My last blog discussed how the Jefferson County local delegation and a few other key legislators seemed to accomplish the impossible by overcoming their infighting and getting new occupational tax legislation — Act 2009-811 — passed. Given that the validity of the proposed legislation was questioned from the very beginning, a legitimate question arises: “Did the Legislators actually accomplish anything?” Unfortunately, the likely answer to that question is “no” with respect to the occupational tax. The accountability legislation that passed was long overdue and rightfully deserves praise. Act 2009-811, however, appears to be fraught with legal issues that may not withstand challenge in the courtroom (a challenge is actually pending — Weissman v Jefferson County, CV-2009-904022, Jefferson County, Alabama Circuit Court — and it will be discussed in a later blog). The following paragraphs briefly explain the legislation and its problems.
A. Summary of the 2009 Act
1. Repeal of the Repeal; Reenact the 1967 Act
Act 2009-811 (the “2009 Act”) retroactively repeals Act 1999-669, which itself repealed the Act 1967-406 (the “1967 Act”). The 1967 Act authorized Jefferson County to levy a business license and an occupational license tax. Accordingly, Jefferson County was collecting a business license and an occupational tax without legal authority. The unlawful collection of occupational taxes after the enactment of Act 1999-669 was the subject of a class action refund lawsuit that was lost by the County in January, 2009 (see my earlier blog for discussion of this case). The 2009 Act purports to retroactively revive the 1967 Act. It explicitly validates the collection of the business license and occupational tax over the last 10 years and validates all actions taken by the county in collecting these taxes. While not explicitly stated, the retroactive revival provisions of this legislation are clearly intended to render moot any refund claims based on the repeal of the business license and occupational taxes.
2. Collection of the “Old” Tax Prior to January 1, 2010
The 2009 Act allows for the collection of the business license and occupational taxes as they existed under the 1967 Act until December 31, 2009. Thus, the tax rate of 0.5% and other provisions of the 1967 Act continue to apply. However, the 1967 Act was modified to exclude any of the exemptions provided for under that Act for persons that pay license fees to the state. Accordingly, licensed professionals such as doctors, lawyers, real estate brokers, etc. became responsible for the business license and occupational taxes under the old law for the period prior to January 1, 2010.
3. Collection of the “New” Tax After January 1, 2010
Starting January 1, 2010, the Jefferson County Commission began collecting the new business license and occupational tax authorized by the 2009 Act. The new rate is 0.45%, and the tax base is “compensation, excluding benefits, or net income before taxes, which is less, of business conducted in the county.” No exemptions exist for persons paying state license fees. While the 2009 Act does not state that the 1967 Act is repealed as of January 1, 2010, it does state that after that date “the county governing body shall have no authority to levy an occupational tax under [the 1967 Act].”
4. Referendum on the Occupational Tax
On the date of the primary election in June, 2012, a referendum will be held on retaining or eliminating the Jefferson County occupational tax authorized by the 2009 Act. If a majority of county residents vote for the tax, it shall be retained in its current form. If a majority of county residents vote against retaining the tax, it shall be phased out over a five-year period at 20% per year commencing on October 1, 2012.
B. Problems with the 2009 Act
As discussed above, the 2009 Act has many potential problems, some of which may be fatal flaws. The following are a few issues I see with the 2009 Act that possibly have an impact on its validity:
1. Retroactive Taxation
The retroactive authorization of the invalid business license and occupational taxes smacks of retroactive taxation. Retroactive taxation is frowned upon by the law and, depending on the circumstances, can constitute a violation of the Due Process Clause of the United States Constitution. The law surrounding unconstitutional retroactive taxation is rather unclear.
The United States Supreme Court’s last pronouncement on the subject, United States v. Carlson, 512 U.S. (1994), held that retroactive tax legislation is permissible “[p]rovided that the retroactive application … is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches.” Carlton involved a retroactive limitation of an estate tax deduction for stock sold to an Employee Stock Ownership Plan (“ESOP”). The deduction in question was enacted in 1986 and the retroactive limitation on the deduction was enacted in 1987. In holding that the retroactive legislation did not violate the Due Process Clause, the Court relied upon the fact that (i) Congress’s purpose was to correct an error in the original legislation and, thus, its actions were not illegitimate or arbitrary and (ii) Congress acted quickly so as not to have an extended period of retroactivity.
Lawyers have widely differing opinions on the Carlton case and the constitutionality of retroactive taxation. Even the Supreme Court had a hard time agreeing on that case — it was a 5-4 decision, with O’Connor concurring in judgment by separate opinion and Scalia and Thomas concurring in judgment and issuing a joint separate opinion. O’Connor and the majority would find the period of retroactivity here — and the time it took the Alabama Legislature to remedy the invalid legislation —troubling to the point of possibly finding a violation of Due Process. Scalia and Thomas would not find a problem with the legislation, because they don’t believe the Due Process Clause confers any substantive rights — only process. Until a recent Alabama Supreme Court decision connected to the occupational tax controversy (subject of yet another blog), Jefferson County Commission v. Edwards, No. 1090517 (Ala. May 14, 2010), I would have said that it would be very difficult to predict whether the Alabama Supreme Court would find a ten-year period of retroactive taxation to violate the Due Process Clause. This recent decision found the 2009 Act’s retroactive taxation to be permissible. However, I still feel the U.S. Supreme Court would likely have a problem with the retroactivity in this case.
