While, unfortunately, there is not a crystal clear answer to this question at this time, there is a good chance that the collection of the tax is invalid. This controversial tax has been the subject of at least seven lawsuits challenging its validity over the past two decades, so it should come as no surprise that it is once again making headlines. A lawsuit filed this year on behalf of taxpayers Jessica Edwards and Jane T. Judge (Edwards v. Jefferson Co. Comm’n) once again challenges the validity of the tax. The basis of this most recent challenge relates to whether the tax was repealed by the Alabama Legislature back in 1999 and, thus, collected without legal authority since that time.
If the Alabama courts found the collection of the occupational license tax to be invalid, the fallout for Jefferson County could be horrific. Just a few of the problems include $400 million or more in refunds claims, possible inability to pay interest on county bonds financing a previous expansion of the Jefferson County Convention Center Complex, and the inability to issue additional tax-financed bonds to help finance projects recently discussed by our local politicians—such as a 40,000 arena/convention facility or an entertainment district.
Why is this tax so controversial and why has Jefferson County once again been hauled into court over its collection? The starting point of the controversy is Act No. 406 passed by the Alabama Legislature during its 1967 regular session (the “1967 Act”). This Act authorized all counties with a population greater than 500,000:
“[t]o levy a license or privilege tax upon any person for engaging in any business for which he is not required by law to pay license or privilege tax to either the State of Alabama or the county by any of the following Article 1, Chapter 20, Title 51; Sections 176, 177, 178, 180, 182, 183, 184, 186, 429, and 826 in Title 51 of the Code of Alabama of 1940 as amended.”
The statutes referenced in the above quote impose general licensing fees upon businesses and professionals as well as license fees and taxes upon utilities, financial institutions, and insurers. Accordingly, the 1967 Act authorized qualified counties to impose an occupational license tax on those persons who do not pay a state or county business license. This statutory language is consistent with the Act’s stated purpose of “equaliz[ing] the burden of taxation” as among those who pay state and county business licenses and those who do not.
It was not until 1987 that Jefferson County enacted Ordinance No. 1120 imposing a license tax on ½ of 1% of the gross receipts earned within Jefferson County, Alabama by those persons engaging in a “vocation, occupation, calling or profession.” While the language of the ordinance specifically exempts the same persons as the 1967 Act, Jefferson County has interpreted the exemptions granted in Ordinance No. 1120 more broadly. It is these numerous exemptions that have made Jefferson County’s occupational license tax so controversial.
A variety of lawsuits have sought to invalidate Ordinance No. 1120 on grounds that it violates the Equal Protection Clause of the U.S. Constitution due to its exempting certain classes of individuals from taxation. However, these equal protection claims were finally decided in favor of Jefferson County in the Alabama Supreme Court’s June 22, 2001 decision in Jefferson County v. Richards, 805 So.2d 690 (Ala. 2001), cert denied 534 U.S. 1019 (2001). The U.S. Supreme Court refused to hear an appeal of this case. Thus, it is settled (rightly or wrongly) that Ordinance No. 1120 does not violate the Equal Protection Clause of the U.S. Constitution.
Prior to the Alabama Supreme Court’s decision in Richards, the Alabama Legislature passed a new occupational license tax statute, Act No. 99-406, in response to a Jefferson County Circuit Court order requesting new legislation which did not include any exemptions. This Act purported to repeal the 1967 Act and authorized a new occupational tax for qualified counties. Pursuant to the Court’s order, the legislation did not contain any exemptions. However, Act 99-406 was never enforced by the County due to fears that it violated provisions of the Alabama Constitution and was not passed in accordance with the appropriate legislative procedures.
Act 99-406 had other problems as well. Under the 1967 Act, all of the tax proceeds went to the Jefferson County General Fund. In fact, the tax accounted for 25% or more of the General Fund. The new Act required that a large portion of the proceeds of the occupational license tax be allocated to a variety of non-public entities. The County Commission was justifiably upset with the Alabama Legislature and threatened a legal challenge to the new act. The Alabama Legislature responded harshly to the County Commission’s threat by passing local legislation, Act No. 99-669, which purported to repeal the 1967 Act.
The legislature’s attempt to repeal authorization for the occupational tax was held invalid by the Jefferson County Circuit Court in Jefferson Co. Employees’ Ass’n v. Jefferson Co., Case No. 00-0297, Jefferson Co. Cir. Ct. (March 8, 2000). The Circuit Court held Act No. 99-669 violated sections of the Alabama Constitution relating to how the legislation is passed. This Act was subject to certain special approval rules contained in the Alabama Constitution, because the legislation was not mentioned in the Governor’s proclamation convening the special session. According to the Court, the repeal legislation neither received the needed votes under this special rule nor did it receive enough votes in the House to pass in a general session. This ruling was not appealed.
