Amicus Curiae Brief — Millcraft-SMS Services, L. L. C. v. Underwood

No. 02-260 ~~ | |

—__=—__ es 6 2007 |

IN THE |

Supreme Court of the Anited States © |

MILLCRAFT-SMS SERVICES, L.L.C. and

ARIZONA CHEMICAL COMPANY,

Petitioners,

V.

CYNTHIA UNDERWOOD, in her official capacity as

Commissioner of the State of Alabama

Department of Revenue,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Alabama

BRIEF OF AMICUS CURIAE

COUNCIL ON STATE TAXATION

IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI

DOUGLAS L. LINDHOLM *

President/Executive Director

DIANN L. SMITH, General Counsel

STEPHEN P.B. KRANZ, Tax Counsel

WILLIAM D. PELTZ, Chair

BOBBY L. BURGNER, Vice-Chair

J. HUGH MCKINNON, Counsel

Lawyers’ Coordinating Subcommittee

COUNCIL ON STATE TAXATION

122 C St., N.W., Suite 330

Washington, D.C. 20001

* Counsel of Record (202) 484-5215

WILSON-EPES PRINTING CO., INC. — = (202) 789-0096 — WASHINGTON, D. C. 20001

TABLE OF CONTENTS

A. Alabama’s Retroactive With-drawal Of A

Procedure To Obtain a Remedy For An

Illegally Collected Tax Violates The Due

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B. Aggrieved State Taxpayers Face Limited

Forums For Challenging Parochial State

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C. The States’ Continued Failure To Provide

Constitutionally Adequate Remedies Results

In a Real Loss of Money and Time by

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Under The Due Process Clause Of The United

States Constitution, The Alabama Supreme Court

Unconstitutionally Deprived The Petitioners Of

Their Property By Retroactively Removing

Previously Established Procedures On Which The

Petitioners Had Relied To Remedy An

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I. DUE PROCESS REMEDY RULES IN

crerccass...

Il. ALABAMA’S REMEDY DESIGN AND

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TABLE OF CONTENTS—Continued

Page

Ill. ALABAMA’S RETROACTIVE WITH-

DRAWAL OF A PROCEDURAL REMEDY

FOR AN ILLEGALLY COLLECTED

TAX VIOLATES THE DUE PROCESS

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TABLE OF AUTHORITIES

CASES Page

Atchison, T. & S.F.R. Co. v. O’Conner, 223 U.S.

NALD seiiliciabeecealeadsssysssibichonestthidbnconstekess 9

California v. Grace Brethren Church, 457 U.S.

oe ig gt Ee TCEOLON SORT CET DOPE COE EE 7

Ford Motor Co. v. Dep’t of Treasury of Indiana,

PE Wis Me CIRO)» cessserviassenisbesnssspsastnesadeniossis 7

Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) .. 8

Graves v. McDonough, 88 So. 2d 371 (Ala.

I din cad tliideriebtindeunishuunaaniasmseeimnasrtininane 11

Harper v. Virginia Dep’t of Taxation, 509 U.S.

Re EP vaciensesticih vachvonaritsicchiveniiicsaaiacwsbiahiiwsennsin 9

McKesson Corp. v. Division of Alcoholic Bever-

ages and Tobacco, 496 U.S. 18 (1990)........ 4,9, 10, 13

McKesson Corp. v. Division of Alcoholic

Beverages and Tobacco, 524 So. 2d 1000

RN tall cuakciihicdicia kde treks tovsnvieneosntdesoroeewsdocese 10

Milwaukee Safeguard Ins. Co. v. Selcke, 754

N.E.2d 349 (Ill. App. 2001), cert. denied, U.S.,

eee EE crc stvecccbnsanpntssednsonenssmerenee 4

Monroe v. Valhalla Cemetery Co., 749 So. 2d

470 (Ala. Civ. App. 1999), cert. denied, (Ala.

