulting from a plaintiff's use of a generic product made and sold by a different company. This legislation restored long-standing product-liability doctrine to provide that a defendant must have a relationship with the product (e.g., must have manufactured or designed it) to be held liable for damages caused by the product.
Open Meetings Act – Act 2015-340 (S.B. 21): This act is intended to address a loophole in Alabama's Open Meetings Act that allowed councils, commissions, and other public bodies to circumvent a requirement to conduct business in public by holding a series of small meetings with less than a quorum of members.
Prison Reform – Act 2015-185 (S.B. 67): This Act overhauls the state's crowded prison system by instituting changes to sentencing and probation standards. The goal of the act is to ease crowding in state prisons, which currently exceeds its capacity by approximately 100 percent.
State Agency Fees – Act 2015-441 (S.B. 216): This act allows state agencies to implement fee increases every five years to reflect changes in the Consumer Price Index. These increases are capped and may be disapproved by the Legislature's Joint Committee on Agency Regulation Review.
B. Bills That Failed But We Will Likely See Again
Gulf State Park Financing Authority (H.B. 586): This bill would have allowed the state to borrow up to $50 million for a lodge and conference center at Gulf State Park. This money would be used in conjunction with funds made available to the state as a result of the BP oil spill to replace the old lodge and hotel, which was destroyed by Hurricane Ivan in 2004. This is a priority for the Bentley Administration, so it may be considered again during the special session.
Alabama Ahead Act (S.B. 1): This bill would have aided local school systems in the transition from physical to digital textbooks by providing $110 million in funding for infrastructure and devices.
III. INCOME TAXES/ECONOMIC DEVELOPMENT INCENTIVES
A. Bills That Passed and Were Signed Into Law
Alabama Jobs Act of 2015 – Act 2015-27 (H.B. 58): This act establishes a jobs tax credit, putting Alabama in line with its neighboring states, and creates a partially transferable capital-investment credit to replace the existing capital credit. H.B. 58 was the second of a five-bill package introduced this session that constitutes what has been described as the most significant overhaul of Alabama economic development incentives since Mercedes-Benz came to the state.
The act creates two distinct credits, which are available to qualifying projects on a discretionary basis. The first is a jobs credit in the amount of up to 3 percent of the previous year's annual wages of eligible employees. The second is a capital-investment credit in the amount of up to 1.5 percent of qualified capital investment. Each credit is available for up to the first 10 years of a project. Qualifying projects can claim one or both of the credits if both are offered to the project by the governor upon the recommendation of the Department of Commerce.
The jobs credit may be claimed against the company's utility taxes paid and includes a five-year carry-forward of unused credit. Alternatively, the company may elect to have the credit paid out of utility taxes paid to the state generally (without regard to how much utility tax the company has actually incurred and paid). The capital-investment credit can be claimed against the income tax (or as a credit toward estimated payments of the tax), financial institution excise tax, insurance premium tax (or as a credit toward estimated payments of the tax), utility tax, or some combination thereof.
Importantly, the investment credit is transferable for the first three years of a project. The credit must be sold at a minimum of 85 percent of face value. Unlike Alabama's historic tax credit, the transferee is free of recapture obligations unless the transfer was fraudulent. The credits created by the act replace the existing income-tax capital credit, the Made in Alabama Act of 2012 credits, and the little-known tariff credit. Companies that wish to seek the existing capital credit can file Form INT-1 by January 2, 2016 (within six months of the effective date of the act), to preserve their right to that credit. However, a project electing to proceed under the existing capital credit must forgo incentives under the act.
Alabama Veterans and Targeted Counties Act – Act 2015-41 (H.B. 57): This act provides enhanced incentives under the Alabama Jobs Act for qualifying projects located in rural counties or that created jobs for veterans. With respect to projects located in counties with less than 25,000 people, the jobs credit is increased to 4 percent of the previous year's wages paid to eligible employees and the annual investment credit period is extended to 15 years if the project will provide goods or services to another qualifying activity within 50 miles of the project site. Importantly, the governor may, at his discretion, provide these enhanced incentives to up to two projects per year that are not located in a qualifying rural county. With respect to projects employing veterans who received an honorable or general discharge that accounted for at least 12 percent of the project's eligible employees, 0.5 percent of the wages paid to such veterans is eligible for an additional job credit. Finally, the act also establishes the Accelerate Alabama Fund, which can fund a loan in an amount up to $2 million per project to provide additional financing for projects that will be located in targeted counties.
