Vulcan Lands, Inc. v. Surtees

• Court: Alabama Court of Civil Appeals
• Writing for the Court: Bryan
• Citation: Vulcan Lands, Inc. v. Surtees, 6 So.3d 1148 (Ala. Civ. App. 2007)
• Decision Date: 30 November 2007
• Docket Number: 2060607.
• Parties: VULCAN LANDS, INC. v. G. Thomas SURTEES, as commissioner of the Alabama Department of Revenue.

6 So.3d 1148

VULCAN LANDS, INC. v. G. Thomas SURTEES, as commissioner of the Alabama Department of Revenue.

2060607.

Court of Civil Appeals of Alabama.

November 30, 2007.

Matthew H. Lembke, Christopher R. Grissom, and John C. Neiman, Jr., of Bradley Arant Rose & White, LLP, Birmingham; and William C. McGowin of Bradley Arant Rose & White, LLP, Montgomery, for appellant.

Susan E. Kennedy and Sabrina L. Comer of Slate Kennedy, LLC, Montgomery, for appellee.

BRYAN, Judge.

The plaintiff, Vulcan Lands, Inc. ("Vulcan Lands"), appeals from a summary judgment in favor of the defendant, G. Thomas Surtees, as commissioner of the Alabama Department of Revenue ("the Department"). We affirm in part, reverse in part, and remand.

Factual Background and Procedural History

In White v. Reynolds Metals Co., 558 So.2d 373 (Ala.1989), the Alabama Supreme Court held that Alabama's franchise-tax scheme did not violate the Commerce Clause of the United States Constitution. However, in South Central Bell Telephone Co. v. Alabama, 526 U.S. 160, 119 S.Ct. 1180, 143 L.Ed.2d 258 (1999), the United States Supreme Court held that Alabama's franchise-tax scheme did violate the Commerce Clause of the United States Constitution. In pertinent part, the United States Supreme Court stated:

"The basic question in this case is whether the franchise tax Alabama assesses on foreign corporations violates the Commerce Clause. We conclude that it does.

"Alabama requires each corporation doing business in that State to pay a franchise tax based upon the firm's capital. A domestic firm, organized under the laws of Alabama, must pay tax in an amount equal to 1% of the par value of the firm's stock. Ala. Const., Art. XII, § 229; Ala.Code § 40-14-40 (1993); App. to Pet. for Cert. 50a, 52a, 61a (Stipulated Facts). A foreign firm, organized under the laws of a State other than Alabama, must pay tax in an amount equal to 0.3% of the value of `the actual amount of capital employed' in Alabama. Ala. Const., Art. XII, § 232; Ala.Code § 40-14-41(a) (Supp.1998). Alabama law grants domestic firms considerable leeway in controlling their own tax base and tax liability, as a firm may set its stock's par value at a level well below its book or market value.App. to Pet. for Cert. 52a-53a (Stipulated Facts). Alabama law does not grant a foreign firm similar leeway to control its tax base, however, as the value of the `actual' capital upon which Alabama calculates the foreign franchise tax includes not only the value of capital stock but also other accounting items (e.g., long-term debt, surplus), the value of which depends upon the firm's financial status. Id., at 53a-54a; Ala.Code §§ 40-14-41(b)(1)-(5), (c) (Supp.1998).

". . . .

". . . [W]e conclude that this Court's Commerce Clause precedent requires us to hold Alabama's franchise tax unconstitutional. Alabama law defines a domestic corporation's tax base as including only one item — the par value of capital stock — which the corporation may set at whatever level it chooses. A foreign corporation's tax base, on the other hand, contains many additional balance sheet items that are valued in accordance with generally accepted accounting principles, rather than by arbitrary assignment by the corporation. Accordingly, as the State has admitted, Alabama law gives domestic corporations the ability to reduce their franchise tax liability simply by reducing the par value of their stock, while it denies foreign corporations that same ability. App. to Pet. for Cert. 52a-53a (Stipulated Facts). And no one claims that the different tax rates for foreign and domestic corporations offset the difference in the tax base. The tax therefore facially discriminates against interstate commerce and is unconstitutional unless the State can offer a sufficient justification for it. Cf. Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) (state tax scheme requiring shareholders in out-of-state corporations to pay tax on a higher percentage of share value than shareholders of corporations operating solely within the State facially discriminated in violation of the Commerce Clause). This discrimination is borne out in practice, as the record, undisputed here, shows that the average domestic corporation pays only one-fifth the franchise tax it would pay if it were treated as a foreign corporation. See App. to Pet. for Cert. 36a (plaintiffs' statement of facts); Mem. Op. 21a, and n. 7 (adopting plaintiffs' statement of facts).