au ics ic iiconannsceoscssnsesspoessnsssaseiscoceein 6, 11

Newsweek, Inc. v. Department of Rev. of the

State of Florida, 522 U.S. 442 (1998) ........... 4,5, 7, 10

In the matter of Panhandle Eastern Pipeline Co.,

et al., Kan. Supreme Ct., No. 86,277 (2002)..... 14

Patterson v. Gladwin Corp., et al., AL Sup. Ct.,

SOUR RN E FF CTE TIGA) ivsesicevnsnennerisveccsessessessecces 5

Reich v. Collins, 513 U.S. 106 (1994) ........... 5, 10, 13, 14

Sharper Image. v. Department of Revenue, 704

So. 2d 657 (Fla. Dist. Ct. App. 1997), cert.

denied, 526 U.S. 1016 (1999) .........sessessesseeees 4

iV

TABLE OF AUTHORITIES—Continued

Page

Sizermore v. Rinehart, 611 So. 2d 1064 (Ala.

Civ. App. 1992), writ quashed as impro-

vidently granted, 611 So. 2d 1069 (Ala. 1993).. 6

South Central Bell Telephone Co. v. Alabama,

S26 GS. EGO CA 9OD) covisciniicaccevctivevevansovnies 4,35% 11, 12

White v. Reynolds Metals Co., 558 So. 2d 373

(Ala. 1989), cert. denied, Reynolds Metals Co.

v. Sizemore, 496 U.S. 912 (1990) ..........ceseeeeeeee 2

UNITED STATES CONSTITUTION

U.S. Comat. Amend, ATV, © 1 ...ccccresesesasssvssceiecusie 9

UB CR ARIE, TEE iid con se csnechichscnaincibieaittsinncins 6, 7

STATUTES

ye wii Clg & hb | Rue eyecare Qeremere es esrers PAh SN CE 6

Ala. Code 1975 §§ 40-14-40, and — 4, repealed

by Act No. 665, 1999 Ala. Acts 131, Second

SOSH THON oii cscsscbiiiceecerdscohasncblnttiockae y

Taxpayers’ Bill of Rights and Uniform Revenue

Procedures Act, Ala. Code 1975, § 40-2A-1

0 BU: * srosncssnsuctactinatbabsinsesiontencaremiaaaicbeien 11

IN THE

Supreme Court of the United States

No. 02-260

MILLCRAFT-SMS SERVICES, L.L.C. and

ARIZONA CHEMICAL COMPANY,

Petitioners,

Vv.

CYNTHIA UNDERWOOD, in her official capacity as

Commissioner of the State of Alabama

Department of Revenue,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Alabama

BRIEF OF AMICUS CURIAE '

COUNCIL ON STATE TAXATION

IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI

SUMMARY OF THE ISSUE

A state’s refusal to timely fix an unconstitutional tax

and its subsequent failure to provide the constitutionally

' No counsel for a party authored this brief in whole or in part, and no

person or entity, other than amicus curiae, has made a monetary

contribution to the preparation or submission of this brief. Written

consents for the filing of this brief have been obtained from the Petitioner

and Respondent and filed with the Clerk of the Court.

2

mandated remedies to its aggrieved taxpayers serves neither

the individual taxpayers involved nor the greater populace to

which the state is ultimately responsible. Once a mistake has

been made, a state needs to fix it promptly and not allow it to

fester and spread. Alabama failed to fix its mistake and now

fails to remedy the mistake it made.

The history of this case could be classified as a “comedy of

errors” if not for the fact that the results are painfully serious.

Alabama imposed an unconstitutional franchise tax on out-of-

state corporations for decades. Ala. Code 1975 §§ 40-14-40,

and —4, repealed by Act No. 665, 1999 Ala. Acts 131, Second

Special Session. The Alabama Supreme Court let this tax

stand, not once, but twice. White v. Reynolds Metals Co., 558

So. 2d 373 (Ala. 1989), cert. denied, Reynolds Metals Co. v.