ABLE (Achieving a Better Life Experience) Act – Act 2015-442 (S.B. 226): Allows parents or guardians of certain developmentally disabled children to establish a savings account the income of which is exempt now from both federal and Alabama income tax. It parallels recent federal legislation that created the same exemption from federal income tax.
B. Bills That Failed But We Will Likely See Again
Alabama Small Business Act (H.B. 414 ): Would create new tax credit equal to 30 percent of the qualified investment in certain small-business and start-up companies (also called the "angel investor act").
Alabama Innovation Act (H.B. 304 ): Would create research and development income and financial institution excise-tax credits modeled after the federal R&D credit, but with an enhanced credit if the research is conducted by Alabama-based academic or nonprofit research institutions.
Alabama Renewal Act (H.B. 416): Would create the Growing Alabama Credit for donations of cash and certain property to approved economic-development organizations in Alabama. The credit could only offset 50 percent of the donor's Alabama income-tax liability, and any unused credit could be carried forward for up to 10 years. The aggregate credit was capped in the amount of $5 million for 2016, $10 million for 2017, and $15 million for 2018 and each tax year thereafter. The bill would also establish a new income-tax credit that could be awarded to certain users based on the increased cargo volume through any publicly owned facility located within the Port of Mobile.
Simplified Flat Tax Act of 2015 (S.B. 409): This bill proposed a constitutional amendment to repeal the existing corporate and personal income taxes (and the federal income tax deduction) and to enact a flat tax of 2.75 percent of an individual's federal adjusted gross income and 4.59 percent of a corporation's federal taxable income, effective January 1, 2017. An outgrowth of the death of this bill is the Simplified Flat Tax Study Commission, summarized above.
Extension of Alabama Historic Tax Credit (H.B. 214): The Alabama HTC program currently authorizes $20 million of tax credits for three years and is scheduled to sunset in 2016. This bill would extend the program by authorizing seven additional allocations of $20 million through 2022, and likewise would extend the sunset date through May 16, 2023.
Extension of Alabama New Markets Tax Credit (S.B. 36 and S.B. 163): These bills would authorize the governor, by executive order, to establish an additional allocation of Qualified Equity Investment authority in an amount of up to $60 million under the Alabama New Markets Development program, which is the Alabama counterpart to the federal New Markets Tax Credit program. S.B. 36 would also allow qualified community-development entities that are based in Alabama, but have not received an allocation of federal credits, to qualify for this additional allocation.
Mandatory Unitary Combined Reporting (MUCR) (H.B. 142): As part of Governor Bentley's eight-bill revenue package, Rep. Mike Hill (R-Columbiana) introduced a MUCR proposal that would be immediately effective for tax years beginning after December 31, 2014. This bill would repeal the existing consolidated-return filing option for corporate income-tax payers and require a taxpayer engaged in a unitary business with one or more other corporations or flow-through entities to file a combined report, which includes the income and apportionment factors of all the "members of the unitary business and such other information as required by the Commissioner."
The bill essentially adopts the Multistate Tax Commission's (MTC) Proposed Model Statute of Combined Reporting, except that it does not provide any common ownership threshold in determining whether an entity is included in the unitary group. Almost all other states that impose MUCR (and the MTC's model regulations) require at least 50 percent common ownership. Unlike prior MUCR proposals, this bill restricts the use of tax credits, net operating losses (NOLs), and other post-apportionment deductions to the member that generated the attribute. In other words, and despite the label "combined" report, all NOLs and other enumerated tax attributes can be used only by the individual member that generated the attribute and cannot be used to offset the income or liability of other members of the unitary group.
