Crowell's Conversations: An Interview With Julie Magee, Commissioner of the Alabama Department of Revenue

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

Julie Magee, interviewed by Don Griswold, Walt Nagel, and Jeremy Abrams  


Julie Magee is Commissioner at the Alabama Department of Revenue. Messrs. Griswold, Nagel, and Abrams are attorneys with Crowell & Moring LLP and can be reached at dgriswold@crowell.com , wnagel@crowell.com , and jabrams@crowell.com . For more information about Crowell's state tax practice, visit www.crowell.com/statetax.  


Building bridges

CROWELL:  

So we're sitting here at the SEATA [Southeastern Association of Tax Administrators] conference in Hilton Head, South Carolina. This is a different venue than many tax conferences because it has such a heavy government official focus for us all; it's a great chance to roll up the sleeves and think about the issues together because we're all in the same field, right?

MAGEE:  

Well, I'm so glad to hear you say that because in addition to serving as Commissioner of Revenue, I'm a businessperson, too, and prior to this appointment by Gov. Robert Bentley, I have had no government service. What I want to do in my tenure is to try to figure out a way to bring opposing sides more to the center of the table to work out solutions that work for everyone. What I've seen from my fresh perspective is a lot of incorrect assumptions made which caused unnecessary frustration for everybody: the industry, business owners, tax attorneys, government workers, etc. At the end of the day, we're all interested in doing the right thing and I don't see why there has to be a contentious effort to do that, so I see myself as more of a bridge builder than anything else.

CROWELL:  

Agreed! How does that translate into practical action for you?

MAGEE:  

The staff at ADOR follows our tax laws by the book and none of us make any decisions based on the stature of the taxpayer or industry. I do, of course, find it frustrating when some try to take advantage of our tax code because they can afford to hire experts that create devious tax structures. Most people certainly can't afford to hire a high-priced accounting or law firm so they may end up paying more taxes than one that can. I find that imbalance a juggling act, but at the end of the day our job is ensuring proper enforcement of the laws passed by our legislators. While my heart belongs with the small, Alabama-based taxpayer, I do what I can to make sure that we apply our tax laws fairly and justly - everybody pays their fair share, no more, no less.

CROWELL:  

So you've got a leadership role on the MTC now. We suspect that your non-tax background, non-political background - which has enabled you to have this sense of common ground, if you will, between taxpayers and government - might enable you to bring something of a breath of fresh air to the MTC?

MAGEE:  

I hope so. I think people are still trying to figure out what to make of me, honestly! I have been involved in the MTC since almost my first day in office. The MTC and the FTA held what I call a “New Commissioners University” in January of 2011 in Dallas. That was such an incredible time because there were 25 new commissioners appointed that year. Not all attended but many did and it allowed me to make connections with my peers that I may not have been able to otherwise.


“If you put yourself in the shoes of any new tax administrator in charge of managing nine billion dollars of revenue, they're going to have a lot of questions and they're going to want to trust the answers.”  


Secondly, we were given two days of real world practical advice and do's and don'ts, from experienced Revenue Commissioners or Tax Directors from all over the country. If you put yourself in the shoes of any new tax administrator in charge of managing nine billion dollars of revenue, they're going to have a lot of questions and they're going to want to trust the answers. This forum allowed us that invaluable opportunity and really set the tone for what I want to accomplish. It was a great introduction to the value of organizations like the MTC and the FTA and I have been fortunate to continue to get more involved over the past two and a half years.

CROWELL:  

One of the members of your staff who we've given a few speeches with is Joe Garrett. As you know, Joe had a major hand in drafting the Addback statute for the MTC as well as Alabama. He's really smart, and he has some very strong opinions. We have some difference of opinions on some of these issues, but Joe is evidence of the depth and strength of the team you've got, isn't he?

