Commerce Clause Problem With Alabama's Franchise Tax
Alabama Legislature has passed Act No. 665, Ala. Acts 1999, which purports to solve prospectively the Commerce Clause problem with Alabama's franchise tax (see our First Interim Order in this case, dated Nov. 17, 1999), and that this Act has become law with the Governor's signature.
In South Central Bell Telephone Co. v. Alabama, 526 U.S. 160, 119 S. Ct. 1180, 143 L. Ed. 2d 258 (1999) ("South Central Bell"), the Supreme Court did not reserve the question whether its holding should apply retroactively.
"When the Supreme Court does not reserve the question whether its holding should be applied to the parties before it, ... an opinion announcing a rule of federal law is properly understood to have followed the normal rule of retroactive application and must be read to hold that its rule should apply retroactively to the litigants then before the Court." Harper v. Virginia Dep't of Taxation, 509 U.S. 86, 97-98, 125 L. Ed. 2d 74, 113 S. Ct. 2510 (1993) (internal quotation marks and ellipses omitted).
The Taxpayers and interests aligned with the State, including the Attorney General, the Department of Revenue, and the Governor, all agree that the Supreme Court's decision in South Central Bell must be applied retroactively.
Harper makes it clear that when a tax is ruled unconstitutional, and that ruling is applied retroactively, a State must give a remedy that comports with Federal due-process principles. Harper, 509 U.S. at 100 (citing American Trucking Ass'n, Inc. v. Smith, 496 U.S. 167, 181, 110 L. Ed. 2d 148, 110 S. Ct. 2323 (1990)).
These principles of due process are found in a line of cases that begin with McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 110 L. Ed. 2d 17, 110 S. Ct. 2238 (1990), and its companion case American Trucking Ass'n. the McKesson case allows a State to comport with due process by:
giving a taxpayer a refund; See McKesson Corp., 496 U.S. at 40.
collecting back taxes from the favored class; See McKesson, 496 U.S. at 40. We make no determination as to whether back taxes can be collected through assessments by the Department of Revenue for prior years under now repealed 40-14-40, Ala. Code Ala. 1975, based upon the interpretation of 229, Constitution of Alabama of 1901, given in our Interim Order of November 17, 1999, as opposed to the Legislature's enactment of retroactive taxes on previously favored domestic corporations. of course, such legislation would have to satisfy federal due process. See McKesson, 496 U.S. at 40 n. 23; United States v. Carlton, 512 U.S. 26, 30-31, 129 L. Ed. 2d 22, 114 S. Ct. 2018 (1994) (retroactivity must serve rational legislative purpose and must be for a short and limited period).
combining aspects of these first two options; See McKesson, 496 U.S. at 40.
barring a refund to a taxpayer that did not follow a state procedural law in seeking the refund; or
refusing to give a remedy, in the rare case in which the State relied on now overturned precedent and the State now faces an extreme hardship if it must give a remedy.
See McKesson, 496 U.S. at 44-45 (observing that in the particular facts of that case, Florida's hardship did not outweigh the need for a refund). But, see, Reynoldsville Casket Co. v. Hyde, 514 U.S. 749, 757-58, 131 L. Ed. 2d 820, 115 S. Ct. 1745 (1995), discussed infra, So. 2d at .
The United States Supreme Court has remanded this case for proceedings not inconsistent with its opinion. In order to discharge that responsibility, this Court needs further evidence that it, as an appellate court, is ill-suited to gather.
The evidence that we require falls into several categories. We first must have specific statements of position of all parties concerning the efficacy of Act No. 665, Ala. Acts 1999, as a cure for the constitutional defect recognized in South Central Bell.
We also require position statements on the question whether Act No. 665 is consistent with 229 and 232 of the Constitution of Alabama of 1901.
We further require information as to the extent to which the Bell Companies and CSXT, Inc., have borne the economic impact of the excess franchise taxes collected, so that we can consider the legal effect of any passing through of the burden to customers. See James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 538-39, 115 L. Ed. 2d 481, 111 S. Ct. 2439 (1991).
We require a detailed explanation of the manner in which the Bell Companies and CSXT, Inc., contend that they complied with applicable provisions of state law governing contests of assessments.
We also require information in another area because we cannot at this juncture foreclose the prospect that this case constitutes that "rare case" of reliance coupled with hardship (see item 5 in the listing above).
In 1989, this Court held that Alabama's franchise tax did not violate the Commerce Clause. White v. Reynolds Metals Co., 558 So. 2d 373 (Ala. 1989).
