Case Title: M & Associates, Inc. v. City of Irondale

Citation: 723 So. 2d 592

Docket Number: 1962143

State: alabama

Court: Alabama Supreme Court

Date: 1998-07-31T00:00:00Z

Document:
723 So. 2d 592 (1998)
M & ASSOCIATES, INC.
v.
CITY OF IRONDALE.
1962143.

Supreme Court of Alabama.
July 31, 1998.
Rehearing Denied October 16, 1998.
Susan S. Wagner, Frank S. James III, and Elise B. May of Berkowitz, Lefkovits, Isom & Kushner, P.C., Birmingham, for appellant.
Frank R. Parsons, Birmingham, for appellee.
Kenneth Smith, league counsel, for amicus curiae Alabama League of Municipalities.
HOUSTON, Justice.
This appeal concerns the validity of a city ordinance that bases the amount to be paid for a business license on the total gross receipts from the sales of the business both from its facilities inside the city limits and from its facilities outside the city limits. The trial court entered a judgment upholding the ordinance. We reverse and remand.
M & Associates, Inc., d/b/a Industrial Electric Supply Company, is an Alabama corporation engaged in the wholesale electrical supply business. The company, which is headquartered in the City of Irondale, sells electrical supplies from its Irondale facility, as well as from its facilities in Mobile; Marietta, Georgia; Nashville, Tennessee; Pascagoula, Mississippi; and Belle Chasse, Louisiana. M & Associates does invoicing and billing from its corporate headquarters, through a centralized accounting system. All gross receipts are transmitted to its headquarters in Irondale.
From 1990 to 1994, M & Associates calculated its business license taxes based solely on the gross receipts from sales made from its Irondale facility. Based on those calculations, M & Associates paid $5,072.84 in 1990; $6,050.50 in 1991; $5,173.00 in 1992; $5,223.86 in 1993; and $4,584.20 in 1994. Following an audit in 1994, the City of Irondale notified M & Associates that it had not properly calculated its license taxes over the previous five-year period and that it owed $116,223.46 in past-due license taxes and penalties. *593 The city based that assessment on its Ordinance No. 805-89, entitled "An Ordinance to Prescribe and Fix Licenses for Businesses, Occupations and Professions in the City of Irondale, Alabama."[1] The ordinance applied to "diverse businesses, vocations, occupations, and professions engaged in or carried on in the City of Irondale." M & Associates was classified under § 1(107) of the ordinance, which assessed a license tax against corporations "engaged in the business of offering for sale, taking or soliciting orders for sale, or selling merchandise of any description, including any such products stored in a warehouse for sale, distribution or delivery, whether as owner, dealer, agent or cosignee." M & Associates was charged the "basic rate," which was "$100.00 plus an amount equal to 1/10 of 1% of gross receipts in excess of $50,000 during the preceding year." Section 3(a) of the ordinance provided:
(Emphasis added.)
After M & Associates questioned the city's authority to tax its sales made from facilities outside the city limits, the city filed an action in the Jefferson County Circuit Court, seeking a judgment for the amount of its assessment. The city also threatened to revoke M & Associates' business license if it did not pay the assessment. M & Associates paid $92,677.97 to the city, under protest, as payment in full for the taxes the city claimed were due for the years 1990-1994. The city agreed to accept this amount (reserving its right to sue to recover the interest it claimed was owed) and to dismiss its action; M & Associates filed this present action to recover its payment, plus attorney fees and expenses of litigation, under the Alabama Litigation Accountability Act, Ala. Code 1975, § 12-19-270 et seq. The trial court's order read, in pertinent part, as follows:
"Whereas:
(Emphasis original.)
Section 11-51-90, Ala. Code 1975, provides in pertinent part:
(Emphasis added.) Section 11-45-1, Ala. Code 1975, provides:
Section 11-51-90(b) "was an admonition to municipalities to so frame their tax ordinances as to avoid transgression of the commerce clause of the federal Constitution." Ingalls Iron Works Co. v. City of Birmingham, 248 Ala. 417, 421, 27 So. 2d 788, 791 (1946) (construing Title 37, § 735, Code of 1940, the predecessor to § 11-51-90). Ordinance No. 805-89 specifically recognized that its scope was limited by federal and state law:
