A leasing company leases specialty railroad cars. The company is headquartered in Illinois. It has no tie to Alabama other than that lessees who lease rail cars from it use the cars in the state.
The state tax department insisted that the leasing company had to apportion part of its rental income from leasing the rail cars to Alabama — and pay income taxes on it — based on the number of miles the rail cars traveled each year in Alabama as a percentage of total mileage. A number of states — for example, Massachusetts, Pennsylvania and Oklahoma — require such apportionment. However, an administrative law judge told the Alabama tax department that it could not collect income taxes in such cases. The judge said any effort to collect taxes from out-of-state lessors would be unadministrable. Rail leasing companies might require lessees to keep track of mileage, but for autos or other types of leased equipment, lessees could not be expected to keep such records. He said that in declining to tax out-of-state lessors, the state would be following Kentucky and Indiana.
The case is Union Tank Car Company v. Alabama Department of Revenue. The judge issued a final order in the case in January.