MAGEE:  

We are very blessed to have people like Joe devote themselves to improving tax policy in our state. He's become one of the most requested speakers at the most important tax seminars around the nation due to his ability to breakdown complex tax avoidance strategies and then to also be able to explain them! That is the kind of guy a Revenue Commissioner wants to have by her side all the time!

Speaking of staffing, I was talking to Tennessee's Commissioner Roberts earlier and we agreed that we are all in the same kind of vulnerable position in that we have a lot of people ready to retire and we are losing that institutional knowledge left and right. So, you're going to see nationwide a lot of states lose 25- to 40-year veterans. I just presented someone with a 42-year service pin last month.

We're fortunate in Alabama to have a Governor that recognizes the importance of a fully staffed DOR, but not all states have that support. Gov. Bentley has allowed me to replace and hire every person we've asked for so we have hired a little over 200 people since January 2011. But, some states still don't have the financial wherewithal to do that, so they lack the resources to conduct the very best tax administration possible. That is why it is even more important for the MTC to continue to offer shared audits, additional training programs and model legislation.

CROWELL:  

Wow! All that institutional knowledge and the wisdom that comes with … you may lose it?

MAGEE:  

Absolutely. You know, my office walls are lined with books on tax codes, and many of the people still working here today actually wrote the code, so they know how we got to the point we are today. The new people that we're hiring are intelligent and bright and highly educated because many of them decided to go to graduate school due to the state of the economy. We're thrilled to have their enthusiasm but it will take them some time to get a good grasp on the complex tax codes put in place over many decades, so it is great that the experienced staff actually like passing on their institutional knowledge to the new hires.

CROWELL:  

So that does present a brain drain at the top, if you will?

MAGEE:  

That really does. Conversely, though, we just hired three new attorneys, for example, and we had over 200 applicants! These new attorneys bring us a fresh perspective on how things should progress and they have some really clever ideas that we've been able to implement.

From Insurance to Tax

CROWELL:  

Let's step back for a moment. How did your 20-year career in the insurance industry lead to your appointment as Commissioner by Gov. Bentley in 2011?

MAGEE:  

It's just bizarre; really, I never dreamed I would leave my job, my home and start a new job in public service. This was not anything I aspired to do, or to be honest with you, thought I would like to do. I had a very nice job in Mobile with a fancy title and a corner office. When I wasn't working, I was a volunteer in then Dr. Bentley's campaign. As I traveled with him and got to know him I very much respected what he stood for and I appreciated his honesty. Gov. Bentley loves this state and he wants the quality of life for all of our citizens to be the best ever in our history.

After the election though, I went back to my regular job with less passion about it than before. Although I had not realized it at the time, Gov. Bentley's mission to improve our State also became my mission. He made me realize that “it's not all about me” and if I can contribute to improving things, that's what I should do. I called him and let him know that if there was any way I could serve his administration and our citizens, I was willing to give up my job and move to Montgomery to do it. Shortly thereafter, he offered me this appointment and we have been very busy ever since!

The Multistate Tax Commission

CROWELL:  

New topic: Many of us in the state tax community have speculated about the impact of California's withdrawal from the Compact. Other states are withdrawing as well. Are we in a “watershed” moment for the Commission?

MAGEE:  

Oh, I'm really excited about the future of the MTC. There is no doubt the Gillettecase immediately caused some concern about the Compact, however, there has never been any doubt about the long term benefits being a member has for a state. The MTC is not the Compact. From a state government point of view, we see the return on investment we get from being involved in the MTC and will continue to be a very active participant. As Chair, I look forward to visiting non-participating states and sharing our positive experience with the MTC.

CROWELL:  

You're referring to the national nexus program, for example?

MAGEE:  

Exactly. On just the audit program itself, the ROI is ridiculously high. So, it would be foolish for Alabama to not be continuing to pursue more MTC audits. That's especially true with the Marketplace Fairness Act (cross our fingers) going to pass in the next year or two. Once that passes, we envision the single audit function as required by MFA to fall upon the MTC. It makes it easier on taxpayers and the States to have this one entity audit them.


