State Supreme Court upholds corporate tax

Published 11:34 pm Monday, September 22, 2008

MONTGOMERY – The Alabama Supreme Court’s decision in a corporate tax case has allowed the state to avoid the prospect of losing millions of dollars in revenue.

On Friday, the state’s highest court approved how the state collects some corporate taxes in a 9-0 ruling. VFJ Ventures Inc. had challenged the collection after state tax officials said the company must pay more than $1 million to the state.

The state Revenue Department has about 30 similar cases pending before an administrative law judge. The department’s tax policy administrator, Joe Garrett, said about $50 million in tax assessments are at dispute in those cases. Plus, if the state had lost the case, it could have also been facing $50 million to $100 million in tax refunds, Garrett said Monday.

“We’re very thankful for the unanimous decision by the Supreme Court,” state Revenue Commissioner Tim Russell said Monday.

VFJ spokesman Paul Mason said Monday the apparel company does not comment on litigation.

The company can ask the U.S. Supreme Court to review the Alabama case, but Mason would not say whether that will be done.

The Alabama Supreme Court’s decision upheld a state Court of Civil Appeals decision from February. The civil appeals court had reversed a ruling by Montgomery County Circuit Judge Tracy McCooey in favor of VFJ Ventures.

The ruling Friday upholds tax collections based on a law the Legislature passed in 2001 during the administration of former Gov. Don Siegelman. That law limited some corporate tax deductions for interest and royalty payments. It was passed during a special session called to find additional revenue to prevent cuts in the budgets for Alabama schools.

VFJ Ventures, previously known as Vanity Fair, challenged the law.

The law was designed to close what the Siegelman administration 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 said it was a way some companies could avoid paying Alabama taxes.

The law passed in 2001 required companies to add back as taxable income those interest and royalty payments.

One exception in the law says a company doesn’t have to add back the deductions if it proves such adjustments were unreasonable.

VFJ Ventures, which makes and markets jeans 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.

McCooey ruled after a four-day trial that the 2001 law did not define “unreasonable.” She then ruled that the royalty payments made by VFJ to Wrangler and Lee represented “real and necessary costs of doing business in Alabama,” and that it was unreasonable for the state to deny them.

But the appeals court, in a 78-page unanimous ruling written by Judge Bill Thompson, ruled that the add-back tax charged VFJ Ventures was fair.