In a bond-financed Industrial Development Authority (IDA) manufacturing project, which Alabama taxes get abated or exempted — deed recording tax, mortgage tax, sales and use tax, ad valorem tax, income tax on rent and bond interest, and the IDA's lease tax?

Plain-English summary

This is a comprehensive tax-incentive ruling for a classic Alabama Industrial Development Authority (IDA) bond deal. "The Company, Inc." (an Alabama corporation) planned to build and equip a manufacturing facility ("the Project") on IDA land. In the usual structure, the Company buys the land from the IDA, deeds it back to the IDA, the IDA issues bonds to finance the Project and leases it back to the Company (rents equal to the bond debt service), the Company buys the IDA's bonds, and a web of mortgages secures the financing. The Company asked the Department to rule on eight tax questions, all against the Tax Incentive Reform Act of 1992 (§ 40-9B-1 et seq.), which authorizes abating noneducational ad valorem taxes, construction-related transaction (sales/use) taxes, and mortgage & recording taxes for private use industrial property.

1. Deed recording tax — none. The three deeds that convey title into or out of the IDA — (a) the IDA's initial sale to the Company, (b) the Company's deed-back to the IDA, and (c) the IDA's later deed on the Company's repurchase option — all relate to "issuing or securing obligations" and involve private use industrial property (§ 40-9B-3(m)) not previously placed in service, so under § 40-9B-4(d) (with authority under § 40-9B-5) no deed recording tax is due.

2. Mortgage recording tax — mostly none, but one is taxable. No tax on the IDA's bond mortgage or the Accommodation Mortgage, because each relates to securing an obligation and conveys title out of the IDA (see § 35-10-26; Dominex, Inc. v. Key). But the Interim Mortgage — between the Company, its Parent, and the Parent's lenders — does not convey title into or out of the IDA, so it is not within the § 40-9B-4(d) abatement and mortgage recording tax IS due on it under § 40-22-2.

3. Sales and use tax — abated, with an education carve-out. Under § 40-9B-4(c), construction-related transaction taxes are abated only on tangible personal property and taxable services incorporated into the property, and only up to the date the property is placed in service (later purchases need a "major addition," § 40-9B-3(g)). The state sales/use tax on tangible personal property is 4% (§ 40-23-2(1), § 40-23-61(a)) and there is a reduced state rate on machinery (§ 40-23-2(3), § 40-23-61(b)) — all of the state amounts may be abated. For the county (2% on tangible personal property, 0.75% on machinery), 40% is allocated for education and cannot be abated, and special school-tax transactions aren't abated; for the city (2% and 0.75%), all may be abated. Local taxes levied for educational purposes are never abated. (The OCR garbles the reduced state machinery rate as "13 percent"; verify the exact figure against the original PDF.)

4. Ad valorem tax — abated for a limited period. Under § 40-9B-4(b), noneducational ad valorem taxes are abated up to a "maximum exemption period" (§ 40-9B-3(h)). If the IDA issues bonds, that period is 10 years from the initial bond issuance, with no abatement until issuance; if bonds aren't issued, the period is redetermined. The abatement covers only the noneducational millage — if the rate is X mills on 20% of fair market value and Y mills go to education, the Company's abatement is X − Y mills.

5. Income-tax deduction for rent — no. Although § 40-18-35 lets corporations deduct interest, § 40-18-35(2) disallows a deduction for interest on debt incurred to carry tax-exempt obligations. Because the Company's rent reimburses the IDA for bond interest that is tax-exempt to the Company, no deduction is allowed for those rent payments.

6. Bond interest income — excluded. Under § 11-92A-16(e) and § 11-92A-18, the interest income the Company receives as holder of the IDA's bonds is exempt from Alabama income tax.

7. IDA lease tax — none. Ordinarily a lessor of tangible personal property owes a leasing privilege/license tax under § 40-12-222, but that statute exempts leasing by a public corporation organized under state law, so the IDA owes no lease tax on the equipment it leases to the Company.

8. Early construction start — no effect. The Company already began construction under a "letter license agreement," but § 40-9B-4(e) only bars abatement for property previously placed in service — merely starting construction doesn't count, so it doesn't change the answers to Questions 1–7. (Abatements granted under the Act are effective only after the Abatement Agreement is executed; abatements from other authority follow that authority's rules.)