Relying on a number of decisions from the United States Supreme Court, including Gwin, White & Prince v. Henneford, 305 U.S. 434, 59 S. Ct. 325, 83 L. Ed. 272 (1939); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977); and Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232, 107 S. Ct. 2810, 97 L. Ed. 2d 199 (1987), M & Associates contends that the ordinance upon which the city's tax assessment is based violated the Commerce and Due Process Clauses of the United States Constitution by authorizing a tax based on the total gross receipts from sales made at its facilities outside the state. Citing Complete Auto Transit, which sets out a four-part test for determining the constitutionality of local taxes on interstate commerce, M & Associates argues that a tax of the sort imposed on it by the city can be upheld against a Commerce Clause challenge only "when the tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." 430 U.S.  at 279, 97 S. Ct.  at 1079.[2] M & Associates maintains *595 that the ordinance runs afoul of the second (fair apportionment) and fourth (fair relation) parts of the Complete Auto Transit test and, therefore, that it violates § 11-51-90. M & Associates also contends that the ordinance violates § 11-51-90 by authorizing a tax based on the gross receipts from in-state sales made at its Mobile facility.
The city contends that the Commerce Clause does not exempt businesses engaged in interstate commerce from paying a reasonable business license tax for the privilege of doing business in the city, provided that interstate commerce is not unduly burdened or discriminated against by the tax. It argues that it had the statutory authority to impose the tax and a concomitant statutory duty to enforce it. The city maintains that the amount of its tax assessment was reasonable when compared to the amount of M & Associates' gross receipts over the five years in question (approximately $110,000,000) and when considered in light of the number of services the city provides to all city residents (police protection, fire protection, water service, street maintenance, etc.).
We note at this point that business license ordinances are presumed to be reasonable and that the burden rests upon the business challenging a license tax charged to it to prove that that tax is unreasonable or that the ordinance was illegally adopted or violates the statutory or fundamental law of the United States or the State of Alabama. State Department of Revenue v. Reynolds Metals Co., 541 So. 2d 524 (Ala.1988).
It is well settled that upon a challenge, a court must evaluate, under the Complete Auto Transit test, whether a local tax is fairly apportioned; it does this by examining the nature of the tax to see whether the tax is "internally and externally consistent." The "internal consistency" test is passed only when the tax is structured so that if every state imposed an identical tax, no multiple taxation would result. In Goldberg v. Sweet, 488 U.S. 252, 260-61, 109 S. Ct. 582, 588, 102 L. Ed. 2d 607 (1989), the Supreme Court stated:
More recently, in Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 115 S. Ct. 1331, 131 L. Ed. 2d 261 (1995), surveying its previous decisions dealing with the Commerce Clause's limitations on state taxation *596 of interstate commerce, the Court reaffirmed the long-standing principle that a state tax calculated on the basis of the gross receipts of a business must not violate the prohibition against multiple state taxation that was recognized in earlier cases such as Gwin, White & Prince, Inc. v. Henneford, supra.
In Gwin, White & Prince, the sole question was whether a Washington privilege tax measured by the gross receipts of the appellant from its business of marketing fruit shipped from Washington to different places of sale in various states and in foreign countries was an unconstitutional burden on interstate commerce. The Court held that it was, and reversed the judgment of the Washington Supreme Court:
305 U.S.  at 435-41, 59 S. Ct. 325 (reversing 193 Wash. 451, 75 P.2d 1017 (1938)).
Based on these statements in Gwin, White & Prince, we conclude that the license tax authorized by Ordinance No. 805-89 was not "internally consistent," as that term has been defined by the United States Supreme Court, because, if local governments in other states in which M & Associates does businessGeorgia, Louisiana, Mississippi, and Tennesseewere to impose license taxes based on gross receipts from sales made within their respective jurisdictions, then multiple state taxation of interstate commerce would result. In other words, if M & Associates were to sell a certain piece of electrical equipment from its facility in Marietta, Georgia, that one sale would be subject to taxation in both Georgia and Alabama. A license tax ordinance that creates the possibility of such multiple taxation does not satisfy the "fair apportionment" part of the Complete Auto Transit test and, therefore, violates the Commerce Clause. In this respect we note, contrary to the city's assertions, that the Supreme Court has "categorically rejected" the necessity of a showing that any other state has actually imposed a license tax based on gross receipts.[3] See Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, supra; Armco Inc. v. Hardesty, 467 U.S. 638, 104 S. Ct. 2620, 81 L. Ed. 2d 540 (1984); American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 107 S. Ct. 2829, 97 L. Ed. 2d 226 (1987). We hold, therefore, that Ordinance No. 805-89, insofar as it assessed a license tax based on M & Associates' gross receipts from out-of-state sales, violated the Commerce Clause.[4] See Oklahoma Tax Comm'n v. Jefferson Lines, Inc., supra, at 185, 115 S. Ct. 1331 ("A failure of internal consistency *599 shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transaction, since allowing such a tax in one State would place interstate commerce at the mercy of those remaining States that might impose an identical tax.").
