Alabama: Tribunal reverses adjustments to taxpayer’s payroll factor

The Alabama Tax Tribunal recently held that amounts paid by a taxpayer to its parent company for employee services were not includable in the taxpayer’s payroll factor. The employees at issue had once been employed by the taxpayer, but after a corporate reorganization, they became employees of the parent company. Upon auditing the taxpayer, who had no employees of its own, the Department of Revenue adjusted the taxpayer’s payroll factor to include the amounts paid to the parent for employee services. Under Alabama’s payroll-factor regulation in effect for the tax years at issue, payments made to an independent contractor or any person not properly classifiable as an employee were excluded from the payroll factor. However, despite the regulation, an ALJ from the Department’s now-defunct Administrative Law Division had held in two prior cases that taxpayers with no employees of their own were required to include compensation of workers employed by an affiliate in their payroll factors. The Tribunal first rejected the Department’s position that it was required to follow the prior holdings. In the Tribunal’s view, the legislature intended the Tribunal to be independent from the Department, and there was nothing in the law that expressly stated the Tribunal was bound by the earlier Administrative Law Division decisions. The Tribunal, however, is required to follow its own decisions. In addressing the substantive issue, the Tribunal concluded that the regulation was consistent with the statute and because the workers at issue were not the taxpayer’s employees, amounts paid for their services could not be included in the taxpayer’s payroll factor.  Please contact Irisa Wood at 404-222-3287 with questions on Complete Payment Recovery Services, Inc. v. Alabama Dep’t of Revenue.