What this means for you

The public-authority "bond/deed-back/lease" structure drives the tax result

The abatements and exemptions in this ruling repeatedly turn on whether a deed or mortgage conveys title into or out of the IDA and relates to issuing or securing the bond obligations. Documents that stay outside the authority — like the Interim Mortgage among the company, its parent, and private lenders — don't get the § 40-9B-4(d) abatement. Map every instrument in your deal to whether it touches the public authority.

"Noneducational" is the recurring limit

Alabama's incentive abatements do not reach taxes earmarked for education. That shows up in the county sales/use tax (the ~40% education share isn't abated, plus special school taxes) and in ad valorem (only the noneducational millage is abated). Model your net cost with the educational portions left in.

Timing and "placed in service" matter

Sales/use abatement runs only to the placed-in-service date (absent a qualifying "major addition"), and ad valorem abatement runs for a maximum exemption period (10 years from bond issuance here). Getting the bonds issued, and the Abatement Agreement executed, on the right timeline is part of capturing the benefit.

Watch the interest-deduction trap

You can't have it both ways on the bonds: because the bond interest is tax-exempt to the company-as-bondholder, the company can't also deduct the rent that funds that interest (§ 40-18-35(2)). Factor that into the deal's after-tax math.

Still a one-taxpayer ruling

Under § 40-2A-5 this ruling is not precedent and binds the Department only as to this Company and its specific documents. Your incentive deal needs its own rulings/abatement approvals.

Common questions

Q: In an IDA bond deal, do the deeds to and from the authority trigger deed recording tax?
A: Not here. Deeds conveying title into or out of the IDA that relate to issuing/securing the bond obligations for private use industrial property are covered by § 40-9B-4(d), so no deed recording tax was due on the initial purchase, the deed-back, or the repurchase-option deed.

Q: Are all the mortgages exempt from mortgage recording tax?
A: No. The IDA's bond mortgage and the Accommodation Mortgage (title out of the IDA) were exempt, but the Interim Mortgage — which only involves the company, its parent, and their lenders and doesn't touch the IDA — was taxable under § 40-22-2.

Q: Is the sales/use tax on construction materials and equipment fully abated?
A: Only partly. State amounts and the city amounts may be abated, but the education-earmarked portions of local tax (e.g., ~40% of the county tax and special school taxes) are not abated, and abatement runs only to the placed-in-service date.

Q: Can the company deduct the rent it pays the IDA, and is its bond interest taxable?
A: The rent that reimburses the IDA for the tax-exempt bond interest is not deductible (§ 40-18-35(2)), and the company's interest income on the bonds is exempt from Alabama income tax (§§ 11-92A-16(e), -18).

Q: Can I rely on this ruling?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one is limited to this Company's facts and documents.

Citations and references

Statutes:

• Ala. Code 1975 § 40-9B-1 et seq. — Tax Incentive Reform Act of 1992
• Ala. Code 1975 § 40-9B-4(b),(c),(d),(e) — abatement of noneducational ad valorem, construction-related transaction, and mortgage/recording taxes; placed-in-service limit
• Ala. Code 1975 § 40-9B-3(g),(h),(m) — "major addition"; "maximum exemption period"; "private use industrial property"
• Ala. Code 1975 § 40-9B-5(a),(b)(3) and § 40-9B-6 — authority to grant abatement; application to the public authority
• Ala. Code 1975 § 40-22-2 — mortgage recording tax
• Ala. Code 1975 § 35-10-26 — legal title passes to the mortgagee
• Ala. Code 1975 § 40-23-2(1),(3) and § 40-23-61(a),(b) — state sales and use tax rates
• Ala. Code 1975 § 40-18-35(2) — corporate interest deduction; exception for indebtedness carrying tax-exempt obligations
• Ala. Code 1975 § 11-92A-16(e) and § 11-92A-18 — bond interest exempt from Alabama income tax
• Ala. Code 1975 § 40-12-222 — leasing/rental privilege tax; exemption for public corporations
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Cases cited:

• Dominex, Inc. v. Key, 456 So. 2d 1047 (Ala. 1984) — legal title passes to the mortgagee when real property is mortgaged

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-93-011.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF III

Assistant Commissioner

GEORGE E. MINGLEDORFF III LEWIS A. EASTERLY

Commissioner (Acting) Secretary

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 93-011

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

TO:

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: October 25, 1993

RE: Abatement of Taxes

FACTS

The Company, Inc. C"™the Company™), an Alabama corporation, is
considering the acquisition of, and construction upon, property
located within the jurisdiction of the County Industrial
Development. Authority Cthe "IDA™). Specifically; the Company
desires to censtruct and equip a manufacturing facility ("the
Project™) on the IDA's property ("the Property™).