Sizemore, 496 U.S. 912 (1990); South Central Bell Telephone

Co. v. Alabama, 526 U.S. 160 (1999) (overruling Alabama

Supreme Court upholding constitutionality of Alabama

foreign franchise tax). When this Court finally reviewed the

tax, after denying review in Alabama’s first decision

upholding the tax, the tax was struck down 9-0. South

Central Bell, 526 U.S. 160. Alabama knew the problems

with its tax and never even argued to this Court that its tax

was constitutional! Alabama continued to collect the tax long

after it recognized its inconstitutionality and denied the

taxpayers’ request to hoid the contested funds in escrow by

promising that all of the taxpayers’ remedies at law would

remain available. Now, after having lost on the con-

stitutionality, Alabama claims for the first time that a 45 year

precedent relied upon by Alabama taxpayers and lower courts

is not the appropriate procedure for taxpayers to obtain a

remedy for the illegally collected tax. Alabama, after having

already reaped the rewards of this Court’s decision not to

review the tax the first time around, now continues to avoid

the consequences by imposing unconstitutional procedural

blockades to relief. COST hopes that this Court will not let

Alabama get away with this.

3

INTEREST OF THE AMICUS CURIAE

The Council On State Taxation (COST) submits this brief

as amicus curiae in support of Petitioners in the above

captioned matter. COST is a non-profit trade association

organized in 1969 as an advisory committee to the Council of

State Chambers of Commerce.’ COST, which was separately

incorporated on January 1, 1992, has a membership of over

540 multistate corporations involved in interstate and

international commerce. COST’s objective is to preserve and

promote equitable and nondiscriminatory state and local

taxation of its members and all multi-jurisdictional business

entities.

The present case involves Alabama’s retroactive

withdrawal of a previously available procedural remedy for

taxpayers seeking refunds of a franchise tax declared

unconstitutional by this Court. Alabama’s former franchise

tax? was imposed on a different base for out-of-state

taxpayers than for in-state taxpayers. The result was that out-

of-state taxpayers frequently bore a heavier tax burden than

they would have if they had been incorporated in Alabama.

In 1999, this Court determined that Alabama’s franchise tax

was unconstitutional. South Central Bell, 526 U.S. 160."

? COST was previously the Committee On State Taxation but changed

its name to the Council On State Taxation by vote of its membership

November 6, 2001.

> In 1999 the Alabama legislature repealed the unconstitutional tax and

adopted a new business privilege tax on all corporations doing business in

the State. Act No. 665, 1999 Ala. Acts 131, Second Special Session.

* South Central Bell is the predecessor to the case at issue here. The

taxpayers in South Central Beil settled their claims individually with the

state following this Court’s ruling and their case was dismissed. This case

then took the lead regarding the establishment of the remedy for the

unconstitutional tax.

4

Three later,” the State continues to add insult to injury by

refusing to review Petitioners’ claims for a remedy. This case

raises the issue of what is the constitutional standard by

which states are judged in providing procedural remedies for

their discriminatory tax schemes and as such is at the core of

COST’s mission.

Many of COST’s members are engaged in business in the

State of Alabama and many have paid the unconstitutional

franchise tax. Thus, these members have a particular interest

in the remedial landscape in the State. Further, ail of COST’s

members are subject to a variety of potentially invalid state

taxes. These members have a continuing interest in the

availability of clear and certain procedural and substantive

remedies to such illegal taxes. COST and its members have

seen first hand the financial loss and confusion that results

when taxpayers are denied their constitutional remedies for an

invalid tax. As a result of this continuing interest in the

problems of remedies for invalid taxes, COST has performed

in-depth studies of the law of state tax remedies and continues

to monitor the problem. In furtherance of this study and

monitoring, COST has filed amicus curiae briefs with this

Court in numerous other cases concerning the scope of the

Due Process Clause requirements related to remedying

unconstitutionally collected taxes. McKesson Corp. v. Divi-

sion of Alcoholic Beverages and Tobacco, 496 U.S. 18

(1990); Newsweek, Inc. v. Department of Rev. of the State of

Florida, 522 U.S. 442 (1998); Sharper Image. v. Department

of Revenue, 704 So. 2d 657 (Fla. Dist. Ct. App. 1997), cert.

denied, 526 U.S. 1016 (1999); and Milwaukee Safeguard Ins.

