SALT Blawg – State and Local Tax
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Chamberlain Hrdlicka Blawgs
By Paul Masters
Alabama House Bill 434, signed by Governor Robert Bentley, enacts three significant changes to Alabama’s apportionment provisions for tax years beginning on or after December 31, 2010:
* Double weight the sales factor for determining apportionment to 50%;
* Change from focusing on the location of income production for apportionment purposes to the taxpayer’s market for the sale for transactions other than tangible personal property; and
* Adoption of a “throwout” rule (similar to that recently rejected by New Jersey), by which a transaction that cannot be assigned to a particular state is removed from the denominator (thereby increasing the factor for apportionment to Alabama).
As to the change to the sales factor apportionment, this change reflects changes being considered by the Multistate Tax Compact. As of December 31, 2010, Alabama now apportions based on the following factors: (i) 25% for property, (ii) 25% for payroll, and 50% for sales.
Regarding the sourcing of sales, the prior version of the rule was more similar to that of Texas, in which one looks to source sales to where the income-producing activity takes place. Tex. Admin. Code § 3.591(e)(26). Alabama now sources services based on the taxpayer’s market for the sale, thus receipts from services are apportioned to Alabama if the service is delivered to Alabama, as adjusted for delivery to multiple locations. Similarly, where a person licenses intangible property for use in Alabama, such transaction would be Alabama-sourced. If the state cannot be fairly determined using the market-source rules, the taxpayer must reasonably approximate such sourcing.
Finally, if a taxpayer is unable to assign receipts based on the market-source rules, and they cannot be reasonably approximated, Alabama employs the so-called “throwout rule” by which the receipts are excluded from the denominator if the state of assignment cannot be determined or reasonably approximated. This was a controversial rule and challenged in New Jersey, as by artificially reducing the denominator it leaves the numerator unchanged, and the Alabama sales factor increases. One would expect for taxpayers to challenge the Alabama throwout rule based on the U.S. Constitution’s Commerce Clause, the Due Process Clause, the Supremacy Clause and the Equal Protection Clause. The New Jersey throwout rule has been challenged, for which New Jersey Supreme Court recently heard oral argument, with the lower courts in the cases of Whirlpool Properties, Inc. and Pfizer, Inc., in which the throwout rule was found to be constitutional.