STATE AND LOCAL TAXATION

June 2000

ALABAMA FRANCHISE TAX PROTECTIVE CLAIM FOR REFUND

By Elizabeth Knoll, CPA, Eisner & Lubin LLP

In March 1999, the U.S. Supreme Court ruled that the Alabama franchise tax discriminated against non-Alabama corporations and was therefore unconstitutional [South Central Bell Telephone Co. v. Alabama, 526 U.S. 160 (3/23/99)]. The franchise tax for domestic (Alabama) corporations was based on the par value of corporate stock, which could be set at relatively low values. Foreign (non-Alabama) corporations, however, were taxed on an apportioned net worth basis. Domestic corporations had also been subject to an intangible tax on their investments in corporate stock.

The U.S. Supreme Court remanded the case back to the Alabama Supreme Court, which ruled that the basis of the franchise tax on domestic corporations should be the same as for foreign corporations, namely the basis of assets used in Alabama.

The Alabama Legislature, with a favorable opinion from the Alabama Supreme Court, replaced the franchise tax and domestic share tax with a business privilege tax and a share tax on both foreign and domestic corporations. The change was prospective only, with an effective date of January 1, 2000. The legislature adjourned without providing for refunds or other relief for prior years.

In January, the Alabama Supreme Court remanded the case back to the trial court, which will take evidence and suggest options for relief. The Alabama Supreme Court will then have to schedule briefs from all interested parties. In the interim, Alabama is still instructing taxpayers to pay this unconstitutional tax until it resolves the "meaningful backward relief" issue. Alabama is enforcing this policy by threatening to revoke the charters of noncompliant taxpayers.

Action Required

Taxpayers should clearly designate any Alabama franchise tax payment as being paid under protest. Furthermore, taxpayers should consider filing a claim for refund for all open years. The Alabama statute of limitations generally is the later of three years from the date the return is filed or two years from the date the tax is paid.

Although Alabama initially encouraged taxpayers to apply for refunds, the state does not have an obligation to provide relief unless taxpayers have complied with the applicable refund statutes. Taxpayers should continuously monitor and aggressively pursue claims through the administrative process to ensure that the state handles the refund claim appropriately. *