The United States Supreme Court, consistent with its prior holdings, denied certiorari review, 496 U.S. 912, 110 S. Ct. 2602, 110 L. Ed. 2d 282 (1990).
However, in 1999 the United States Supreme Court declared the Alabama franchise tax unconstitutional as violating the Commerce Clause. South Central Bell v. Alabama, supra.
The United States Supreme Court had previously held, in two separate cases, that Alabama's franchise tax did not violate the Commerce Clause of the United States Constitution. Southern Natural Gas Corp. v. Alabama, 301 U.S. 148, 81 L. Ed. 970, 57 S. Ct. 696 (1937); and Kansas City, M. & B.R.R. v. Stiles, 242 U.S. 111, 61 L. Ed. 176, 37 S. Ct. 58 (1916).
In his dissent to this Court's opinion on the original appeal in this present case, dated March 20, 1998, Justice See observed that our holding in Reynolds Metals was premised on the State's argument, renewed in the original appeal in this case, that the combination of the effects of a higher rate applicable to domestic corporations and the shares tax also imposed on domestic corporations created an intrastate burden that compensated for the higher foreign franchise tax. 711 So. 2d 1005 at 1011.
Then, Justice See observed that "the Supreme Court has since our decision in Reynolds Metals clarified and narrowed the definition of a compensatory tax." Id.
Justice See then cited a trilogy of United States Supreme Court cases: Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U.S. 93, 128 L. Ed. 2d 13, 114 S. Ct. 1345 (1994); Associated Industries of Missouri. v. Lohman, 511 U.S. 641, 128 L. Ed. 2d 639, 114 S. Ct. 1815 (1994); and Fulton Corp. v. Faulkner, 516 U.S. 325, 133 L. Ed. 2d 796, 116 S. Ct. 848 (1996). the United States Supreme Court also noted the evolving nature of recent cases, stating:
"The Alabama trial court agreed with the Bell plaintiffs that their evidence, taken together with this Court's recent Commerce Clause cases, 'clearly and abundantly demonstrates that the franchise tax on foreign corporations discriminates against them for no other reason than the state of their incorporation.' Memorandum Opinion in App. to Pet. for Cert. 21a-22a ... (citing Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U.S. 93, 128 L. Ed. 2d 13, 114 S. Ct. 1345 (1994); Associated Industries of Mo. v. Lohman, 511 U.S. 641, 128 L. Ed. 2d 639, 114 S. Ct. 1815 (1994); Fulton Corp. v. Faulkner, 516 U.S. 325, 133 L. Ed. 2d 796, 116 S. Ct. 848 (1996))."
South Central Bell, id., 526 U.S. at , 119 S. Ct. at 1183. When the first of the trilogy, all decided after Reynolds Metals, was released, Chief Justice Rehnquist stated in his dissent:
"Once again, ... as in Philadelphia v. New Jersey, 437 U.S. 617, 57 L. Ed. 2d 475, 98 S. Ct. 2531 (1978), and Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 119 L. Ed. 2d 121, 112 S. Ct. 2009 (1992), the Court further cranks the dormant Commerce Clause ratchet against the States by striking down such cost-based fees, and by so doing ties the hands of the States in addressing the vexing national problem of solid waste disposal. I dissent."
Oregon Waste Systems, Inc., supra, 511 U.S. at 109.
With each crank of the ratchet, the increased effect on a State-taxing authority that relies on the former law can be enormous. After it had decided McKesson Corp., the Supreme Court addressed the role of reliance, in James B. Beam Distilling Co. v. Georgia, 501 U.S. at 543-44, stating that "nothing we say here precludes consideration of individual equities when deciding remedial issues in specific cases," and that "nothing we say here deprives the State of its opportunity ... to demonstrate reliance interests entitled to consideration in determining the nature of the remedy that must be provided, a matter with which McKesson did not deal."
After James B. Beam Distilling Co., the Supreme Court rejected the imposition of a remedial limitation upon the retroactive application of a new rule to pending cases, in the context of an Ohio tolling statute that discriminated against out-of-state defendants. See Reynoldsville Casket Co. v. Hyde, 514 U.S. 749, 757-58, 131 L. Ed. 2d 820, 115 S. Ct. 1745 (1995), where the Court declined to extend the rule protecting a state official sued individually from personal liability where the unconstitutional conduct of the official was not "clearly established" at the time of the arrest.
In so holding, the Court noted the absence of "significant policy justifications" that are presented in proceedings such as actions against law-enforcement officers where burdens would fall on "society as a whole" if the rule were otherwise. 514 U.S. at 758-59.