“On major tax issues, we ought to treat taxpayers consistently nationwide. That's the fundamental basis of the MTC . . .”  


CROWELL:  

What is the MTC's role, then?

MAGEE:  

I think the MTC's role is to support the states. I want the states to control their own tax administration; let Congress handle federal. We see too much encroachment of the federal government on state taxation. So we share best practices among the states and with the MTC and other organizations. On major tax issues, we ought to treat taxpayers consistently nationwide. That's the fundamental basis of the MTC and that's what we're doing.

CROWELL:  

Speaking of consistency, Alabama's sourcing regulation encourages mediation in accordance with the MTC's procedures in the event that a taxpayer is subject to different sourcing methods in other states, even if the other states are not members of the MTC. Do you see room for states to work collectively to provide relief when a taxpayer is taxed on over 100 percent of its income nationwide?

MAGEE:  

We have successfully participated in the MTC mediation program. It was a new concept for us. This is a difficult process for tax administrators to embrace and I would not be truthful if I didn't admit to it being out of our comfort zone. But sometimes we need to step out and challenge ourselves. So while people were not thrilled to death to sit at the mediation table, it ended up being a very positive experience. As such, we will participate in more MTC mediated tax situations as they come up and I will continue to share our experience with my peers.

We really would rather not litigate; we would rather come to some sort of understanding that is a good solution for all parties. However, when we do have to litigate, we will, and we'll go hard for it as fast as we can and as stringently as we can.

CROWELL:  

How does the MTC interact with industry in determining sound policy to recommend to the states?

MAGEE:  

We invite stakeholders who have an interest in whatever model legislation we are working on to make public comments. We have worked diligently to be as transparent as we possibly can. Recently, we had a person speak to us from the insurance industry and he basically told us that our model legislation never gets adopted and then asked us “Why do you guys even do this?” He said, “Let the legislators write the legislation.” He was protecting his client's interest, so I understood his point of view, since our model legislation would impact them in a negative way.

However, I could not accept this rationale about the MTC's efforts to try to implement good tax policy. I find this part of my job frustrating. I had to remind him that we are drafting tax code based on policy, not on popularity. If our model legislation doesn't get enacted, it's not because it's not good tax law, it just may not have the strength to withstand the strong lobby that the special interests may have. So, in Alabama and at the MTC, we're not looking for the same outcome that the special interests are. I think that is what a taxpayer should look for in tax administration, whether it's the IRS or whether it's a state. They should insist we set sound tax policy - not policy that's popular for certain special interests that can afford to pay for it.

Raising More Revenue

CROWELL:  

Do you find any tension between sound tax policy and revenue-raising?

MAGEE:  

Yes, sometimes good tax policy and raising revenue are at odds. However, my belief is that any department of revenue operating solely on the basis of “I've got to collect more revenue,” is not serving the public well. If the recession hurts the revenue in your state, you can't whiplash the taxpayer in order to collect more revenue because your tax revenue is down in your state. The legislature can close corporate loopholes, raise taxes or find some other way to do it. But as a tax administrator, I'd be hard pressed to find one who is willing to violate the tax code just to increase revenue in the state. That's not our role. However, we can raise more revenue by diligently applying better enforcement of the laws on the books. For example, we recently worked on two large tobacco tax evasion cases where millions of dollars were evaded due to smuggling cigars into our state. We are also aggressively pursuing people who fail to file a State income tax return. We can raise revenue through better compliance, and I think that is only fair.

CROWELL:  

One of the topics this morning at the SEATA conference was the breach of security at the South Carolina Department of Revenue. How do you feel about where Alabama is and where we are nationwide with that risk?

