House Bill 419 is one of the most significant pieces of legislation in several years. Introduced on April 11 by Rep. Kyle South (R-Fayette), the 33-page bill is the culmination of nearly 12 months of work between the banking industry and the Alabama Department of Revenue (ADOR). Known as the Financial Institution Excise Tax (FIET) Reform Act, House Bill 419 proposes the most technical revisions to the FIET in its 80-year history.
Since 1939, significant variances have gradually developed between the FIET and the laws governing state and federal corporate income taxes. Consequently, ADOR’s practice of having FIET computations mirror state and federal income tax computations, a practice designed to ease administrative burdens on taxpayers, has become increasingly problematic over time, but especially after the federal Tax Cuts and Jobs Act became law in 2017. ADOR approached the association last year to gauge the industry’s appetite to codify many of the department’s administrative practices into law. What followed was the development of a working group filled with at least two dozen CFOs, tax officers, CPAs, tax attorneys who met regularly – electronically and in person – with a team of top ADOR officials to hammer out the finer points of this proposal.
From the outset, the goal was to create a revenue-neutral plan that eased the administrative burden on the banking industry as well as ADOR. Since the beginning, either “side” had the power to shutter the project altogether, and generally speaking, nothing was included or excluded from the final proposal without agreement from all parties. While hyper-technical, House Bill 419 might be one of the more practical legislative undertakings ABA and ADOR has ever worked on together.
In short, the FIET Reform Act:
- Uses the federal definition of “taxable income” as the base calculation for the FIET;
- Repairs constitutional defects related to deductions allowed for subsidiary entities;
- Reduces administrative burdens on financial institutions filing consolidated returns;
- Changes the tax distribution formula from location-based to population-based; and
- Mirrors FIET and federal income tax filing dates and payment schedules.
The bill was referred to the House Ways and Means-General Fund Committee and could be on a committee agenda as soon as next Wednesday. Anyone connected with the preparation, calculation, and filing of your bank’s state and federal taxes should look at this legislation and provide the association with any concerns. The legislation can be viewed here.
As always, Capitol Notes provides readers with a brief summary of legislation that might impact Alabama’s banking industry. Those summaries are as follows:
House Bill 101 by Rep. Kerry Rich (R-Albertville) and Senate Bill 54 by Sen. Shay Shelnutt (R-Trussville) adopts the National Association of Insurance Commissioners’ Insurance Data Security Law. Federal data security regulations already apply to financial institutions, including to those institutions’ insurance-related subsidiaries. To ensure that this legislation did not also apply to those entities, our association worked with the American Bankers Association to draft an amendment exempting financial institutions from the provisions of this bill. The amendment was unanimously adopted in both the House and Senate versions of the bill. Both bills have passed out of their houses of origin. The House bill was referred to the Senate Banking and Insurance Committee, while the Senate bill was referred to the House Technology and Research Committee.
House Bill 133 by Rep. Jim Hill (R-Pell City) would require state taxes or fees not already distributed to the Education Trust Fund or State General Fund to be deposited in the State General Fund unless those taxes or fees are constitutionally required to be distributed to a specific fund for a specific purpose. As introduced, this bill would likely divert assessment fees paid by state-chartered banks away from the State Banking Department and into the State General Fund, since assessment fees are not required by the constitution to be distributed to the State Banking Department. The association has historically opposed efforts to divert bank assessment fees away from the State Banking Department. Several other agencies are similarly impacted, and the Association is working with them, as well as with the State Banking Department, to amend the legislation. Last week, this bill was added to, then removed, from the agenda for the House Fiscal Responsibility Committee. The association will continue to monitor this legislation.
House Bill 139 by Rep. K.L. Brown (R-Jacksonville) would require a lender that holds all or part of a payment for an insurance claim to, upon request by the insured for payment, either issue the payment or provide a detailed notice of why the payment is being withheld and the steps the insured needs to take for the payment to be released. As currently written, the lender would have 10 days to provide information to the insured or risk paying 20 percent interest on any insurance proceeds held by the lender. This legislation is allegedly in response to issues that arose in the aftermath of the tornadoes that impacted Jacksonville and the surrounding areas last May. The association is in discussions with the sponsor and other interest groups, such as the Homebuilders Association of Alabama, about the legislation and hopes a compromise can be reached, especially with respect to the timelines and interest rate. The association, working with the Homebuilders Association of Alabama, amended this bill in the House Insurance Committee this week. The amendment increases the notice period to 14 days, decreases the interest rate to 10 percent, and makes clear that financial institutions retain all rights under current law and under agreements with homeowners, including the right to retain insurance proceeds when distributing them is economically unfeasible.