The bill repeals neither (a) Alabama's add-back statute, which disallows certain intangible and interest expenses incurred between related parties that would severely increase the risk of double taxation on these transactions, nor (b) the restrictions on intercompany transfer pricing that largely parallel I.R.C. section 482. A second MUCR proposal was also introduced as H.B. 455. Neither made it out of Committee.
Business Privilege Tax (H.B. 581): This bill would eliminate the 0.00025 Business Privilege Tax rate and, instead, base the amount on the taxpayer's net worth. In addition, it would raise the maximum amount due from $15,000 to $22,000 for the state's highest-net-worth businesses. It would also eliminate the tax for businesses that had less than $10,000 in Alabama taxable net worth. This bill was included in the House of Representatives' revenue plan and would have netted the General Fund $39 million.
Cigarette Tax Increase (H.B. 572): Also part of the House revenue plan, this bill would increase the tax on cigarettes from $0.425 a pack to $0.675 a pack, which would have increased General Fund revenue by $66 million.
Factor Presence Nexus (H.B. 466/S.B. 497): These bills, which would be retroactively effective to tax years beginning after December 31, 2014, would establish broad "factor presence" nexus standards for out-of-state taxpayers with business activities in Alabama. Under the bill, a nonresident individual or business entity would be deemed to have a substantial nexus with Alabama, and thus an Alabama business privilege tax and income tax or financial institution excise tax (FIET) filing obligation, if in any tax period, the taxpayer's property, payroll, or sales in Alabama exceed any of the following thresholds: $50,000 of property; $50,000 of payroll; $500,000 of sales; or 25 percent of total property, total payroll, or total sales. The bill would also provide that pass-through entities (e.g., partnerships, LLCs, S corporations, and trusts) shall determine their threshold amounts at the entity level, but if the property, payroll, or sales of an entity in Alabama exceed the nexus threshold, the owners of the pass-through entity would be automatically subject to income tax or FIET on their allocable share of the entity's Alabama income.
Notably, the bill also provides that if the aggregate property, payroll, or sales of the entities of any unitary business meet one of the nexus thresholds, then each entity that's part of that unitary business would be deemed to have nexus and would be required to file and pay Alabama income tax or FIET. This bill was based on a model statute drafted by the Multistate Tax Commission, of which Alabama is a member. The House Ways and Means Education Committee voted to strip out the broad unitary business language in S.B. 497 after it passed the Senate.
CAPCO Reauthorization (H.B. 368): This bill would rename the CAPCO program the Alabama Small Business Investment Act and provide for an additional allocation of insurance premium tax credits to ASBICs in an amount equal to 50 percent of the total pool of tax credits that have already been allocated under current law.
HSA Conformity Bills (S.B. 9, H.B. 70 and 215): This bill would conform Alabama income tax law to its federal counterpart in the area of health savings accounts (HSAs).
IV. TRANSACTIONAL TAXES
A. Bills That Passed and Were Signed Into Law
Alabama Reinvestment and Abatements Act – Act No. 2015-24 (H.B. 59): This act expands the list of projects that may qualify for sales, property, and mortgage recording tax abatements under the Tax Incentive Reform Act of 1992 (TIRA) and provides several significant enhancements to these incentives. New industries that can qualify for these incentives include aircraft support, flight training, rail transportation, motion picture and video production, record production, wireless and satellite telecommunications, Internet publishing and broadcasting, financial transaction processing, and logistic consulting services. The act also removes the logistic and additional job requirement that previously applied to warehousing and storage facilities and clarifies that the abatements can be granted to one or more users of a co-location data-processing center.
In addition, the act also provides certain abatements for any qualifying project that proposes to invest at least $2 million "as part of any addition, expansion, improvement, renovation, re-opening, or rehabilitation of a facility, or replacement of any existing equipment or tangible personal property," provided that a project agreement has not been previously entered into with the state. In addition to other qualifying costs under TIRA, capitalized repairs, rebuilds, maintenance, and replacement equipment can also qualify for sales tax abatements. These projects are also eligible for a refund of utility taxes for up to 10 years, equal to the amount of taxes paid in excess of the average three-year amount paid prior to placing the project in service.