MAGEE:  

This was the topic of conversation on a secure conference call we had immediately after the South Carolina breach. This is one of the most important things to be concerned about in our society today. Twenty-two states were represented on that call sharing advice and comparing notes. We have a five-person division within the DOR with the single responsibility of data security. All states are not so fortunate to be equipped with this level of security but we never say “never” and continue to evaluate and add resources to protect taxpayer information. I believe all states are doing the same thing now because of the South Carolina breach. I can also tell you that we now all know what it means to encrypt in transit and at rest, which was not part of my vernacular before South Carolina, but it is now!

The states for the most part - whether they're SEATA states or MTC states or FTA states - we, the top administrators and division directors in each of the tax types, talk often and frequently about all kinds of issues, including security. I have three e-mails that I received just today that included a survey. New York wants to know how you handle this. South Carolina wants to know how to handle that. We survey each other all the time. One today was a simple one: “Do you plan to upgrade to Office 365?” And I bet we received thirty or so responses so far from various states on whether or not we plan to upgrade to Office 365.

CROWELL:  

This regular information sharing…do SEATA and FTA sponsor it too?

MAGEE:  

A lot of this overlaps but it seems to me that each of the organizations serve unique purposes. They all do much more, but if I had to put it in a simplistic way, I would say the MTC's role is more along the lines of setting policy. The FTA's role is more aligned with efficiencies and processes. And at SEATA, we do a lot of training and continuing education. Each member organization offers something beneficial and worthwhile.

Certainty and Flexibility

CROWELL:  

Moving on to a new topic: We've been talking a lot at conferences about “sham” and “business purpose” and other common law rules where the government argues that it is authorized to some extent to say, “Oh yes these were the rules, but they don't really apply to you.” What's your view on the states' use of these doctrines - where do you draw the line?

MAGEE:  

The general taxpayer complaint is that they “just need to know what the rules are” so they can comply and have some certainty in their business dealings. When the tax authority has discretionary powers to adjust returns to reflect the economic realities of a taxpayer's situation - instead of the technical presentation of the taxpayer's situation - then the taxpayer cannot or may not know for sure what the rules are. There is some truth, some validity, to the taxpayer's complaint, but I think the negatives are outweighed by the benefits the tax authority has in having flexibility to deal with abusive transactions. And there are abusive transactions. The largest benefit of discretionary adjustment provisions is their deterrent effect. If the taxpayer knows that a potentially abusive transaction may be challenged by the tax authority they are less inclined to enter into the transaction. If it is a transaction that is good for the business above and beyond the potential tax savings, the possibility that the tax savings associated with transaction may be challenged, should not be a deterrent.

Our tax system is so complicated, and necessarily so given the realities of multistate business and the intersection of state income tax systems with the federal system; it is so complicated that discretionary adjustment powers are necessary for the Department to respond when taxpayers wade too far out into the system's many gray areas.

Alabama Tax Litigation

CROWELL:  

Alabama's been involved in a lot of important tax litigation. There's the CSXcase of course, and Lynch. Earlier this year, the U.S. Supreme Court declined to review the Kimberly Clark case, which held that the entire gain from sale of Alabama property used in multistate business could be allocated to Alabama. You must be relieved that the litigation is finally concluded and the state has succeeded. Will there be further implications for taxpayers?

MAGEE:  

I'm sure you can understand that my legal team prefers I not comment on recent legal cases. What I can say is that we are very pleased with the way the courts ruled in the Kimberly Clark case. This situation is never going to happen again because the law was changed in ’01 so we hope all that is now behind us. We are evaluating our options in CSX. As far as Lynch,we don't know when the 11th circuit is going to rule on the Lynch case, but it did rule that we did not discriminate against minorities based on race or any other reason.

CROWELL:  

Bill Thompson, the Chief ALJ, recently ruled in Van Horn, that a single sales call by a salesperson in Alabama does not create nexus for sales tax purposes. Bill and I serve on the Hartman board together. We've known each other for probably 20 years at this point now and he just strikes me as one of the most intellectually honest ALJs out there.