2. Failure to Properly Reenact the 1967 Act
It appears that the legislature’s attempt to reenact the 1967 Act it repealed in 1999 falls short of properly reenacting that Act. The retroactive revival of the 1967 Act is discussed above. A retroactive revival is in essence a reenactment. The preamble of the 2009 Act is clear that it intends to “reenact Act 406 of the 167 Regular Session (Acts 1967, p. 1032), to authorize an occupational tax in Jefferson County.” The preamble further confirms that the 2009 Act intends to “ratify and confirm the actions of the county governing body in previously levying and collecting the taxes levied under Act 406.” The body of the 2009 Act contains provisions that purport to accomplish what is stated in the preamble with respect to the reenactment of the 1967 Act.
Section 45 of the Alabama Constitution requires that laws cannot be revived or reenacted by merely mentioning their title only. This section requires that the portion of a law that is “revived, amended, extended, or conferred, shall be reenacted and published at length.” The body of the 2009 Act does not contain much more detail and does not contain any portions of the original 1967 Act. It certainly appears that these brief portions of the 2009 Act meant to reenact the 1967 Act do not comply with Section 45 of the Alabama Constitution. Accordingly, while the Alabama Supreme Court evidently finds retroactive taxation to be permissible, the attempted revival of the 1967 Act (the means of the retroactive taxation) appears to be invalid.
3. Delegation of Taxing Authority
The referendum gives Jefferson County voters the ability to continue or eliminate the occupational tax. Section 212 of the Alabama Constitution of 1901 expressly prohibits delegation of taxing authority to individuals, corporations, etc. Accordingly, it appears that the referendum represents an invalid delegation of taxing authority. Jerry Basset, director of the Legislative Reference Service, told The Birmingham News on August 16, 2009 that he feels the referendum does not violate section 212. Mr. Bassett’s reasoning is that the referendum is on the county’s authority to impose the tax and not on the tax itself. That is, voting to eliminate the tax is not OK, but voting to eliminate the County Commission’s otherwise valid authority to impose the tax is OK. I’m not sure I follow this reasoning. If a majority of the citizens of Jefferson County vote not to extend the tax, it goes away. In that case, the 2009 Act specifically provides that the tax phases out over a five-year period. If our citizens vote to keep the tax, it stays. The referendum gives citizens all of the discretion with respect to whether or not this tax will be levied after a certain date. Looks like an unconstitutional delegation to me. However, as always, it is difficult to predict how the Alabama courts would view this referendum.
4. Tax on Net Income
The tax base for the occupational tax to be levied beginning January 1, 2010 is “compensation, excluding benefits, or net income before taxes, whichever is less, of business activity conducted in the county.” Legislators and their constituents have always disliked the gross receipts tax base of the Jefferson County business license and occupational tax. Accordingly, legislators examined adopting a net income tax base — that would result in a lower tax burden for their constituents — during the meetings in Birmingham and the Special Session. However, all throughout these discussions, some Alabama tax and constitutional experts expressed the opinion that using net income as the tax base for the new business license and/or occupational tax would be invalid.
It is clear that the 2009 Act references “net income” in the tax base language. However, if gross compensation less benefits is less than net income, the tax base appears to be gross compensation less benefits. I find it hard to imagine a situation where gross compensation, less benefits, is ever going to be less than net income — which makes this appear to be a tax based on the net income of the business (license tax) or employee (occupational tax). It will be interesting to see how the County Commission translates this strange language in its ordinance. (I have intentionally avoided intense study of the ordinance to maintain the integrity of the blog series. The ordinance will be the subject of a later blog)
So what is the problem with a county imposing a net income tax? Counties are creatures of statute and can only exercise those powers bestowed upon them by the Alabama Legislature. At the time the 2009 Act was passed, there were no statutes passed by the Alabama Legislature authorizing a county to impose a net income tax. The reason for this has to do with history and the Alabama Constitutions of 1868, 1875 and 1901. Alabama Courts reviewing state taxes on net income under the aforementioned Constitutions struck them down as unconstitutionally exceeding limitations on property taxes. See Eliasberg v. Brothers Mercantile Co., 86 So. 56 (Ala. 1920). However, the Alabama Courts permitted state and local license and occupational taxes measured by the gross receipts or salaries of business activities or employees. See Western Union Tel. Co. v. State Board of Assessment, 80 Ala. 273 (Ala. 1885). These rulings were based on two important concepts. First, that income was “property” and, thus, subject to the constitutional rate caps on property taxes. Second, taxes on the gross receipts of business activities or vocations were not income taxes. Rather, these were excise or privilege taxes on the activity of carrying on a business or being employed in an occupation.
