City of Birmingham v. AmSouth Bank, NA

Citations: 591 So. 2d 473; 1991 Ala. LEXIS 1211; 1991 WL 261457Docket: 1900799

Court: Supreme Court of Alabama; December 12, 1991; Alabama; State Supreme Court

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The Supreme Court of Alabama ruled on the case of City of Birmingham v. AmSouth Bank regarding the interpretation and application of the Birmingham occupational license fee, as established by Ordinance No. 70-75. The City of Birmingham assessed AmSouth $130,101.21 for unpaid occupational tax, interest, and penalties for the period from January 1, 1984, to December 21, 1988, based on an audit that included noncash and indirect cash compensation. AmSouth contested this assessment, paying only $14,607 for one item and leaving a balance of $115,494.21.

AmSouth sought a declaratory judgment, arguing that the City could only assess the Occupational License Tax on direct compensation provided to employees during their employment. The City counterclaimed to enforce the assessment. After additional audits revealed more compensation types, the City pursued further action under Alabama law for accounting.

The trial court consolidated the cases and, after considering evidence, concluded that the City's prior interpretation of the Ordinance had been limited to base wages and salaries. Consequently, it ruled that:

1. The City could not retroactively change its interpretation to impose interest and penalties on AmSouth.
2. The Occupational Tax applies only to direct compensation, excluding fringe benefits such as profit-sharing plans and insurance benefits.
3. The City could not retroactively include retirement benefits or post-termination payments under the Occupational Tax.

The City is prohibited from taxing payments from a specific type of plan received by individuals whose employment has ended if it has not taxed similar payments for active employees. Direct compensation subject to the Occupational Tax that is contributed to ERISA-qualified plans must either be reported and withheld by the employer at the time of contribution or reported by the employee upon withdrawal; the employer is not liable for withholding on employee withdrawals. Amendments to the Ordinance require City Council approval. 

The Ordinance mandates employers to withhold a license fee of 1% from employee payments starting December 1, 1970. 'Gross Receipts' and 'Compensation' encompass all forms of monetary payment for work performed, excluding certain reimbursed travel expenses. The Director of Finance can establish regulations to administer the Ordinance, which include rules for payroll deductions at a 1% rate on all earnings for work conducted within Birmingham's city limits. The tax applies to all forms of compensation without deductions for benefits like vacation or sick pay, and is consistent with the Ordinance's language emphasizing its comprehensive application to employee compensation.

Employers are mandated to deduct 1% from all earnings of employees working within the City limits, as per the regulations. This requirement creates ambiguity compared to the ordinance, which measures the tax based on a percentage of all compensation with monetary value. City ordinances are interpreted using the same principles as legislative acts, focusing on the intent of the City Council. Courts should derive this intent from the ordinance's language, considering potential implications of different interpretations if ambiguity arises. A key principle in statutory construction favors taxpayers in cases of ambiguous tax statutes. It is also recognized that longstanding administrative interpretations of statutes or ordinances are persuasive in understanding legislative intent, particularly if such interpretations have guided public conduct over time. The trial court found that prior to a 1989 audit, the City had not applied the occupational tax beyond base wages, leading to a ruling that the City could not now extend the tax to other compensations. However, this ruling was erroneous, as the ordinance explicitly allows for taxation on any compensation with monetary value, thus making it unambiguous and reaffirming the tax's applicability as outlined in the regulation.

The regulation mandates that employers must deduct 1% from all employee earnings, leading to an ambiguity that is inconsistent with the Ordinance. This ambiguity does not prevent the City from enforcing the Ordinance as written, which allows for the tax to apply to all forms of compensatory earnings. The trial court's decision barring the City from altering its interpretation of the Ordinance is reversed. The new interpretation cannot be applied retroactively, and the trial court's ruling that certain fringe benefits (e.g., profit sharing, stock options, life insurance) are exempt from the occupational tax is also reversed; the City may tax these benefits moving forward but not retroactively. The City cannot redefine retirement benefits or post-employment payments to include them under the occupational tax if they were not previously taxed. The City is permitted to tax any form of compensation as defined by the Ordinance from the date of this opinion. Additionally, contributions to ERISA-qualified plans must be reported or withheld in accordance with Ordinance provisions. The requirement for City Council approval for changes in the Ordinance's application is reversed. The judgment is affirmed in part and reversed in part. Justice Houston concurs in part but dissents regarding the majority's view that finance director regulations are void; he emphasizes that AmSouth and other employers are obligated to make the specified payroll deductions based on the Ordinance's stipulations.

A debt is defined as owed by a party primarily bound to pay, regardless of whether the payment time has arrived. The terms "earnings paid to the employee(s)" and "compensation due each employee" are distinct, with the former being narrower than the latter. The Ordinance mandates employers to deduct taxes on both earnings paid and compensation due, creating an ambiguity that reasonable persons would recognize. Under legal precedents, ambiguous tax statutes are interpreted against the taxing authority and favor the taxpayer, indicating that deductions should be based on earnings paid rather than compensation due.

In this case, the trial court found that since 1970, the City has collected the Occupational Tax and conducted audits focused on base salary or direct compensation, not on the value of personal benefits. City officials acknowledged the existence of various benefit types, although they lacked specifics on individual employer benefits. AmSouth provided all requested records during the audit, but did not produce records on benefit plans unless specifically requested. The court determined that AmSouth complied fully with the City’s requests and that previous audits similarly did not contest the treatment of certain benefit payments.

Historically, the City also provided automobiles to department heads without applying the Occupational Tax to the personal use of these vehicles, a practice known to City officials. Following a change in IRS policy in 1985, the City adjusted its treatment of personal vehicle use for federal tax purposes, yet did not apply the Occupational Tax to such benefits until the current audit of AmSouth. The court concluded that prior to this audit, the City had not interpreted or applied the Ordinance to anything beyond base wages or salaries.

The City has historically limited the application of the Occupational Tax, despite awareness of various employer benefit programs and the private use of City vehicles by employees. During an audit of AmSouth, the City began reevaluating what items should be subject to the tax, ultimately documenting discussions that led to the decision to include specific items for the first time in 20 years. The court concluded that the Occupational Tax applies only to base wages, salaries, and direct compensation, including cash bonuses, until the director of finance revises the existing Rules and Regulations. The court found no error in the trial court's interpretation of the tax's scope prior to any potential changes, noting that the Rules and Regulations created ambiguity by imposing a narrower tax than allowed by the Ordinance. The Ordinance is generally clear but requires employers like AmSouth to adhere to the director's regulations. The ambiguity may be resolved if the director amends the Rules and Regulations to enable full taxation as authorized by the Ordinance.