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Last updated 5:23PM ET
March 8, 2021
Corporate Tax Appeal Could Cost Millions
(APR - Alabama Public Radio ) - State revenue officials say Alabama could lose $30 million to $50 million in annual corporate income tax collections if the state loses its appeal on a case over business tax deductions.

A circuit judge has already ruled against the state and a loss in the appeals process, which could drag on for years, also could lead to the state's paying as much as $100 million in refunds, state officials estimate.

Lower corporate income tax collections would directly affect public schools and colleges, because almost all of that money goes to the state Education Trust Fund.

"It's a significant amount," state Revenue Commissioner Tom Surtees told The Birmingham News in a story for Sunday's editions.

Attorneys for Alabama, led by Jeff Patterson, are scheduled to file a brief with the Alabama Court of Civil Appeals on Monday. Attorneys for the company involved in the case, VFJ Ventures Inc., will have as long as four weeks from Monday to file their brief.

Bruce Ely of Birmingham, who is representing VFJ Ventures, said companies and tax officials in other states are keeping a close watch on the case, which produced the first judge's ruling in the nation on a law designed to limit some corporate tax deductions for interest and royalty payments.

So far, about 20 states, including Alabama, have passed such add-back laws, said Joe Garrett, a lawyer and Alabama's administrator of tax policy.

The case centers on a law that Alabama legislators passed in 2001 at the request of then-Gov. Don Siegelman.

The law was designed to close what Siegelman aides said was a loophole that let Alabama companies reduce their state income tax bills by paying interest or trademark royalties to sister or parent companies in states with no corporate income tax, such as Delaware.

The Alabama companies could deduct those interest or royalty payments from their taxable income, thereby lowering their Alabama tax bill, while their parent or sister companies earned the income from Alabama free of any state tax. Critics called it a giant tax-avoidance scheme.

Alabama's law required companies to add back as taxable income those interest and royalty payments.

The law has exceptions. For instance, a company doesn't have to add back the deductions if it proved such adjustments were unreasonable.

VFJ Ventures, which makes and markets jeans mainly with the Lee and Wrangler brand names, filed suit, challenging the law and a 2003 claim by state auditors that it owed Alabama an extra $1.02 million in income taxes on its income from 2001.

In 2001 the company had operations in several states, including Alabama, where it employed about 600 people at distribution centers and a cutting plant, according to a filing by its attorneys. It paid a total of $102.6 million that year in royalties to the H.D. Lee Co. and Wrangler Clothing Corp. for the right to use trademarks owned by Lee and Wrangler.

VFJ, Lee and Wrangler all are subsidiaries of VF Corp. in Greensboro, N.C.

After a trial in July 2006, Montgomery County Circuit Judge Tracy McCooey ruled for VFJ in January and the state is appealing her ruling.

In her decision, McCooey said the 2001 law did not define "unreasonable." She then ruled that the royalty payments made by VFJ represented "real and necessary costs of doing business in Alabama," and that it was unreasonable for the state to deny them.

Garrett said McCooey's view of what was unreasonable created an exception to the add-back law that is too broad. He said she in effect denied the power of state lawmakers to disallow specific tax deductions.

Garrett estimates the loss of the add-back law would cost the state at least $30 million a year in income taxes and refunds to companies that companies might seek refunds for several years of tax payments, which could total as much as $100 million.

Ely said the losing side could seek review by the Alabama Supreme Court and even the U.S. Supreme Court after that, so a final ruling could take years.

He said he thinks the chances are good that appeals courts will agree with McCooey and rule that VFJ was right to deduct its royalty payments from its Alabama taxable income.

"It was a perfectly legitimate operation that the state just doesn't need to be getting involved with," he said. "I think the state has an uphill battle."

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