In an unusual twist of legislative procedure, the Alabama legislature passed a joint resolution (SJR 4) vetoing an Alabama Department of Revenue (Department) regulation that disallowed a Business Privilege Tax (BPT) deduction for equity investments in subsidiaries. 

The saga of SJR 4 relates to AT&T Corp. v. Surtees, 953 So. 2d 1240 (Ala. Civ. App. 2006). In AT&T, the Alabama Court of Appeals held that the BPT deduction for investments in subsidiaries found in Ala. Code § 40-14A-23(g)(1) was facially unconstitutional under the Commerce Clause, because the deduction was limited to only those subsidiaries doing business in Alabama. The court did not order the deduction to be stricken, but rather remanded the case to the trial court to afford the Department an opportunity to offer a permissible justification for the discrimination. The parties ultimately settled before the court entered judgment on the remedy issue.

Following the resolution of the AT&T case, rather than broadening the deduction to  investments in all entities, the Department instead adopted a regulation (Ala. Admin. Code. r. 810-2-8-.08) on June 21, 2010, denying the deduction entirely. The Department’s regulation was in direct conflict with the statutory deduction and arguably resulted in multiple taxation of the same property. 

In response to the Department’s actions, the Alabama legislature’s administrative agency oversight panel unanimously vetoed the regulation on July 21, 2010. Under the Alabama Administrative Procedure Act, the regulation would be retroactively reinstated unless the legislature confirmed the veto through a joint resolution. On March 17, 2011, Governor Robert Bentley signed into law SJR 4, confirming the veto and putting the final nail in the coffin for the controversial regulation. 

It remains to be seen whether the legislature will take further action to correct the presently unconstitutional statute. Taxpayers owning subsidiaries not doing business in Alabama that have historically not qualified for the deduction should consider claiming it when filing BPT returns. We understand that although the Department has already deleted the line item on the 2011 BPT forms where the deduction was previously reported, the Department nevertheless intends to allow eligible taxpayers to claim the deduction following the passage of SJR 4.