"The State cannot justify this discrimination on the ground that the foreign franchise tax is a `complementary' or `compensatory' tax that offsets the tax burden that the domestic shares tax imposes upon domestic corporations. E.g., Henneford v. Silas Mason Co., 300 U.S. 577 (1937) (upholding a facially discriminatory use tax as `complementary' to a domestic sales tax). Our cases hold that a discriminatory tax cannot be upheld as 'compensatory' unless the State proves that the special burden that the franchise tax imposes upon foreign corporations is `roughly . . . approximate' to the special burden on domestic corporations, and that the taxes are similar enough `in substance' to serve as `mutually exclusive' proxies for one another. Oregon Waste Systems[, Inc. v. Department of Envt'l Quality], 511 U.S. [93] at 103 [(1994)]; accord, Fulton, supra, at 332-333.

"In this case, however, the relevant tax burdens are not `roughly approximate.' See App. to Pet. for Cert. 36a-37a (plaintiffs' statement of facts, showing that the foreign franchise tax burden far exceeds the domestic franchise tax and the domestic shares tax combined); Mem. Op. 21a, n. 7 (adopting plaintiffs' statement of facts); cf. [South Central Bell Telephone Co. v. State,] 711 So.2d [1005] at 1011 [(Ala.1998)] (See, J., dissenting) (in the face of the State's `indefinite assertion,' plaintiffs offered `substantial evidence . . . that the foreign franchise tax exceeds any intrastate burden' imposed through the higher franchise tax rate and the domestic shares tax). And the State has made no effort to persuade this Court otherwise.

"Nor are the two tax burdens similar in substance. Alabama imposes its foreign franchise tax upon a foreign firm's decision to do business in the State; Alabama imposes its domestic shares tax upon the ownership of a certain form of property, namely, shares in domestic corporations. Compare Ala.Code § 40-14-41 with § 40-14-70 (1993 and Supp. 1998). No one has explained to us how the one could be seen as a `proxy' for the other.

". . . .

"For these reasons, the judgment of the Alabama Supreme Court is reversed, and the case is remanded for further proceedings not inconsistent with this opinion."

526 U.S. at 162-71, 119 S.Ct. 1180.

After the United States Supreme Court remanded South Central Bell Telephone Co. v. Alabama to the Alabama Supreme Court, the Alabama Supreme Court issued an interim order in that case in which it stated, in pertinent part:

"The question remaining for this Court's determination is what remedy, if any, should be fashioned.

"Harper [v. Virginia Department of Taxation, 509 U.S. 86 (1993),] 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, 113 S.Ct. 2510 (citing American Trucking Ass'ns. Inc. v. Smith, 496 U.S. 167, 181, 110 S.Ct. 2323, 110 L.Ed.2d 148 (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 S.Ct. 2238, 110 L.Ed.2d 17 (1990), and its companion case American Trucking Ass'ns., Inc. The McKesson case allows a State to comport with due process by:

"1) giving a taxpayer a refund;

"2) collecting back taxes from the favored class;

"3) combining aspects of these first two options;

"4) barring a refund to a taxpayer that did not follow a state procedural law in seeking the refund; or

"5) 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."

South Cent. Bell Tel. Co. v. State, 789 So.2d 147, 148-49 (Ala.2000) (footnotes omitted). The Alabama Supreme Court then remanded the action to the trial court for it to receive evidence regarding what remedy, if any, should be fashioned. However, that action was settled before the trial court determined what remedy, if any, should be fashioned.

On March 15, 1999, eight days before the United States Supreme Court delivered its decision in South Central Bell Telephone Co. v. Alabama, Vulcan Lands, a corporation incorporated under the laws of the State of New Jersey, paid the Department $29,890 in franchise tax. On August 31, 1999, approximately five months after the United States Supreme Court delivered its decision in South Central Bell Telephone Co. v. Alabama, Vulcan Lands voluntarily paid an additional $371 in franchise tax to the Department.

On August 28, 2000, Vulcan Lands, on the basis of the holding of the United States Supreme Court in South Central Bell Telephone Co. v. Alabama, petitioned the Department for a refund of the $30,261 in franchise tax Vulcan Lands had paid during 1999. The Department did not respond to Vulcan Lands' petition within six months. Consequently, pursuant to § 40-2A-7(c)(3), Ala.Code 1975, the petition of Vulcan Lands was deemed denied.

Vulcan Lands appealed from the denial of its petition to the Montgomery Circuit Court on April 16, 2001. After conducting discovery, Vulcan Lands and the Department filed cross-motions for a summary judgment. On March 12, 2007, the trial court entered a judgment granting the summary-judgment motion filed by the Department and denying the one filed by Vulcan Lands. That judgment stated:

"This cause having come before the Court on Cross Motions for Summary Judgment, the same having been heard and considered, it...