* One of the many truly galling things about this case is that the State

basically agreed that its franchise tax was unconstitutional before even

arguing its case to this Court by failing to present any argument

supporting its constitutionality. In its argument in South Central Bell, like

in the case sub judice, the State tried to hide behind sovereign immunity

to shield it from its constitutionally mandated obligations.

5

Co. v. Selcke, 754 N.E.2d 349 (Ill. App. 2001), cert. denied,

U.S., No. 01-1311, (2002). In fact this Court endorsed the

“bait and switch” language first proposed by COST in its

amicus brief in Reich v. Collins. Today, COST and its mem-

bers remain concerned about the states’ continuing reluc-

tance, as evidenced by the Alabama Supreme Court’s opinion

in this case, to provide remedies that comport with Due

Process. Therefore, COST and all of its members have an

interest in this case and their knowledge can add to the

discussion of the issue.

REASONS FOR GRANTING THE PETITION

A. Alabama’s Retroactive Withdrawal Of A Pro-

cedural Remedy For An Illegally Collected Tax

Violates The Due Process Clause.

This Court is asked once again to overturn a state court’s

decision to ignore Due Process requirements for remedies

associated with illegally collected state taxés. As in the past,

a state is attempting to avoid the consequences of imposing

an unconstitutional tax by retroactively limiting the pro-

cedural remedies available to injured taxpayers seeking

recovery of the taxes paid. This Court has specifically

forbidden such “bait and switch” tactics in Reich v. Collins,

513 U.S. 106 (1994) and applied the prohibition again in a

summary reversal in Newsweek, 522 U.S. 442. Thus, this

Court has shown a strong predilection for limiting states’

disobedience in this area.

Notwithstanding this Court’s explicit, recent, and repeated

prohibition on retroactively changing the available procedural

remedies with the effect of denying a taxpayer meaningful

backward looking relief for an unconstitutionally collected

tax, the Alabama court in this case managed to conclude that

Reich does not apply here because a “reasonable taxpayer

would have thought that [the administrative remedies]

represented . . . the exclusive remedy for unlawful franchise

6

taxes.” Patterson v. Gladwin Corp., et al., AL Sup. Ct., No.

1001747 (5/17/02) (emphasis in original)(quoting Reich v.

Collins). The implausibility of this analysis is evidenced by

the fact that two Alabama appellate courts had held pre-

viously that the procedural remedy chosen by the Petitioners

is available. Monroe v. Valhalla Cemetery Co., 749 So. 2d

470, 473 (Ala. Civ. App. 1999), cert. denied, (Ala. Nov. 5,

1999), and cert. denied, 529 U.S. 1022 (2000); Sizermore v.

Rinehart, 611 So. 2d 1064, 1067-68 (Ala. Civ. App. 1992),

writ quashed as improvidently granted, 611 So. 2d 1069 (Ala.

1993). Thus, it is not just the Petitioners or their advisors or

all of the taxpayers over the past 45 years that have used the

procedure, now retroactively withdrawn by the Alabama

Supreme Court, who thought the procedural remedy rejected

by the Alabama Court was available. The judges of Ala-

bama’s intermediate appellate court system came to the same

conclusion. Unable to distinguish these appellate court cases,

the Alabama Supreme Court resorted to overruling them. By

doing so, the Alabama Supreme Court basically held that the

judges on those courts did not represent “reasonable tax-

payers”. The folly of such a conclusion is strong evidence

that the Alabama Supreme Court reached its result first—no

refunds—and then sought a theory by which to accomplish

the result—procedural path chosen by Petitioners invalid.

COST requests this Court not to allow this growing

practice.

B. Aggrieved State Taxpayers Face Limited Forums

For Challenging Parochial State Court Decisions.

