United States

Alabama: City Business-License Tax Not Barred by Import-Export Clause

Oct 02, 2017
From KPMG TaxWatch

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Recently, the Alabama Court of Civil Appeals addressed whether a trial court erred when it held that the City of Prichard’s business-license tax, as applied to receipts from a taxpayer’s lumber sales, did not violate the Import-Export Clause of the U.S. Constitution. Specifically, the taxpayer argued that the city improperly included gross revenues from export sales in calculating its business-license tax liability. The Import-Export Clause, the taxpayer argued, prohibits the city from taxing receipts attributed to exported lumber. The Import-Export Clause provides that “no State shall, without the Consent of Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws...." The court noted that the cases relied on by the taxpayer were all decided before the 1976 case, Michelin Tire Corp. v. Wages. In this case, the U.S. Supreme Court “initiated a different approach to Import-Export Clause cases” and started looking closely at the nature of the tax being imposed to determine whether it truly qualified as an impost or a duty.

Applying the relevant policy considerations set forth in Michelin Tire for determining whether a tax is of the type the Import-Export Clause prohibits, the appeals court concluded that the city’s business-license tax was constitutional. The first consideration was whether the tax restrained the ability of the federal government to conduct foreign policy. The court observed that the nondiscriminatory business-license tax at issue applied to all businesses operating within the geographical limits of the city regardless of whether a business imported or exported goods. In the court’s view, there was no evidence indicating that the business-license tax, imposed for the privilege of operating a business within the geographical limits of the city, in any way impeded the regulation of foreign trade. The second relevant factor from Michelin Tire was whether the business-license tax affected harmony among the states. The court concluded that the taxpayer had failed to prove that the tax created interstate rivalry or friction between the states, although it might increase the cost of goods purchased by consumers. Accordingly, the court concluded that the business-license tax was not an impost or duty of the type contemplated by the Import-Export Clause. Please contact Shirley Sicilian at 202-533-3466 with questions on P.J. Lumber Co., Inc. v. City of Prichard or the Import-Export Clause in general.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.