The record does not indicate that the issue whether Ordinance No. 805-89 violated § 11-51-90 by authorizing a tax based on the gross receipts from sales made at M & Associates' Mobile facility was presented to the trial court as part of the stipulation of the parties; therefore, that issue is not properly before this Court.[5] In any event, we note that this Court has held that a city "can impose on businesses located within its corporate limits a license fee based upon the gross receipts of those businesses despite the fact that some of those receipts are derived from transactions conducted outside the city's corporate limits." See City of Tuscaloosa v. Tuscaloosa Vending Co., 545 So. 2d 13, 14 (Ala.1989):
Tuscaloosa Vending controls the question whether a city can base its business license tax on the gross receipts from sales made by a business outside the city limits and the police jurisdiction.
For the foregoing reasons, the judgment is reversed and the cause is remanded.
REVERSED AND REMANDED.
HOOPER, C.J., and MADDOX, ALMON,[*] SHORES, COOK, SEE, and LYONS, JJ., concur.
[1]  The city repealed Ordinance No. 805-89 effective January 1, 1995, and replaced it with an ordinance that did not base license taxes on a business's total gross receipts (Ordinance No. 4-1194). However, effective January 1, 1998, the city returned to a business license tax based on total gross receipts (Ordinance No. 6-1197).
[2]  The United States Supreme Court has on a number of occasions considered whether state taxes violate the Commerce Clause. The wavering doctrinal lines of the Court's pre-Complete Auto Transit cases reflect the tension between two competing concepts: the view that interstate commerce enjoys a "free trade" immunity from state taxation; and the view that businesses engaged in interstate commerce may be required to pay their own way. Complete Auto Transit sought to resolve this tension by specifically rejecting the view that the states cannot tax interstate commerce, while at the same time imposing limits on state taxation of interstate commerce. The purpose of the Complete Auto Transit test was to establish a consistent and rational method of inquiry focusing on the practical effect of a challenged tax. See Goldberg v. Sweet, 488 U.S. 252, 259-60, 109 S. Ct. 582, 102 L. Ed. 2d 607 (1989), and the cases cited therein. Since the Complete Auto Transit decision, the Supreme Court has applied its four-part test on numerous occasions. We have applied it as well. See, e.g., White v. Reynolds Metals Co., 558 So. 2d 373 (Ala.1989); Ex parte Fleming Foods of Alabama, Inc., 648 So. 2d 577 (Ala.1994).
[3]  M & Associates' attorney indicated during the oral argument of this case that the record was silent as to whether any other state has imposed a gross-receipts-based license tax on M & Associates. Although the record does not appear to be completely silent, it is by no means clear. For example, Teresa Stowe, a former accounting manager and controller with M & Associates, testified by deposition:

"Q. Okay. Which of the cities and the offices that you had under your control paid a license based on gross receipts?
"A. To the best of my knowledge, the Mobile office did, the Marietta office did. I don't believe the Pascagoula office did. I never examined the licenses for Belle Chasse. At one point the Memphis license was. I do not believe that the Nashville license was based on gross receipts, but I'm not exactly sure."
Walter E. Mason, the president of the company, testified by deposition that he was not aware that the Marietta, Georgia, business license was based on gross receipts.
[4]  In light of our holding that the ordinance did not pass constitutional muster under the "internal consistency" test, we pretermit any discussion of M & Associates' other arguments concerning the constitutionality of the ordinance.
[5]  Also not properly before this Court is the issue whether M & Associates is entitled to an award of attorney fees and expenses under the Alabama Litigation Accountability Act. It does not appear that that issue was presented to the trial court; even if it was, the trial court, because of its holding, never reached it.
[*]  Although Justice Almon was not present at oral argument in this case, he has listened to the tape of oral argument.