House Bill 140 and House Bill 420 by Rep. Kyle South (R-Fayette) would allow banks and the Department of Revenue to voluntarily enter into an agreement to share certain identification information for bank customers who have been determined by the department to be delinquent taxpayers. Under current law, over half of all garnishment notices sent to banks are returned because the subject of the notice is not a bank customer. In theory, a data match agreement between a bank and the department would eliminate these “useless” notices. So far, the department has been extremely accommodating in helping the association work out the industry’s causes for concern. Discussions with the department resulted in a second bill, House Bill 420, being dropped this week. The “new” bill makes clear that the data match agreements are voluntary, allows the department and an institution to include in an agreement the amount of money the department will pay to reimburse the institution for conducting a data match, and removes language that would otherwise have constricted how an institution used information that a customer was potentially subject to a future garnishment. The two bills are in separate committees, but this new, agreed-upon language will be included in any legislation that moves forward.
House Bill 162 by Rep. Chris Blackshear (R-Phenix City) and Senate Bill 127 by Sen. Shay Shelnutt (R-Trussville) is the Future Advance Mortgage Protection Act. As introduced, the bill would make clear that future advance mortgages are created upon their execution and not, as the state Supreme Court has ruled, when funds are actually advanced. Discussions with the Homebuilders Association of Alabama resulted in additional language being added to the bill to provide clarity on the subject of lien priority for obligatory or optional future advances. A committee substitute to these bills was adopted in the House and Senate last week. Conventional wisdom would hold that the Supreme Court’s ruling from March 29 leaves banks in a better position than these pieces of legislation, meaning these bills will likely not advance any further.
House Bill 304 by Rep. Merika Coleman (D-Birmingham) and Senate Bill 181 by Sen. Shay Shelnutt (R-Trussville) makes clear that certified real estate appraisers can perform a valuation for certain financial transactions involving real estate. While federal law allows valuations to be performed by anyone in certain situations, current state law provides that real estate appraisers can only perform appraisals, effectively eliminating professional real estate evaluators from the current valuations market. These bills were favorably reported by House and Senate committees this week. Coincidentally, the national Appraisers Standards Board updated the Uniform Standards of Professional Appraisal Practice on Friday, April 5, to allow appraisers to perform evaluations beginning Jan. 1, 2020.
House Bill 420 by Rep. Kyle South (R-Fayette), the Financial Institution Excise Tax Reform Act, makes numerous technical changes to the Financial Institution Excise Tax statutes (see above for more information). The bill was referred to the House Ways and Means – General Fund Committee.
House Bill 424 by Rep. Joe Lovvorn (R-Auburn), the Alabama Innovation Act, provides a tax credit for research conducted in Alabama. Modeled after the federal research and development tax credit, the tax credit is available to Alabama businesses for qualified research expenses incurred by Alabama companies that spend funds and resources in-house or pay Alabama research companies to conduct qualified research for new or improved products or services. The combined amount of credits cannot exceed $25 million, or $2 million per taxpayer, in a single year. Credits can be issued against the state income tax or the Financial Institution Excise Tax. Approved research activities involve a variety of research and development avenues, including research types approved by the Alabama Department of Commerce. Note that any credits to offset FIET liability will be limited to the state portion of the tax only.
Senate Bill 106 by Sen. Andrew Jones (R-Centre) would allow a member of any branch of the Armed Forces of the United States to contract with a financial institution to obtain a loan or open a checking or savings account. Generally speaking, current state law prohibits anyone under the age of 19 from entering into a contract, including a contract with a financial institution. A person may join the Armed Forces at age 17 with parental consent, or at age 18 or older without parental consent. This bill was favorably reported out of the Senate Banking and Insurance Committee last week. If the bill reaches the Senate floor, the sponsor has agreed to add an amendment that, one, provides that once a person signs a contract pursuant to this new law, that contract remains valid even if the person subsequently leaves the Armed Services, and two, allows a financial institution to require a person signing a contract pursuant to this new law to present in person a valid form of military identification.
As of the end of the ninth legislative day, legislators have introduced 705 bills – 428 in the House and 277 in the Senate – and 158 resolutions. So far, 10 of these measures have been enacted into law. The 2019 Regular Session can last for no more than 30 legislative days and must end on or before June 17.
The Legislature will reconvene for its 10th legislative day on April 16.
Questions or comments? Contact Jason Isbell, ABA’s VP of Legal and Governmental Affairs, at email@example.com.