Voluntary Non-Nexus Use Tax Remittance Bill – Act 2015-448 (S.B. 437): The bill essentially replicates the current sales and use tax code, except that it establishes a single tax rate (8 percent) applicable to non-nexus sellers and a single, simplified tax base. It also provides a 2 percent vendor allowance for non-nexus sellers collecting/remitting under the program.
B. Bills That Failed But We Will Likely See Again
Reliance on ADOR's Website for Correct Local Tax Rate (S.B. 322): Beginning March 1, 2016, this bill would relieve taxpayers of any liability for collecting and charging the incorrect sales, use, rental, or lodging tax rate based on the rate published by the ADOR's website, including relief from any penalties or interest as under current law. The bill also provides additional procedures for local governments to notify the ADOR of rate changes and provides that such rate changes do not take effect until the first day of the third month following the ADOR's receipt of proper notification. In addition, this bill also clarifies that the ADOR shall not charge any city or county a fee for the cost of filing, payment processing, and remittance services provided through ONE SPOT.
V. AD VALOREM PROPERTY TAXES
Alabama Reinvestment and Abatements Act – Act 2015-24 (H.B. 59): As mentioned above, this act includes several significant enhancements to the Tax Incentive Reform Act of 1992. With respect to property taxes, the maximum property-tax abatement period is extended from 10 to 20 years but requires that each governing body approve the additional 10-year abatement for their respective taxes. Further, for "any addition, expansion, improvement, renovation, re-opening, or rehabilitation of a facility, or replacement of any existing equipment or tangible personal property," the amount of the available property-tax abatement is limited to the excess amount owed prior to placing the project in service.
VI. MISCELLANEOUS TAXES/PROCEDURAL MATTERS
A. Bills That Passed and Were Signed Into Law
Technical Corrections to Alabama Limited Liability Company Law of 2014 – Act 2015-165 (H.B. 54): This act provides for several technical corrections to the Alabama Limited Liability Company Law of 2014 (Act 2014-144), which substantially amended Alabama's LLC laws (including allowing the formation of and recognizing series LLCs) and was generally effective January 1, 2015. Act 2014-144 also updated the federal conformity provision by providing that LLCs are treated as partnerships for state tax purposes unless classified otherwise for federal tax purposes. While the intent was to align the tax classification of LLCs with relatively recent changes to the U.S. Treasury Department's check-the-box regulations in the area of single-member LLCs and excise and payroll taxes, the deletion of the word "income" created uncertainty with respect to the tax classification of SMLLCs for other state taxes (particularly sales, use, and rental taxes). Thus, the act removes this uncertainty by changing the tax classification language back to the law in effect prior to Act 2014-144, i.e., federal "income" tax purpose.
B. Bills That Failed But We Will Likely See Again
Tax Reportable Transactions Disclosure (H.B. 467): This bill would require disclosure of a defined list of reportable transactions and provide for several new penalties related to this requirement, including penalties for the failure to file the required disclosures, understatement of tax resulting from a reportable transaction, and engaging in certain tax shelters. In addition to adopting the federal definitions of "listed transaction" and "reportable transaction" under IRC § 6011 and the related Treasury Department regulations, the bill also allows the commissioner to specifically identify certain transactions as "listed" or "reportable" through notice, regulation, or other form of official ADOR guidance.
Contractor's Gross Receipts Tax Exemptions for Municipal and County Road/Bridge Projects Repealed (S.B. 475): This bill would remove the existing exemption for municipal and county road and bridge projects and direct a substantial portion of those funds to the state road and bridge fund.
Note: J. Davis Stewart III, Joshua O. Blades, Bruce P. Ely, James E. Long Jr., and J. Sims Rhyne III contributed to this report. The authors and other members of Bradley Arant Boult Cummings LLP were involved in some of the items of legislation discussed herein.
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