This Court’s continued vigilance in assuring an

unequivocal definition of the requirements of a constitutional

remedy for an unconstitutional tax and mandating that the

states provide this relief is also necessary because of the

limited forums available to taxpayers to pursue the available

remedies. A taxpayer generally cannot challenge the consti-

tutionality of a state or local tax in the lower federal courts.

7

U.S. Const. Amend. XI; 28 U.S.C. § 1341. The Eleventh

Amendment ° prohibits suits for monetary damages against a

state in federal court and thus prevents all suits for state tax

refunds. Ford Motor Co. v. Dep't of Treasury of Indiana,

323 U.S. 459, 462 (1945). The Tax Injunction Act, as

interpreted, prohibits taxpayers from bringing any action in

federal court if there is a “plain, speedy, or efficient” remedy

at state law. Newsweek, 522 U.S. at 444. Most of the cases

interpreting the Tax Injunction Act have determined that state

refund or protest systems are plain, speedy, and efficient and

thus jurisdiction in the federal courts is generally prohibited.

See, e.g., id.; California v. Grace Brethren Church, 457 U.S.

- 393 (1982). While this Court has accepted several state tax

remedy cases in the past, review by this Court is anything but

guaranteed. Thus, taxpayers are usually limited to a state

court as the final arbiter of what is an adequate remedy. In

order to remind state courts what constitutes a constitutionally

sufficient remedy and that their compliance with this rule is

being monitored, COST respectfully requests this Court to

accept this case for review.

C. Fairness: The States’ Continued Failure To Pro-

vide Constitutionally Adequate Remedies Results

In a Real Loss of Money and Time by Taxpayers.

Finally, we note why this case has captured the attention of

the state tax community. It is not surprising to state that the

issue of remedies for unconstitutional taxes is one of the most

important issues’ in state and local tax today. Time and

again over the past several years, taxpayers have been denied

a constitutional remedy by state courts. This is real money

° “The Judicial power of the United States shall not be construed to

extend to any suit . .. commenced or prosecuted against one of the United

States by citizens of another state... .” U.S. amend. XI.

’ The other pressing issues being nexus concerns and discriminatory

taxes.

8

being lost by real taxpayers. With the loss of this money, a

certain amount of faith in the system is also lost. Taxpayers’

only recourse is to appeal to this Court. States continue to

impose unconstitutional taxes, but when a court ultimately

invalidates these taxes, many states nevertheless refuse to

provide the taxpayer with constitutionally sufficient relief.

This situation is a source of significant frustration® to

taxpayers, and this Court is unfortunately the only forum in

which a solution is available. In fact, over the past year the

issue of remedies has reached such significance in the state

and local tax community that the topic has been a feature of at

least three of the major state tax conferences.” Perhaps, if the

states are forced to confront the true costs of providing a

constitutionally adequate remedy, the legislatures will be

more mindful in crafting their tax statutes to begin with and

will be quicker to address a constitutional problem when it

comes to light. If this Court clearly exhibits its intent to

enforce the Constitution’s remedy rules on the states, states

like Alabama (unconstitutional franchise tax) and California

(unconstitutional dividends received deduction) '° may decide

® The lack of adequate remedies has become a frequent topic of

discussion at taxpayer gatherings. Some taxpayers, after years of ulti-

mately successful litigation challenging a tax have taken to cynically

waving a dollar bill in the air and commenting that they have not received

even one dollar in refunds from the suit. This is a sad commentary on the

current system.

* Paul J. Hartman (Vanderbilt University Law School) State & Local

Tax Forum 2001, New York University State and Local Tax Institute

2001, Georgetown University Advanced SALT Institute 2002.

