Franchise tax refunds still debated

MONTGOMERY - Gov. Bob Riley's attorneys are in state appellate court saying Alabama cannot afford to pay millions of dollars in franchise tax refunds to hundreds of companies that have been waiting for their overpayments since 1999.

Meanwhile, attorneys for the state Department of Revenue argue in the Court of Civil Appeals that fiscal hardship is the reason Alabama cannot refund illegally collected franchise tax payments.

As the court proceedings continue, money to pay the refunds sits in an escrow account.

The franchise tax refund escrow account will have $142 million by Sept. 30, but the Legislature is using that money to balance next fiscal year's General Fund, according to state figures.

The action further escalates the bad feelings that have been lingering since 1999 from the franchise tax issue. At the same time, large, out-of-state corporations question whether Alabama is a viable place to expand and add jobs.

"Alabama has done quite an amount of foot dragging on this," said Douglas L. Lindholm, president and executive director of Council on State Taxation in Washington. "A lot of (corporations) are upset. Alabama dragging (its) feet on paying refunds impacts how companies view Alabama."

The taxation council represents more than 600 of the nation's largest companies on tax and policy issues. The list includes Fortune 500 companies such as General Electric, Johnson & Johnson, Coca-Cola, Sprint, Chevron Corp., Microsoft Corp. and Wal-Mart, according to the council's Web site.

"Our concern is not the level of tax but with equitable and nondiscrimination in state taxes," Lindholm said.

When asked to comment about Lindholm's assessment of Alabama's business climate and the fact that money is available to pay refunds, state Finance Director Jim Main said, through a spokeswoman, "The finance director did not include that in any of his revenue projections."

The franchise tax case controversy began in 1999 when the U.S. Supreme Court said Alabama's franchise tax charged to out-of-state companies such as South Central Bell was unconstitutional because the tax charged to in-state companies was lower.

Then Gov. Don Siegelman hired attorneys to defend the state and negotiate lower settlements, a policy continued by Riley when he took office in 2003.

So far, courts have whittled down the original $937 million in claims by about 780 corporate taxpayers. Now that total is $147 million in claims by just under 390 claimants, according to the Department of Revenue.

Since 2005, the state has refunded $10.3 million from the escrow account, which is expected to have $141.8 million in it by Sept. 30, the end of this fiscal year.

The escrow account is created by money from a business privilege tax that replaced the unconstitutional franchise tax.

The pro-business Tax Analysis newsletter stated in 2007 that some claims are being settled for as little as 19 cents on the dollar. The newsletter also noted that states vigorously defend against challenges to taxation and "defend with equal vigor against taxpayers seeking a remedy."

In March 2007, companies appealed a lower court ruling that said the state didn't have to pay refunds because the companies that paid the unconstitutional franchise tax weren't harmed.

The state's hardship plea filed in August to defend the case notes that refunds "would have a devastating effect on Alabama's fiscal health." The plea also states that the revenue department invokes the "hardship defense as an equitable consideration to limit the recovery of any injured taxpayers."

An oral argument was requested on the filing but later denied, according to court records.

Riley spokeswoman Tara Hutchison said some companies have been willing to settle and accept refunds in the form of credits against future taxes. She also said there are statute of limitation issues and a "number of outstanding legal issues that are still working their way through the court system."

"Until these claims are litigated, a settlement can't be negotiated," she said. "The total amount due some of these companies is substantially less than what is claimed."

In March, when the Legislature convened in regular session, the House General Fund budget committee chairman, Rep. John Knight, D-Montgomery, introduced next fiscal year's General Fund budget.

The bill that passed and ultimately was signed by Riley moves $126 million from the franchise tax escrow account to the General Fund. The amount is $107 million more than Riley wanted to shift.

Knight couldn't be reached for comment.

State Rep. Gerald Allen, R-Tuscaloosa, a member of the General Fund budget committee, said he doesn't recall discussion of shifting money from the escrow account.

Dana Beyerle can be reached at (334) 264-6605.