If an Industrial Development Board buys new equipment to replace worn-out equipment at a facility it leased to a company before Alabama's 1992 Tax Incentive Reform Act took effect, is the replacement equipment still exempt from ad valorem (property) tax?

Plain-English summary

An Industrial Development Board (IDB) — a public authority Alabama cities and counties use to attract industry — owned a brick-manufacturing facility and leased it to a private company ("Company A") under a 1989 lease running to 2004. Because the IDB (not the company) held title, the property was exempt from tax under § 11-54-96, even though the company enjoyed the facility and claimed the federal income-tax benefits of ownership. That is the normal IDB structure: public title, private use, no property tax.

In 1992 Alabama changed the rules. The Tax Incentive Reform Act of 1992 (Act 92-599, § 40-9B-1 et seq.), effective May 21, 1992, defined a new category — "private use property" (§ 40-9B-3(n): property treated as owned by a private user for federal income-tax purposes even though a public body holds title) — and § 40-9B-7(a) made such property once again subject to (1) ad valorem taxes, (2) construction-related transaction taxes, and (3) recording taxes, unless the non-educational portion is abated under § 40-9B-5. Company A's facility fits the "private use property" definition.

But the Act includes a grandfather clause, § 40-9B-7(c): the ad valorem rule "shall not apply … if a private user was entitled to use the property pursuant to a lease or other agreement entered into before May 21, 1992." Company A's 1989 lease predates the Act, so the original equipment stayed fully tax-exempt.

The question the company raised was narrower: the original equipment had worn out, and the IDB planned to buy roughly $1,125,000 of replacement equipment (financed by new bonds, leased back under a supplemental lease) after the Act's effective date. Does new equipment bought after May 21, 1992 get the same exemption?

The Department held yes. Section 40-9B-7(c) doesn't mention replacement equipment, but the Department's own Rule 810-4-3-.03(4)B.2 says "[r]eplacement equipment acquired subject to a lease in effect prior to Act 92-599 becoming law shall be taxable only according to the provisions of the lease." The Department read that rule's intent as carrying the original equipment's exempt status over to its replacement. Because the original equipment under the 1989 lease was tax-exempt, so is the replacement. The ruling concludes that, under § 40-9B-7(c) and Rule 810-4-3-.03(4)B.2, the replacement equipment is exempt from all taxation.

What this means for you

Companies operating in IDB / public-authority financed facilities

If you use property that a public authority owns and leases to you (a classic bond-financed IDB deal), the key date is May 21, 1992. A lease or agreement entered into before that date is grandfathered under § 40-9B-7(c), so the property escapes the ad valorem tax that the 1992 Act otherwise imposes on "private use property." Equipment you replace within that pre-1992 lease can inherit the original's exempt status under Rule 810-4-3-.03(4)B.2 — the replacement is "taxable only according to the provisions of the lease."

Newer deals need an abatement, not the grandfather clause

For a lease or agreement entered into on or after May 21, 1992, the grandfather clause does not help. Private use property is subject to ad valorem, construction-related transaction, and recording taxes unless you obtain an abatement of the non-educational portion under § 40-9B-5, meeting the requirements of § 40-9B-3(f)-(g). Plan the abatement into the project up front.

"Exempt from all taxation" is about property/transaction taxes here

This ruling is about the ad valorem (property) tax and the related construction-transaction and recording taxes that the Tax Incentive Reform Act reaches — not sales tax on an ordinary purchase. Note too that the Act's own limits carve out educational taxes: even grandfathered/abated property generally still bears the educational portion.

This is a ruling for one taxpayer's facts

By its own terms and § 40-2A-5, an Alabama revenue ruling may not be cited as precedent and binds the Department only as to the taxpayer and facts it addressed. Your dates, lease terms, and property will differ — treat this as guidance on how the Department reads § 40-9B-7(c), not a guarantee for your project.

Common questions

Q: Does property a city or county IDB leases to a company pay Alabama property tax?
A: It depends on the deal's date. Before the 1992 Tax Incentive Reform Act, IDB-owned property was exempt from all tax under § 11-54-96. Since May 21, 1992, "private use property" is subject to ad valorem tax unless it is grandfathered (leased before that date under § 40-9B-7(c)) or abated under § 40-9B-5.

Q: What is the "grandfather" date?
A: May 21, 1992 — the effective date of the Tax Incentive Reform Act of 1992 (Act 92-599). A private user "entitled to use the property pursuant to a lease or other agreement entered into before May 21, 1992" keeps the ad valorem exemption under § 40-9B-7(c).

Q: We're replacing worn-out equipment in an old (pre-1992) IDB deal. Is the new equipment taxable?
A: Under this ruling, no. DOR Rule 810-4-3-.03(4)B.2 provides that replacement equipment acquired subject to a pre-Act lease is "taxable only according to the provisions of the lease," which the Department applied to give the replacement the same exempt status the original equipment had — even though the new equipment is bought after the Act took effect.

Q: Can I rely on this ruling for my own facility?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one binds the Department only for Company A's facts. Confirm your own lease dates and get written guidance or an abatement for your project.

