The Alabama Tax Tribunal held that a taxpayer’s payments to an affiliated entity for employee services were not included in the payroll factor of the apportionment formula for business-income tax purposes because the payments were not made directly to the taxpayer’s employees.
During the years at issue, an Alabama regulation stated that only amounts paid directly to employees were included in the payroll factor. Payments to independent contractors or persons not properly classified as an employee were excluded from the payroll factor. Ala. Admin. Code r. 810-27-4.13(a)(3) (repealed in 2016). Thus, the taxpayer apportioned its income to Alabama with no payroll factor because it had no employees in Alabama or elsewhere. The Department of Revenue, however, adjusted the taxpayers reported payroll factor to include in both the numerator (for Alabama services) and denominator (for total services) the payments to the affiliated entity for the employee services based on prior Administrative Law Division rulings.
Even though prior rulings of the Administrative Law Division (the Tax Tribunal’s predecessor) held that the regulation impermissibly enlarged the statute, the Tax Tribunal concluded that it was not required to follow the rulings because the Legislature did not reference the Administrative Law Division or expressly state that the Tax Tribunal was bound by the Administrative Law Division’s prior decisions. Rather, the Tax Tribunal was established as independent from the Department of Revenue and the Administrative Law Division. Thus, based on the Tax Tribunal review, the language in the regulations was consistent with the statutory provisions. The Tax Tribunal looked to the statutory definition of “compensation,” which was defined as “wages, salaries, commissions any other form of remuneration paid to employees for personal services.” Because the definition stated that compensation is paid “to employees,” the regulation’s language clarifying that payments must be made directly to employees to be considered “compensation” was consistent with the statute. Therefore, the taxpayer’s payments for employee services to its affiliated entity were properly excluded from the payroll factor.