'° California is another perfect illustration of the pervasiveness of this

problem. California has known since at least this Court’s decision in

Fulton Corp. v. Faulkner, 516 U.S. 325, 346- 47 (1996), that its dividend

received deduction was unconstitutional because it discriminated against

interstate commerce. However, in those at least six years, California has

done nothing, except to resist taxpayer’s challenges to the DRD, to fix the

offending provision. Continuing such an illegal tax is not just

inconvenient to the taxpayers. It fails to provide good fiscal management

9

in the future not to keep their clearly unconstitutional taxes on

their books for a lengthy and ultimately costly fight. Such a

result will save the states, taxpayers, and ultimately this Court

unnecessary and repetitive litigation. COST and its mem-

bers hope that this Court will again add light to this

important issue.

ARGUMENT

Under the Due Process Clause of the United States

Constitution, the Alabama Supreme’ Court

unconstitutionally deprived the Petitioners of their

property by _ retroactively removing previously

established procedures on which the Petitioners had

relied to remedy an unconstitutional tax.

I. DUE PROCESS REMEDY RULES IN STATE

TAX CASES

A remedy for a state tax declared unconstitutional must

comply with the requirements of the Due Process Clause

of the Fourteenth Amendment to the United States

Constitution." Harper v. Virginia Dep’t of Taxation, 509

U.S. 86, 100 (1992). Under the Due Process Clause, a remedy

is constitutional only if it meets two tests: 1) the remedy must

provide either a predeprivation remedy or “meaningful

backward looking relief,” id.; and 2) the remedy must be

“clear and certain,” Atchison, T. & S.F.R. Co. v. O’Conner,

223 U.S. 280, 285 (1912); McKesson Corp., 496 U.S.

at 39 n. 22.

In McKesson, the Florida Supreme Court found that a

Florida tax unconstitutionally discriminated against interstate

commerce but provided prospective only relief. The court

to the general populace of the state. The bill for the unconstitutionally

collected tax just keeps getting bigger and bigger.

'! “tNjor shall any State deprive any person of life, liberty, or property,

without due process of law . . . .” U.S. Const. Amend. XIV, § 1.

10

premised its denial of meaningful backward looking relief on

its determination that the state relied in good faith on a

presumptively valid statute, and the taxpayer would receive a

windfall if it received a refund of a tax likely passed on to

its customers. McKesson Corp. v. Division of Alcoholic

Beverages and Tobacco, 524 So. 2d 1000, 1010 (1988). This

Court framed the issue before it as “whether prospective

relief, by itself, exhausts the requirements of federal law. The

answer is no.” McKesson, 496 U.S. at 31. In reversing the

Florida Supreme Court, the McKesson Court held that the

state must provide “an opportunity to contest the validity of

the tax and a ‘clear and certain remedy’ designed to

render the opportunity meaningful by preventing any

permanent unlawful deprivation of property.” Jd. at 36-37

(emphasis added).

In Reich v. Collins, 513 U.S. 106 (1994) the taxpayer

challenged the constitutionality of a state tax under a statutory

refund provision. /d. The state tax code provided for both

predeprivation challenges (protests) and post-deprivation

challenges (refund suits). After the tax was ruled

unconstitutional, the state tried to avoid paying the refund by

arguing that since the taxpayer could have challenged the tax

before paying the tax, the taxpayer had paid the tax

voluntarily and no refund was due. /d. at 110. This Court

soundly rejected that argument. /d. at 111.

In a follow-up to Reich, the taxpayer in Newsweek sought

a refund of an unconstitutional tax imposed on certain

publications. In reversing the state court, this Court once

again noted that under Reich v. Collins, the state must not

employ a “bait and switch” approach to the availability of

remedies. Newsweek, 522 U.S. 442.

Thus, the rule is clear: a state has flexibility in the type of

relief it provides, but once that relief is available and relied on

by injured taxpayers, the state cannot retroactively withdraw

it as a choice. This is true even if the state also provided

11

other procedural remedies in excess of those constitutionally

required.

