The Alabama House of Representatives has passed a tax bill that would adopt single-sales-factor apportionment, eliminate the state’s “throwback rule,” exempt federal COVID-19 tax relief from state taxation, and decouple from some business tax changes in the federal Tax Cuts and Jobs Act.
H.B. 170, sponsored by Rep. Danny Garrett (R), passed the House on a 94–0 vote February 4. The bill was referred to the Senate Committee on Finance and Taxation Education.
Patrick Reynolds, senior tax counsel for the Council On State Taxation, which represents over 500 multistate corporations, submitted testimony to the House Ways and Means Education Committee via email in support of some provisions in the bill.
Those provisions would retroactively decouple the state from the global intangible low-taxed income provision of the TCJA, limit the application of the business interest expense limitation in IRC section 163(j) of the TCJA, and eliminate the state’s throwback rule, which is used to prevent businesses from avoiding taxation on sales into states where they lack nexus for corporate income tax purposes.
Reynolds said the bill would “put Alabama in a better position as it seeks to retain and attract new businesses to the state and mitigate the unintended tax increase resulting from conformity to the TCJA.”
H.B. 170 would also move from three-factor apportionment with a double-weighted sales factor to single-sales-factor apportionment.
The measure would create an elective workaround to the $10,000 cap on the federal state and local tax deduction for passthrough entities. The workaround would allow passthrough businesses to be taxed at the entity level at the highest marginal individual income tax rate. Unlike workarounds in other states, the owners would not receive a credit for the taxes paid.
It would also exempt from state tax the stimulus payments, advance refunds, grants, and small business loans forgiven under the Paycheck Protection Program under the federal Coronavirus Aid, Relief, and Economic Security Act and the Consolidated Appropriations Act of 2021.
In her 2021 State of the State address, Gov. Kay Ivey (R) said one of the first bills she wanted the Legislature to pass is one that will ensure that CARES Act relief is not subject to state tax. Ivey issued an emergency proclamation in December 2020 declaring that all distributions from the CARES Act would be exempt from state tax.
Ivey’s press secretary Gina Maiola told Tax Notes on February 5 that the governor intends to sign H.B. 170 without delay once it reaches her desk.
H.B. 170 is expected to increase revenues in the Education Trust Fund by $12.95 million for the fiscal year ending September 30 and by about $12.75 million each year after, according to the bill’s fiscal note.
Garrett in February 2020 introduced a similar bill (H.B. 353/S.B. 250) that would have adopted single-sales-factor apportionment, decoupled from GILTI, established a SALT workaround, and addressed other changes under the TCJA. However, that bill failed to advance when the session was shortened because of the COVID-19 pandemic.