Jefferson County has previously stated in the The Birmingham News (click here for article) that the court’s decision in Jefferson Co. Employees’ Ass’n held the repealer Act to be invalid and that it will seek dismissal of the plaintiffs’ case on that basis. It appears that Jefferson County is relying on the doctrine of res judicata (or claim preclusion) as its primary defense in Edwards v. Jefferson Co. Comm’n. This doctrine holds that a judicial decision is binding as between the litigating parties and acts as a bar to future litigation involving the same claims. While Jefferson County and its governing Commission were parties in the Jefferson Co. Employees’ Ass’n case, Ms. Edwards and Ms. Judge were not. Under Alabama case law, the only way the doctrine of res judicata can act to bar the current plaintiffs from pursuing their claims is if: (1) there was some very close connection (i.e., privity) between the current plaintiffs and a party to the previous case or (2) the interests of the current plaintiffs are so closely aligned with the interests of a party to the previous case that the party to the previous case could be deemed the “virtual representative” of the current plaintiffs.
If it is determined that the current plaintiffs belonged to the Jefferson County Employees Association in 2000, res judicata will likely apply to bar their lawsuit due to their close relationship with—or privity with—the Association. At this point, not enough is known about the plaintiffs to determine whether they belonged to this Association or had a very close connection to one of the other parties in the Jefferson Co. Employees’ Ass’n case. So, at this time, res judicata does not appear to bar the current plaintiff’s claims on the basis of a close relationship between the parties. Accordingly, the remaining basis for the application of res judicata is the theory of virtual representation.
Assuming the current plaintiffs were not members of the Jefferson County Employees Association, it seems quite a stretch to conclude that the Association could stand as their virtual representative. The only thing the parties apparently have in common is that they both paid the occupational license tax. Had the Jefferson County Employees Association prevailed in their previous lawsuit, the current plaintiffs would not have directly received a refund. They would have had to pursue their own refund claims against the County. Furthermore, there is no indication that the current plaintiffs were given any notice regarding the prior case and that case did not involve a class action that purported to represent all payers of the Jefferson County occupational license tax. The Alabama Supreme Court ruled in Burdeshaw v. White, 585 So. 2d 842 (Ala. 1991), that a taxpayer cannot serve as the virtual representative of another taxpayer in a subsequent lawsuit when the subsequent plaintiff did not participate in the previous action and the previous action did not involve a class action determination that the taxpayer is an adequate representative of a class of which the subsequent plaintiff is a member. Accordingly, it appears that Jefferson County is the only other likely candidate for possible virtual representative of the current taxpayers.
One could make the argument that Jefferson County, acting in its official capacity, represented all of its residents in the adjudication of the Jefferson Co. Employees’ Ass’n. However, neither the Alabama courts nor the U.S. Supreme Court has held that public bodies or officials are always sufficient virtual representatives for purposes of res judicata. In fact, the U.S. Supreme Court specifically refrained from addressing this question in Richards v. Jefferson Co., 517 U.S. 793 (1996), a case that involved Jefferson County’s occupational license tax. Also, the Alabama courts have not specified any circumstances whereby a county government should be deemed to be the virtual representative of a taxpayer in a subsequent action. Jefferson County’s interests in Jefferson Co. Employees’ Ass’n—having the repeal struck down—are adverse to the interests of the plaintiffs in the current case—having the repeal recognized as valid. This makes a strong case not permitting Jefferson County to serve as the virtual representative of the current plaintiffs in Jefferson Co. Employees’ Ass’n.
Given the current plaintiffs’ lack of direct participation, lack of potential direct benefit, and adverse interests to Jefferson County, it does not seem “fair” to preclude the current plaintiffs from challenging the occupational license tax based on the County’s participation in Jefferson Co. Employees’ Ass’n. From a practical standpoint, it seems wise to place limits on a taxpayer’s ability to challenge tax statutes. However, the best way to handle such multiple taxpayer challenges is for the courts to simply dispose of such cases by applying established precedents (i.e., apply the doctrine of stare decisis), rather than use res judicata to preclude such lawsuits from being filed. Clearly, res judicata should not be applied in all taxpayer challenges. While reasonable persons (and attorneys) may disagree, it seems that it would be virtually impossible to ever overturn an incorrectly decided tax case (or any case) involving a state or local governmental entity if such entity was always deemed to virtually represent their constituents for purposes of res judicata.
If the Jefferson County Circuit Court does not bar the current plaintiffs from bringing their case, it likely will examine the passage of the repealer Act No. 99-669 in light of Jefferson Civic Center Authority v. City of Birmingham, 912 So. 2d 204 (Ala. 2005). The issue in this case was whether certain legislation met the requirements in the Alabama Constitution for passage of legislation. The Alabama Supreme Court deemed this issue a political question and refused to rule on it—noting that the Legislature has the discretion to determine under what conditions legislation is considered to pass. Accordingly, this 2005 ruling may call into question the Jefferson County Circuit Court’s decision in Jefferson Co. Employees’ Ass’n that the repealer Act No. 99-669 was not passed in accordance with constitutional standards. The Circuit Court may apply Jefferson Civic Center Authority and determine that it must recognize as valid the Legislature’s passage of the repealer Act.
As you can see, whether or not the Jefferson County occupational license tax is being validly collected is a question that is not easily answered. Based on the little I know at this point about the most recent case, Jefferson County has legitimate cause for worry. However, I know better than to predict the results of litigation. Despite the uncertainty, if I were an employee currently paying the Jefferson County occupational tax, I would seriously consider filing a refund claim with the County. I will be following this case and will submit updates and further thoughts. You can bet that the final word in this case will come from the Alabama Supreme Court.
Russell M. Cunningham, IV
Cunningham Firm, LLC