Opinion ID: 1307781
Heading Depth: 2
Heading Rank: 2

Heading: the exemption certificate

Text: Union argues that the Certificate of Industrial Exemption granted to Collier specifically requires the hypothetical tax liability of the exempt plant to be determined by separate accounting and that the resulting exemption be applied to directly offset the consolidated tax liability of Union. Union points to section I of the Certificate as mandating this result. Section I states: All income tax returns and other tax returns required to be filed with the Department of Revenue or other departments shall be complied with as though no exemption existed and copies of all returns shall be furnished to the Commissioner of Economic Development on their due dates, including any extension of time granted by the department whose tax returns are involved. The applicants shall indicate on or attached to the returns what portion of the receipts, income and expenses are derived from the exempt property as defined in paragraph A and may show on the returns the amount of credits claimed. The fact that an applicant may be included as a member of a consolidated group which files a consolidated income tax return with the State of Alaska shall not operate to deny the exemption from Alaska income taxes granted herein to any such applicant. However, if consolidated returns are filed the amount of the tax credit granted shall be only that amount that would be allowed if separate returns had been filed. For example, the exempted business may have a net income for tax purposes (computed as if no exemption existed) of $100,000 and a tax of $8,370. Whereas, a consolidated return showing a $1,000,000 in taxable income would have a tax of, say, $93,000. (Part of its tax being in a higher tax rate classification.) The amount of tax credit claimed on the consolidated return would be $8,370 and not the amount of tax arising on $100,000 income if it were computed as coming off the top at the higher tax rate. (Note: The income and tax figures used in this paragraph are hypothetical. Actual figures would have to be used in each instance.) Under AS 43.25.040, the Exemption Certificate is considered a contract between the grantee and the state. In interpreting this contract, 71 Am.Jur.2d State and Local Taxation § 331 at 642 (1973) provides guidance: The principle that tax exemption laws are strictly construed against the exemption is especially applicable to contracts granting exemption from taxation. Such contracts are in derogation of the sovereign authority and of common right, and therefore are not to be extended beyond the exact and express requirements of the language used, construed strictissimi juris. (Footnotes omitted). If the state's interpretation of the contract is reasonable, that interpretation will control. Only if the taxpayer establishes that the contract clearly and unequivocally extends the exemption beyond the state's interpretation should the taxpayer prevail. [7] This presumption in favor of the state's interpretation is based on the disruption in the equality of taxation that an exemption creates. In order to determine whether the state's interpretation of the Exemption Certificate is reasonable, it is necessary to ascertain whether this interpretation is in harmony with the purposes of the Alaska Industrial Incentive Act since it was this legislation which forms the basis for the Exemption Certificate. The Alaska Industrial Incentive Act does not expressly address the methodology to be used for applying the exemption against the tax liability of an applicant. For most businesses, formulary apportionment is not used in computing income tax. Apportionment is used only by companies engaged in multistate activities. When an applicant is a member of a consolidated group  such as Collier with Union Oil  and formulary apportionment is used on the consolidated return, complications arise which the Act simply does not address. An application of the statute to this situation must be adopted which is consistent with the statute's general scheme and intent. [8] The statute authorizes only an exemption from income taxes which would otherwise be due on industrial development income. AS 43.25.010(a) states that [a]n exempted business is exempt from income tax upon its industrial development income derived during the 10 years following the date of beginning its operations as determined by the [D]epartment [of Commerce and Economic Development]. An exemption is defined as immunity from certain legal obligations, as ... the payment of taxes. Black's Law Dictionary 513 (5th ed. 1979). The problem with Union's approach is inherent in the two accounting methods which it utilizes. Use of separate accounting to calculate industrial development income and formulary apportionment to calculate income from all its Alaska operations allows Union to shelter the income from its other Alaska operations through the use of the tax credits generated from the income derived from the exempt plant. While the exempt plant should be tax free, it goes well beyond the purposes of the Industrial Incentive Act to allow the exempt plant to provide tax immunity to Union's other operations. [9] By employing a different accounting method, Union has exceeded the tax immunity created by the Alaska Industrial Incentive Act. The exemption should be limited to solely that which the act specifically exempts  the income tax liability of the exempt plant's income. Since this tax liability would be determined by formulary apportionment, the exemption should likewise be limited to the liability as determined by this method. This is precisely the result under the state's interpretation. Turning to the language of the Exemption Certificate, we find ample support for the state's interpretation. The second sentence in the second paragraph of section I states: [h]owever, if consolidated returns are filed the amount of the tax credit granted shall be only that amount that would be allowed if separate returns had been filed. The state argues that this phrase limits the tax exemption to the tax liability of the exempt plant computed by formulary apportionment. If Collier, the applicant, had filed a separate return, its tax liability would have been computed by formulary apportionment, since it is a unitary business with activities both inside and outside of Alaska. [10] The amount of exemption would therefore be limited to the separate tax liability of Collier as computed by formulary apportionment, according to the language of the second sentence. More importantly, the Certificate grants the exemption to the applicant, which is specifically designated in the contract as Collier  not the consolidated group. The state's interpretation of the contract limits the exemption to Collier. Under Union's approach, the entire consolidated group pays no state income tax, hence extending the benefit beyond the contract provisions. Union points to language in the Certificate to support its interpretation. Section I's requirement that the applicant report income and expenses is stressed. Union contends that had formulary apportionment been required, there would have been a requirement in the Certificate for a separate statement of property, payroll, and sales of only the exempted business. Since such information need not be reported, the Certificate contemplates the exclusive use of separate accounting in applying the exemption. Union also points to the Exemption Certificate referring to the amount of credit to which the consolidated group is entitled. Union argues this means that the amount of exemption computed by separate accounting should be directly applied to the consolidated tax return. A credit, in taxation, refers to an amount which may be subtracted from the computed tax itself (in contrast to a deduction which is generally subtracted from gross income). See Black's Law Dictionary 331 (5th ed. 1979). This language lends some support to a direct application of the exempt plant's tax liability against the consolidated return. [11] But while Union has shown that the contract contains some language in support of its position, it has not established that the state's interpretation is unreasonable. Indeed, although the Certificate is not free of all ambiguity, the state's interpretation appears considerably more reasonable than Union's when both the language of the Certificate and the enabling legislation are considered. For these reasons, we uphold the state's interpretation of the Certificate to limit the exemption to the tax liability of Collier as computed by formulary apportionment. [12]