Il. ALABAMA’S REMEDY DESIGN AND

APPLICATION

Alabama, like many states, provided both administrative

and judicial remedies to taxpayers seeking to recover a tax

incorrectly collected by the State. In most cases, the admin-

istrative procedures must be completed before the taxpayer

had a right to proceed to court. Taxpayers’ Bill of Rights and

Uniform Revenue Procedures Act, Ala. Code 1975, § 40-2A-

1 et seg. However, as is also common in other states, because

the State administrative body does not have authority to rule a

tax unconstitutional or illegal, it was considered futile to

exhaust the administrative procedures when the only issue

raised by the taxpayer was the validity of the tax statute itself.

Graves v. McDonough, 88 So. 2d 371, 373 (Ala. 1956). Thus,

in those circumstances, Alabama courts have for 45 years

allowed suits to be brought directly in the court for a refund

of an unconstitutional or otherwise illegal tax without first

exhausting the fruitless administrative procedures. See cases

cited at pages 7- 9, Petitioner’s Brief. The taxpayer’s right to

pursue a challenge to the legality of a tax statute directly in

court is so well established that it was recently specifically

upheld in two Alabama appellate court cases. Monroe, 749

So. 2d at 473; Sizermore, 611 So. 2d at 1067-68. Thus, there

is little doubt that the procedure of challenging the legality of

a state tax directly in Alabama courts has a long and solid

history in the State.

This case, however, changed everything. This case is a

class action brought by Petitioners on behalf of foreign

corporations who paid franchise taxes to the State of Alabama

under the tax scheme ruled unconstitutional in South Central

Bell Telephone. The Petitioners’ complaint sought, among

other items, a refund of the previously collected taxes. The

Petitioners initially requested an injunction placing the

12

franchise taxes collected by the State into escrow pending a

final determination as to the constitutionality of the tax. Pet.

App. 68a-69a. The Alabama Supreme Court denied the

escrow because the Petitioners had “an adequate remedy at

law.”'? Pet. App. 70a-72a. After this Court ruled the

disputed tax unconstitutional, the Commissioner requested

dismissal of the Petitioners’ case on the theory that the

Petitioners had failed to exhaust their administrative remedies

and, thus, the Alabama courts lacked jurisdiction. Pet. App.

39a-40a. The Alabama Supreme Court ultimately dismissed

the case, finding that because the Petitioners had not

exhausted their administrative remedies, which according to

the Alabama Supreme Court was the sole procedure for

aggrieved taxpayers to obtain a refund, the State had not

waived its sovereign immunity from suit in state court and

the Alabama courts lacked jurisdiction over the case. Pet.

App. 34a. The Alabama Supreme Court determined that

exhaustion of the administrative remedies was required

notwithstanding a 45-year history and recent state appellate

court precedent upholding a direct court action when the only

"2 This is another example of the frustrations encountered by the

Petitioners in this case. While the constitutionality of Alabama’s

franchise tax was pending, Alabama continued to collect the tax. It

threatened companies that failed to pay with a withdrawal of their

privilege to do business in the State. Even though it became clear to the

State at some point prior to this Court’s decision in South Central Beil that

the tax was likely invalid (as evidenced by the State’s failure to support its

constitutionality before this Court) the State still continued to collect the

tax. When the Petitioners asked that this tax at issue be put into escrow,

the State promised that the Petitioners were not at risk of losing any

remedies to which they were entitled so no escrow was necessary. Now

that it has come time for Alabama to pay the piper, the State has pulled

out every trick in the book—sovereign immunity, latches, exhaustion of

remedies, Chevron prospectively, equitable need, and several more in a

last ditch effort to avoid paying an illegally collected tax. It is

embarrassing that a state government would behave like a three year old

caught with her hand in the cookie jar.

13

issue involved the constitutionality of a state statute. App.

29a-33a

Thus, Alabama applied a game enjoyed by small children

at play and people teasing pets—dangle a treat in front of

your target and snatch it away just as they reach for it. The

Alabama Supreme Court’s justifications do not support the

retroactive withdrawal of a procedural remedy, and therefore

the Alabama Supreme Court should be summarily reversed.

Il, ALABAMA’S RETROACTIVE WITHDRAWAL

OF A .PROCEDURAL REMEDY FOR AN

ILLEGALLY COLLECTED TAX VIOLATES

THE DUE PROCESS CLAUSE.

