The State Giveth and the State Taketh Away: Occupational Taxes

Alabama municipalities must seek state approval to levy occupational taxes

Christian Borek, Attorney with Burr & Forman

In early February, the City of Montgomery was considering implementing a 1 percent occupation tax on certain persons working within its city limits. An “occupational tax” is a form of excise tax imposed on certain individuals for their conduct of a profession, occupation, calling or vocation. The tax, sometimes levied as a license fee, is measured by a percentage of a person’s gross receipts from working within that city county (“municipality”). According to the Alabama League of Municipalities, 26 Alabama municipalities impose occupational taxes on employees, but businesses in the remaining parts of Alabama can rejoice from recent legislative opposition to these taxes.

On February 4, Representative Chris Sells introduced Act No. 2020-14 (the “Act”), which Governor Kay Ivey signed into law on March 3. The Act prohibits any municipality from implementing an occupational tax without approval from the state legislature. Thus, municipalities are not precluded from enacting occupational taxes; only the way in which the occupational taxes are enacted has changed. The Act, despite becoming effective March 3, 2020, applies retroactively to any occupational tax that went into effect on or after February 1, 2020. While many are rejoicing at the fact that municipalities cannot, on their own accord, levy occupational taxes, the municipalities are surely displeased.

Municipalities Face Uphill Battle to Regain Power to Implement Occupational Tax

Despite their displeasure with the Act, it is unlikely that the municipalities will be able to overturn it. That is, the municipalities do not have a strong legal argument to overturn the new law.

When Alabama amended its Constitution in 1901, one of the predominant themes that continues to this very day is the restrictions placed on the ability of municipalities to govern themselves. The Alabama Supreme Court has frequently inserted this theme into Alabama law. In doing so, it has stated that municipalities are nothing more than creatures of the state, and, therefore, only have the powers delegated to them by the state and the Alabama Constitution. Yet, the Alabama Supreme Court has also stated that even those powers delegated to a municipality can, absent some constitutional prohibition to the contrary, be taken from it by the state. Thus, while the state may have permitted municipalities to levy occupational taxes in the past, it had the right to, and did, strip them of that delegated power.

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Regardless of the fact that the state can generally delegate power to municipalities as it sees fit, some will argue that this law is unconstitutional because it was in reaction to the City of Montgomery’s attempt to levy an occupational tax. This argument will likely not succeed in overturning the Act. This is because the Act is a “general law,” rather than a “special or private law” or a “local law.” General laws are laws that apply to the whole state or, alternatively, to certain municipalities defined by the legislation. Special or private laws are laws that apply to “an individual, association or corporation,” whereas local laws are laws that are neither a general nor private law. Local laws are generally specific to a certain municipality.

While general laws, such as Act No. 2020-14, are ordinarily meant to apply to a number of municipalities (or the entire state), the Alabama Supreme Court has stated that such characterization is not affected when the general law was enacted; it only applied to one municipality. In other words, it does not matter that a law was drafted in response to the City of Montgomery’s attempt to levy an occupational tax because the Act applies to all municipalities that did not have an occupational tax in place as of February 1, 2020.

Businesses and Employees Benefit

Overall, Alabama and the businesses (including their employees) in this state — current and future — are the beneficiaries of this piece of legislation. Act 2020-14 will likely make it more difficult for municipalities to pass occupational taxes because any new occupational taxes must be approved by the state legislature. Not only will this keep money in the hands of employees, but it will also aid in keeping Alabama a competitive, low-tax environment in attracting companies to locate their operations in this state.

Christian W. Borek is a Birmingham-based attorney in Burr & Forman’s Corporate & Tax practice group, where he counsels clients on tax and business planning. He may be reached at [email protected].

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