Pursuant to a resolution of its directors, the IDA proposed
various incentives, including tax incentives, to induce the
Company to lcecate the Project in the County. This inducement
and its proposed transactions, according to facts as presented
to the Alabama Department of Revenue, are described as follows:

First, the Company wiil submit to the IDA a Petition for Bond
Inducement and Abatement of taxes, an Application for Abatement,
an Abatement Agreement, an Inducement and Loan Agreement, and a
Land Sales Agreement. Pursuant to the Land Sales Agreement and
a separate “Letter License Agreement," the Company has been
granted authority to commence construction, and already has
commenced construction, on the Property pricr to taking title.
The Company was induced to commence construction by promises
made by the IDA; prior to commencement, to provide certain tax
and financing incentives.

After purchasing the Property from the IDA pursuant to the Land
Sales Agreement, the Company will deed the Property back to the
IDA. The IDA will issue bonds to finance the Project, and the
IDA then will lease the Project to the Company. The IDA's bonds
will be supported by a pledge of the rents and revenues from the

Project. The terms of the lease provide that the rents to be
paid from the Company to the IDA will be equal to the debt
service to be paid on the bonds. The bonds issued by the IDA
will be sold to the Company and, at the Company's instruction, a
trustee as named in a mortgage and trust indenture, pursuant to
which the bonds will be issued, will invest the proceeds from
the sale of the bonds in a demand promissory note of the
Company's parent corporation (the "Parent™) during the Project's
construction. To obtain the monies necessary for the Company to
purchase the IDA bonds and to fund the Demand Promissory Note,
the Parent will receive advances pursuant to a Credit Agreement
with the Parent's primary lenders. An agent for these primary
lenders, and for certain other financial institutions to whom
the Parent owes financial obligations (the "Lenders' Agent"™),
will take a leasehold and accommodation fee mortgage from the
Company and the IDA, respectively, to secure the obligations of
the Company and the Parent to the lenders’ and such. other
financial institutions (the "Accommodation Mortgage™).

Prior to the closing on the bond issue and prior to the
execution of the Accommodation Mortgage, the Lenders Agent may
advance a portion of the funds to the Parent for the benefit of
the Company. If so, the Lenders" Agent will take an interim
mortgage (The "Interim Mortgage"), which will be replaced by the
Accommodation Mortgage at the bond closing.

QUESTIONS/RULINGS

You have requested that I rule on the following questions, which
are restated verbatim.

1. Will there be a deed tax payable with respect to (a) the
   deed from the IDA to the Company upon the initial purchase of
   the property by the Company, (b) the deed back to the IDA by the
   Company in association with the issuance of the Bond, or (Cc) the
   deed granted by the IDA to the Company upon the exercise of an
   option to repurchase the property by the Company at the
   expiration of the lease term?

The Tax Incentive Reform Act of 1992 Chereinafter referred to as
“the Act™), 840-9B-l et seq., Code of Alabama 1975, authorizes

the abatement of non-educational ad valorem taxes,
construction-related transaction taxes, and mortgage and
recording taxes, in certain situations. In 840-9B-4(d), an

abatement for deed recording tax is provided as follows:

"Cd) Mortgage and recording taxes with
respect to mortgages, deeds, and documents
relating to issuing or securing obligations
and conveying title into or out of the
public authority or county or municipal
government with respect to a private use
industrial property may be abated by

complying with the procedures set forth in
this chapter."

In subsection (Ce), an abatement pursuant to the provisions of
§40-9B-4 "may be granted only with respect to private use
industrial property that has not previously been placed in
service by the private user who is applying for the abatement or
by a person who is a related party.” Furthermore, in
§40-9B-5(b) (3), an abatement may be granted, as in this case, by
"the governing body of a_= public industrial authority, with
respect to private use industrial property located within the
jurisdiction of the public industrial authority.™ To receive
such abatements, any person who proposes to become a private
user of industrial development property files an application
with the public industrial authority, pursuant to §840-9B-6.