Alabama, at the very least, had never discouraged the

practice of bringing a state tax challenge directly in state

court when exhausting the administrative remedies would be

futile due to the administrative agency’s inability to declare a

statute invalid. What does this precedent mean? It means

that the judiciary itself accepted the Petitioners’ procedural

remedy as a valid course in Alabama. Amicus understands,

and in fact supports, a state’s needed flexibility in designing

the procedural remedies available to its taxpayers. However,

what amicus cannot support is the complete withdrawal

by the Alabama Supreme Court of an explicit, judicially

accepted procedure, retroactivly. “Under McKesson, [the

State] has the flexibility to maintain [a] . . . remedial scheme,

so long as that scheme is ‘clear and certain.”” Reich v.

Collins, 513 U.S. at 110-11 (emphasis added). Alabama’s

insistence on enforcing its unconstitutional tax on the

Petitioners, despite the Petitioners’ use of a procedure

accepted by 45 years of precedent and the Alabama appellate

courts, does not amount to a “clear and certain” remedy as

required by the Due Process Clause.

As the Petitioners point out, the remedy provided by

Alabama Supreme Court violates one of the clear standards

already articulated by this Court—a state may not “bait and

14

switch” in applying a remedy. Reich v. Collins, 513 U.S.

106. This is just what Alabama did here: it offered the judicial

remedy of a direct to court suit, but when the Petitioners came

to court to obtain the advertised remedy, the state basically

said—you made a mistake; you trusted us.

This Court is asked once again to specifically direct a state,

in this case Alabama, to comply with, and not flout, the Due

Process Clause contained in the Fourteenth Amendment to

the United States Constitution. Alabama, like several other

states,'? has found itself in the predicament of deciding how

to remedy an unconstitutionally imposed tax. Instead of

crafting a remedy to correct the discrimination found in its tax

through refunds, credits, or some other substantive relief, the

State denies the Petitioners a day in court by asserting that the

Petitioners pursued the “wrong” procedure. We have seen

this before—Florida tried to claim that taxpayers that filed a

refund claim rather than protest a tax before payment

followed the wrong procedure and thus were precluded from

recovery—and this Court has rejected such an action. If this

court does not do the same here, it will send a message that

incentivizes other state courts, legislatures, and tax agencies

to follow Alabama’s lead.

'? Some states do understand their obligation under the Due Process

Clause to remedy unconstitutionally imposed taxes. Recently, following

the finding in Jn the Matter of Panhandle Eastern Pipe Line Co. et al.,

Kan. Supreme Ct., No. 86,277 (2002), that a tax benefit was illegally

withheld, the state of Kansas announced plans to refund $25 million to the

affected taxpayers. One of Kansas’ state representatives recognized a fact

that Alabama (and Massachusetts and Illinois before it) seems to have

failed to internalize. Senate Minority Leader Anthony Hensley (D-

Topeka) commented that: “I’m not sure we have any other option at this

point ... . We lost the suit.” Alabama, like Kansas, lost the suit and

therefore has no other option—it needs to pay up in one form or fashion.

Alabama should not be allowed to shirk its obligations while Kansas

shoulders its. Obviously, the disparity in the results in these cases

demonstrates a need for guidance, and the role of providing such guidance

falls squarely on this Court.

15

CONCLUSION

For the reasons stated above, COST respectfully requests

the Court to grant the Petition for Certiorari.

Respectfully submitted,

DOUGLAS L. LINDHOLM *

President/Executive Director

DIANN L. SMITH, General Counsel

STEPHEN P.B. KRANZ, Tax Counsel

WILLIAM D. PELTZ, Chair

BOBBY L. BURGNER, Vice-Chair

J. HUGH MCKINNON, Counsel

Lawyers’ Coordinating Subcommittee

COUNCIL ON STATE TAXATION

122 C St., N.W., Suite 330

Washington, D.C. 20001

* Counsel of Record (202) 484-5215