Alabama's add-back tax statute imposes a discriminatory and extraterritorial restriction on a taxpayer's ability to deduct ordinary business expenses, and threatens to lead other states to approve similar laws. In a joint brief filed 2/23/2009, the Council on State Taxation and the NAM supported the appeal of this case to the Supreme Court, arguing that Alabama's add-back tax statute is unconstitutional.
The provision essentially restricts the ability of a taxpayer to deduct as expenses certain intangible and interest payments made to related companies. Our brief focuses on an exception to the law that makes the Alabama tax dependent on how well other states tax the transactions, which unconstitutionally varies a state tax liability based entirely on activities and tax policy shifts outside of Alabama. The issue of extraterritorial taxation from such add-back statutes arises in about 18 other states with similar legislation, and Supreme Court review is needed.
Unfortunately, the Court declined to review this appeal on April 27, 2009.