As to Question l(a), I rule as follows, based on information
provided by you to the Alabama Department of Revenues

First, the deed from the IDA to the Company upon the Company's
initial purchase of the Property is an instrument contemplated
in 840-9B-G(d), in that it relates to “issuing or securing
obligations," i.e., the Petition for Bond Inducement and the
Inducement and Loan Agreement, and in that it conveys "title
into or out of the public authority,” or the IDA. Second, the
Property fits within the statutory definition of "private use
industrial property,™ as that term is defined in 840-9B-3(m).
Third, the Property has not been placed in service previously by
the Company or aerelated party. Finally, the granting of
abatement by the IDA is authorized by 840-9B-5(a) and (€b)(3), in
that the Property is located within the IDA's jurisdiction.

Based on the foregoing, no deed recording tax will be due with
respect to the deed from the IDA to the Company upon. the
Company's initial purchase of the property.

Concerning Question 1(b), no deed recording tax will be due with
respect to the deed back to the IDA by the Company in
association with the issuance of the IDA's bonds. This ruling
is based on the rationale expressed in the ruling on Question
l(a).

Concerning Question l(c), no deed recording tax will be due with
respect to the deed granted by the IDA to the Company, upon the
Company's exercise of its option to repurchase the Property at
the expiration of the lease. Again, this ruling is based on the
rationale expressed in the ruling on Question l(a).

2. Will there be a mortgage tax payable on the mortgage from
   the IDA in association with the issuance of its Bond, the
   Interim Mortgage, or the Accommodation Mortgage?

Concerning the mortgage from the IDA in association with its
bond issue, no mortgage recording tax will be due upon
recordation since the mortgage is one which relates to. the

issuing or securing of an obligation and since the mortgage
conveys title out of the IDA. See §35-10-26, Code of Alabama
1975, and Dominex, Inc. v. Key, 456 So.2d 1047 (Ala. 1984)
(stating that legal title passes to mortgagee upon real property
being mortgaged).

Concerning the Interim Mortgage, mortgage recording taxes will
be due and payable upon recordation, as provided in 840-22-2,
Code of Alabama 1975. The Interim Mortgage involves’ the
Company, the Parent, and the Parent's lenders, and does not
convey title "into or out of™ the IDA. Therefore, an abatement
of recording taxes concerning the Interim Mortgage is not
contemplated by the provisions of 840-9B-4(d).

Concerning the Accommodation Mortgage, no mortgage recording tax
will be due since the Accommodation Mortgage secures’7 the
obligations of the Company and the Parent to the Parent's
lenders, and since the Accommodation Mortgage conveys title out
of the IDA.

3. Will the sales and use taxes payable on the manufacturing
   equipment and construction materials be abated as stated in the
   Abatement Agreement? Are the sales and use taxes payable net of
   the abatement correctly stated in the Abatement Agreement?

Section 40-9B-4(c), Code of Alabama 1975, provides for an
abatement of construction-related transaction taxes in certain
situations. As such, the Company is to be allowed an abatement
of construction-related transaction taxes; only with respect to
tangible personal property and taxable services incorporated
into the private use industrial property, if the cost may be,
but not necessarily is, capitalized. Also, an abatement is
allowable only to the date that the private use industrial
property is placed in service. According to the Application for
Abatement, filed by the Company with the IDA, the estimated date
the Property is to be placed in service is .
Thereafter, the Company shall not receive further abatement,
unless the applicable taxes are incurred in connection with a
"major addition," as that term is defined in 840-9B-3(g).
Despite the foregoing, the Company shall not be allowed an
abatement of local construction-related transaction taxes which
are levied for educational purposes or for capital improvements
for education. Therefore, the Company is entitled to an
abatement “af construction-related transaction taxes as noted
previously, and as specifically addressed in 840-9B-GCoc),
notwithstanding the language of the Abatement Agreement.

Concerning applicable sales and use taxes, the State rate of
taxation, for tangible personal property is 4 percent, pursuant
to §40-23-2(1) and 840-23-6l(Ca). Pursuant to §840-23-2(3) and
§40-23-61(b), the State rate of taxation for machinery is

13 percent. All of these amounts may be abated. For the
County, the rates of sales and use taxation are 2 percent for
tangible personal property and .75 percent for machinery. Of

the proceeds based on these rates, 40 percent is allocated for

educational purposes. Therefore, this 40 percent shall not be

abated. Also, any taxes arising from transactions which were
subject to the special school tax in the County are not to be
abated. Finally, the rates of sales and use taxation for the

City are 2 percent for tangible personal property and 75
percent for machinery. All of these amounts may be abated.