MAGEE:  

He just follows his internal compass when he rules on cases. You have to respect that and I think most everyone he has dealt with would agree with me. He's a very good asset for taxpayers in our state, and while we may not always agree with what he decides, I think he really tries to apply the tax code as fairly as humanly possible.

CROWELL:  

One of the issues that was raised in the Van Horn case was this concept of trailing Nexus - when is there finality that you're out of the state? Is that more sort of a systems problem for states like Alabama or others? Can't there be a time when it's clear that Nexus doesn't continue?

MAGEE:  

Alabama's economic nexus approach for some of our taxes, such as the Financial Institution Excise Tax (Alabama's tax on banking entities) allows for a more malleable approach for these type of taxes relative to “trailing nexus.” However, the physical presence standard per Quill v. North Dakotawould seem to be the more appropriate standard in applying trailing nexus when dealing with Sales and Use Taxes. Quill'sphysical presence test is, however, based on the Commerce Clause, U.S. Const. Art. I, §8, cl. 3, which does not apply to intrastate transactions.

Changed Perceptions

CROWELL:  

Sounds like you're really proud of your team.

MAGEE:  

I am. Coming from the business world, I had absolutely no experience dealing with government employees at all. And I had a stereotype in my mind about them. They were people who couldn't get a job in the real world, people who did not have ambition or desire, people who didn't want to grow a business, etc. I had all these perceptions that have now been shattered after working along-side with them for the past two and a half years. For example, our Assistant Commissioner Mike Mason comes to work almost every day with a new idea or suggestion for us to implement and he's been here more than thirty years! You would think in all that time, his enthusiasm would diminish but it hasn't whatsoever. He came up with the idea we named “One Spot” to make it simpler for retailers, large and small, to file sales tax returns and payments in one online portal, a mission some said would never take place in Alabama. We go live with it on Oct. 1, 2013. Our goal is to constantly implement processes and procedures that make it easier and more efficient for the taxpayer to do business with the state. And you would think after thirty years you would not want to think about these issues anymore. But, for the most part, our team is still willing to try new things and not have tunnel vision on how things should be handled which is why I have enjoyed my time at DOR so much.

Credits and Abatements

CROWELL:  

Why should companies choose to locate or expand their business in Alabama? Are there currently any programs set up to encourage investment or expansion in Alabama?

MAGEE:  

The Department of Revenue is one of the few in the country that has a dedicated team for economic development. Some of my peers nationwide seem to have a contentious relationship between the Department of Commerce or the Department of Economic Development and the Department of Revenue. To avoid that, we created an Alabama Economic Development team. All our tax credits and abatements are statutory so that also helps us maintain consistency in awarding them. Our team will work with the Department of Commerce, local Chambers, and various state and local government officials on the recruiting process from the very start.

For example, a few months ago we all converged in a meeting at the Mobile Chamber of Commerce to meet with the executives of an international company that was contemplating opening a new plant in Mobile. We explained what tax credits and abatements their operation would likely qualify for under the statutes and after we finished, the Department of Commerce explained what they could do for the company. Engineers next spoke about permitting procedures, and then the power company made a pitch followed by the Chamber officials. There were others who spoke, but I think you can see how we operate. This team approach has worked really well for us, as evidenced by landing Airbus through EADS North America, Austal, Mercedes, Honda, and Hyundai. Company officials like it because we streamline the process saving them time and we like it because everyone is on the same page from the very start.

Our team also works with existing Alabama-based businesses to help them discover opportunities they may not know are available. Again, because our tax credits and abatements are statutory, our team awards them based on the merits of the project. I highly encourage any business thinking of or already operating in Alabama to call us and discuss their project and let us determine if there are any potential tax credit and abatement opportunities. This is a free service we provide to any size business and we will be happy to explain how the Revenue Department can assist them in growing their business.

CROWELL:  

Well, this interview has been very enjoyable as well. Thanks for sitting down with us, Julie.