In 1932, Amendment 25 to the Alabama Constitution of 1901 authorized the Alabama Legislature to levy a tax on income for state revenue purposes, removed income taxes from being classified as property for ad valorem tax purposes, and set a rate cap of 5% on individuals (still in force) and 3% on corporations (now 6.5% due to two subsequent amendments). This amendment did not change the law with respect to license and occupational taxes. Alabama courts have continued to hold that business license and occupational taxes based on gross receipts are permissible and do not constitute income taxes. See Estes v. City of Gadsden, 94 So.2d 744 (Ala. 1957); Parker v. Jefferson County, 796 So.2d 1071 (Ala. 2001). To my knowledge, the Alabama appellate courts have never been asked to review a business license or occupational tax that is measured on net income.
Amendment 25 is clear that the legislature may only impose income taxes “for state purposes.” Thus, it would seem that the Alabama Legislature could not validly levy a local license or occupational tax measured by net income. If the legislature were to do so — which it may have here — it would seem that such a tax would be subject to the 5% cap on individuals and the 6.5% cap on corporations. Given that the State already imposes a 5% and 6.5% tax on individuals’ and corporations’ income, respectively, an additional income tax, whether state or local, could not be added to the existing tax burden. Accordingly, if a court were to find the 2009 Act as imposing a net income tax, it would in all likelihood be struck down as unconstitutional.
5. Use of a Local Act to Repeal General Acts
The 2009 Act purports to repeal a number of general laws granting exemptions from local privilege and license taxes. The 2009 Act is clear that it repeals all of the exemptions existing in the 1967 Act for state-licensed professionals. However, a number of the exempted professionals actually drew their exemption not from the 1967 Act but from separate state license statutes. For example, attorneys were exempt under the 1967 Act because they paid a state license tax under the state license provisions of the Code of Alabama 1940 — like dozens of other professions. However, the specific license tax statute for attorneys also provided an exemption from county taxes. For example, section 40-12-49 of the Code of Alabama 1975, as amended, provides that attorneys engaged in the practice of law “shall pay an annual license tax to the state, but none to the county.” Similar exemption statutes exist for certain other state-licensed professionals such as accountants, architects, dentists, engineers and physicians.
Section 105 of the Alabama Constitution prohibits a local law from conflicting with or repealing a general law. The 2009 Act is a local law with application only to Jefferson County, Alabama. This local legislation was voted on by the Jefferson County delegation as well as a few legislators who did not observe the traditional legislative privilege (tradition of not voting on local matters relating to districts you do not represent). Eleven state license tax statutes — all general laws — contain specific exemptions from county taxation like the exemption for attorneys. To repeal the exemption portion of these general laws with the 2009 Act would be in direct violation of Section 105 of the Alabama Constitution.
One cannot completely discuss the general law/local law issue without mentioning section 40-12-31 of the Code of Alabama 1975. This statute provides that the Alabama Legislature may pass legislation that imposes an occupational tax on individuals that is to be paid to a county or otherwise, without regard to whether he or she pays a license fee to the state. This is a very curious statute passed during Governor Siegelman’s administration at the same time various tax “loop-hole” closing statutes were passed. Regardless of this statute’s true purpose, some might argue that this is a general law that appears to implicitly repeal exemptions from county occupational tax existing in certain state license tax statutes (there are eleven such statutes). First, I don’t think the vague language of this statute makes for an effective repeal of the specific exemptions existing in the aforementioned statutes. Implied repeal of statutes is not looked upon favorably by the Alabama courts. See Anniston Urologic Assocs., P.C. v. Kline, 689 So.2d 54,59 (Ala. 1997). Second, this Act was likely passed for the rather innocuous purpose of clarifying that occupational taxes are not inherently illegal to impose upon persons that pay license fees to the state — addressing the frequently-made argument that imposing a county occupational tax on someone who holds a state license constitutes impermissible double taxation of the same income or activity.
It appears that the hastily crafted 2009 Act is unconstitutional. There is a good chance that the 2009 Act fails to properly reenact the 1967 Act, improperly delegates taxing authority, improperly taxes net income and uses a local act to repeal multiple general acts. If a court finds the 2009 Act has one or more of these problems, the County may be right back in the same financial crisis it was a year ago. This would be most unfortunate given the importance of the occupational tax to Jefferson County’s revenue base. Given the extreme unpopularity of the occupational tax and the number of people warning of legal problems with the draft legislation, it makes one wonder if the legislators intentionally passed defective authorizing legislation.
Part III of this blog series will focus on the Alabama Supreme Court’s opinion affirming Judge Rains ruling that the Jefferson County occupational tax was invalid due to its effective repeal in 1999.
Russell M. Cunningham, IV
Cunningham Firm, LLC