4G. Will ad valorem taxes on the Project be abated as described
in the Abatement Agreement? Is the rate of taxation net of the
abatement correctly stated in the Abatement Agreement?

Section 40-9B-4(b) allows an abatement of "™noneducational ad
valorem taxes," as that term is defined in 840-9B-3(3), provided
that the abatement shall not exceed the "maximum exemption
period,™ as defined in §840-9B-3Ch). According to information
provided by you to the Alabama Department of Revenue, it is the
intention of the IDA to issue bonds to finance the Project. If
such bonds are issued, the "maximum exemption period" for the
abatement of noneducational ad valorem taxes will be 10 years
from the date of initial issuance by the IDA of these bonds. In
such case, no abatement of ad valorem taxes would be applicable

until such date of issuance. If, however, these bonds are not
issued, then the "maximum exemption period" would be
redetermined, pursuant to the remaining provisions of

§840-9B-3Ch). Afterwards, no further abatement would be allowed
to the Company, unless the applicable taxes would be incurred in
connection with a "major addition.™ See §840-9B-3(g).

Here, the ad valorem tax rate will be X mills on 20 percent of
the Property's fair market value. Of the X mills, Y mills are
allocated for educational purposes or for capital improvements
for education. Therefore, the Company will be entitled to an
abatement of X mills - Y mills.

5. Will the Company be permitted to deduct for Alabama income
   tax purposes rent payments paid to the IDA that reimburse the
   IDA for interest paid on the Bond?

Section 40-18-35, Code of Alabama 1975, allows certain
specific deductions to corporations in computing net income. In
840-18-35(2), the following deduction is allowed:

All interest paid or accrued within the
taxable year on its indebtedness except on
indebtedness incurred or continued to
purchase or carry obligations or securities,
other than obligations of the United States
issued after September 24, 1917, the
interest upon which is wholly exempt from
taxation under this title as income to _ the
taxpayer.

CEmphasis added.)

Since the Company's "indebtedness" is embraced by the exception
provision in 840-18-35(2), no deduction will be allowed for rent
payments which reimburse the IDA for interest paid on the bond
issue held by the Company.

6. Will the Company, as the holder of the Bond, be permitted to
   exclude interest income paid on the Bond for Alabama income tax
   purposes?

Pursuant to §11-92A-16Ce) and 811-92A-18, Code of Alabama 1975
C1993 Cum. Supp.), the interest income received by the Company,
as holder of the bond issue, shall be exempt from Alabama income
tax.

7. Will the IDA be required to pay a lease tax for rents
   received by it under its lease with the Company with respect to
   tangible personal property leased by the IDA to the Company?

Ordinarily, persons leasing or renting tangible personal
-property within the State of Alabama must pay a privilege or
license tax, as provided in 840-12-222, Code of Alabama 1975.
In this situation, however, the IDA shall not be subject to any
such tax, according to the following provision in §840-12-222:
"provided further, that the tax levied in this article shall not
apply to any leasing or rental, as lessor, by... . any public
corporation organized under the laws of the state."
Accordingly, the IDA shall not be subject to the lease tax of
840-12-222 for rents received by it from the Company, with
respect to tangible personal property which the Company leases
from the IDA.

8. Are any. of the rulings on the foregoing questions affected
   by the fact that the Company has commenced construction pursuant
   to the letter license agreement?

Commencement of construction by the Company, in and of itself,
does not affect the rulings in Questions 1 through 7. Subject,
of course, to other requirements of the Act, 840-9B-4Ce)
provides that an abatement may be granted only to property which
has not previously been “placed in service." Accordingly;
commencement of construction is of no effect. However, if any
abatements are granted pursuant to the provisions of the Act,
then those abatements are effective only after the date of
execution of the Abatement Agreement. If, however, any
abatements are granted pursuant to authority other than the Act,
then the effective dates of those abatements do not depend on
the date of execution of the Abatement Agreement. Instead, the
effective dates of such abatements would be determined pursuant
to the particular authority granting those abatements.

George E. Minglédor#/ Art

GEM: JP:pj05