Sales Tax Slice: To Contest Local Assessments Learn ‘Where Bodies Are Buried,’ Look to State Law

Taxpayers can face special challenges when they deal with local sales and use tax assessments. 

So what is the best action a practitioner could take in challenging local sales and use tax assessments? Get local counsel, advises Bruce Ely, co-counsel to a taxpayer that recently succeeded in overturning a local assessment. It also helps to know the limitations that are imposed on the local taxing authority’s taxing power.

“You need local counsel who knows where the bodies are buried,” said Ely, who is partner with Bradley Arant Boult Cummings LLP in Birmingham. “Knowledge is power. You have to know of these quirks in local practice, and know the personalities, too.”

In Pacific Rim Capital Inc. v. Tuscaloosa Co. Special Tax Bd., decided on Apr. 15 in Montgomery County Circuit Court, the court found that the local taxing authority had to parallel state law when it comes to sales and use tax exemptions. When the taxpayer sought a local tax refund for a rental tax paid in error, the county tax authority assessed a use tax against the taxpayer based on its purchase and ownership of the same equipment it leases to customers in that county.

Since Alabama’s local “wholesale sale” definition is tied to the state definition, and the state excludes from tax tangible personal property purchased for rental, the local taxing authority could not impose use tax on those items at the local level, the taxpayer argued. The court found the local government must parallel the state tax levy, including the wholesale sale exemption.

This case stands for the proposition that Alabama’s local taxing authorities must follow state law, both in terms of appeals procedures and substantive issues such as exemptions, said Ely.  He said that he and co-counsel used an Alabama Supreme Court case from a few years ago as strong authority for their client. In that case, the Alabama Supreme Court found that local governments that administer their own sales, use, and rental taxes must parallel the state appeals procedure. Tuscaloosa County – the same county in the Pacific Rim case – had unsuccessfully argued that it did not need to follow the Alabama Taxpayers’ Bill of Rights and have an administrative hearing officer or ALJ, Ely said.

This issue could arise in other states that have self-administered local taxing authorities or private auditing firms, such as Louisiana, Colorado, and Arizona, noted Ely.

By Rebecca Helmes