Citations and references

Statutes and rules:

• Ala. Code 1975 § 40-9B-1 et seq. — Tax Incentive Reform Act of 1992 (Act 92-599), effective May 21, 1992
• Ala. Code 1975 § 40-9B-3(n) — definition of "private use property"
• Ala. Code 1975 § 40-9B-3(f)-(g) — requirements to qualify for an abatement
• Ala. Code 1975 § 40-9B-5 — abatement of the non-educational portion of the taxes
• Ala. Code 1975 § 40-9B-7(a)(1)-(3) — private use property subject to ad valorem, construction-related transaction, and recording taxes
• Ala. Code 1975 § 40-9B-7(c) — grandfather clause for property leased before May 21, 1992
• Ala. Code 1975 § 11-54-96 — industrial development board property exempt from all taxation
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent
• Alabama Dept. of Revenue Rule 810-4-3-.03(4)B.2 — replacement equipment taxed only per the lease

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-92-001.pdf

Original ruling text

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 92-001

This document say not be used or cited as precedent. Code of
Alabama 1975, 840-2A-5(a).

REQUESTOR: Company A

SUBJECT: Exemption from Ad Valorem Taxes of Replacement
Equipment under the Tax Incentive Reform Act
§§40-9B-1, et seq., Code of Alabama 1975 (1992
Cum. Supp.).

DATE: March 22, 1993

FACTS

On June 1, 1989, the Industrial Development Board of the
City of Montgomery entered into a lease agreement with Company
A. The agreement provided that the Board would construct and
equip a brick manufacturing facility within the City and lease
the facility to Company A for a term to expire on September 15,
2004. The lease was assigned by the Board to AmSouth Bank,
N.A., as trustee to secure payments under the revenue bonds
issued to finance the facility.

Certain pieces of the original equipment are no. longer
serviceable and the Board is proposing to acquire and install
new equipment at a cost of approximately ¢1,125,000.00. The
replacement equipment will perfora the same functions and will
be leased to Company A by the Board pursuant to a supplemental
lease. The term of the original lease will remain unchanged.

The replacement equipment will be financed by the Board

through the issuance of bonds and the supplemental lease will be

assigned to SouthTrust Bank of Alabama, N.A.» as trustee to

secure payments under the bonds.

ISSUE

Whether replacement equipment, to be purchased after the
effective date of the Tax Incentive Reform Act of 1992, is

entitled to the same tax-exempt status as the original equipment?

LAW AND ANALYSIS

Prior to passage of the Tax Incentive Reform Act of 1992
(the Act), which became effective May 21, 1992, property owned
by an industrial development board was exempt from all taxes

pursuant to §11-54-96, Code of Alabama 1975... "The industrial

development board and all properties at any time owned by it...
shall be exempt from all taxation in the State of Alabama."
This statute aids boards in their efforts to attract business
and industry to the State.

Boards routinely hold title to property and then lease the
property (real and personal) to private users on long-term
leases. The private users pay no taxes on the property due to
board ownership, yet enjoy all the benefits of ownership for
federal income tax purposes. This makes Alabama an attractive
environnent for business and industry. This scenario describes
the relationship between Company A and the Industrial
Development Board of the City of Montgomery.

The Tax Incentive Reform Act of 1992 (€§§40-9B-1 et seq.,

Code of Alabama 1975 (1992 Cum. Supp.))», restricts

tax-exemptions for private use property to non-educational ad

valorem taxes, non-educational construction related transaction
taxes and in some instances recording taxes.

Section 40-9B-3(n) defines private use property as "Any real
and/or personal property which is or will be treated as owned by
a private user for federal income tax purposes even though title
may be held by a public authority or municipal or county
government". The Company A facility is private use property.

Sections 40-9B-7(a)(1)-(3) subject all private use property
to: (1) ad valorem taxes, (2) construction-related transaction
taxes, and (3) recording taxes. Section 40-9B-5 does allow the
non-educational portion of these taxes to be abated if the
private use property can meet the requirements for an abatement
pursuant to §§40-9B-3(f)-(g).

The tax-exempt status of the original Company A facility has
not been altered due to the Act's "grandfather™ clause. Section
G0-9B-7(c) states:

"The rule of subsection (a)(1) [discussed
above] shall not apply to ad valorem taxes
if a private user was entitled to use the
property pursuant to a lease or other

agreement entered into before May 2i,
1992...".

The equipment covered in the 1989 lease is unquestionably
tax-exempt, However, is the replacement equipment, which is to
be purchased after May 21, 1992, tax-exempt as well?

Section 40-9B-7(c) does not specifically address replacement
equipment, however, the rules adopted by the Department of
Revenue allow replacement equipment to assume the tax-exempt
status of the equipment it replaces in some situations.

Department of Revenue Rule No. 810-4-3-.03(4)B.2 states:

"Replacement equipment acquired subject to a
lease in effect prior to Act 92-599 becoming
law shall be taxable only according te the
provisions of the lease".
Although the rule speaks in terms of taxing replacement
equipment pursuant to a lease, its intent is to exempt from
taxation, equipment purchased to replace original equipment that

was tax exempt. The original equipment covered in the 1989

lease was tax-exempt, therefore, so is its replacement.

HOLDING
Based on the facts as presented, the Department agrees that

pursuant to §40-9B-7(c), Code of Alabama 1975 (1992 Cum.

Supp.), and Department of Revenue Rule 810-4-3-.03(4)B.2, the

replacement equipment is exempt from all taxation.

STAN MCDONALD
Commissioner of Revenue

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