Alabama Tax Tribunal: Regulation Limiting Credit for Tax Paid to Other States Invalid

Alabama residents who paid taxes to other states and whose credits were limited by the invalid regulation may have a refund opportunity going back to 2013.

All states that assess a personal income tax provide some kind of credit or adjustment to residents for the tax they have paid on their income to other states. Since residents are typically taxed on their entire net income in their home state, this credit prevents them from being taxed twice on the same item of income.

Beginning with the 2013 tax year, Alabama added a regulation addressing how the state’s credit for taxes paid to other states should be calculated by residents. [1] In an Alabama Tax Tribunal ruling issued on Sept. 29, 2016, the Tribunal determined that this new regulation was invalid since it constructed a limitation that was not provided for in the actual tax statute passed by the Alabama legislature. [2]

Under the existing tax statute, a resident’s credit is limited to the lower of the actual tax paid to the other state or the tax that would be due on the income taxed by the other state by applying Alabama rates. [3] The regulation on this statute instructs that the limiting amount of Alabama tax that would have been due on such income should be computed by multiplying the total Alabama tax calculated on all income by a fraction of the non-Alabama source income over total income. [4]

This calculation is different from the method used by other states, such as Georgia, which compute the resident state tax that would have been due by applying the resident state tax rate against the actual income taxed by the other state. [5] In using the fraction limitation, Alabama’s method could result in a lower credit and thus greater overall tax due in cases where the other state does not provide for the same deductions and exclusions as Alabama.

In its ruling, the Tribunal concluded that the regulation went beyond the plain meaning of the statute in applying this additional limitation and effectively imposes double taxation on some resident taxpayers. Since the original credit statute does not express the intent to create such a rule, the Department of Revenue goes beyond its authority to interpret the statute by regulating this additional limitation.

As a result of this ruling, Alabama residents who paid taxes to other states and whose credits were limited by the “non-Alabama source income” percentage described in the invalid regulation may have an opportunity for refund going back to the 2013 tax year. [6]

Aprio has experience consulting with multi-state taxpayers regarding state income tax issues and can assist you with any refund claims to ensure that you are claiming the credits to which you are entitled. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2016 SALT Newsletter. To view the newsletter, click here.

[1] AL Admin. Code 810-3-21-.03

[2] Samuel S. & Linda W. Moody v. State of Alabama, Docket No. Inc. 15-797

[3] AL Code §40-18-21(a)(2)

[4] AL Admin. Code 810-3-21-03(2)

[5] O.C.G.A. §48-7-28; GA Comp. R. & Regs. 560-7-7-.01

[6] The 30-day period for the AL DOR to appeal this decision has expired, and it does not appear that an appeal was filed.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.