Bulletin: AL2008001

Dear Associates:

Effective August 1, 2008, Alabama Act 2008-504 (the "Act") (to be codified as Code of Alabama (1975) Section 40-18-86) will impose an income tax withholding requirement on the sale or transfer of real property and related tangible personal property in Alabama by a seller who is a "Nonresident of Alabama" as that term is specially defined within the Act. The Act requires that the buyer or transferee withhold and remit a certain percentage of the sale proceeds from a transaction involving a seller or transferor of Alabama real estate who is a "Nonresident of Alabama" under the Act.

The Alabama Department of Revenue ("ADOR") has released additional guidance on the implementation of the Act.  The ADOR specified that the withholding requirement under the Act does NOT apply to residents of Alabama. Alabama residents include both individuals and business entities domiciled in Alabama. Business entities will be considered domiciled in Alabama if they are organized under Alabama law or they have their principal place of business in Alabama.

Sellers who are nonresidents of Alabama can qualify to be deemed  residents of Alabama for purposes of the Act if  they meet all of the following conditions:

1. The seller or transferor has filed Alabama Income Tax Returns or Extensions have been obtained for the two years preceding the sale in question;
   
   
2. If the seller or transferor is a business, that the seller or transferor is presently in business in Alabama and will continue conducting substantially the same business in Alabama; or, in the alternative, the seller or transferor will continue to own Alabama real property of greater or equal value than the withholding tax liability after the sale;
   
   
3. The seller or transferor will report the proceeds of the sale in an Alabama Income Tax Return for the current taxable year and file it by the due date; and
   
   
4. If the seller is a foreign corporation or a foreign limited partnership, the entity must be registered with the Secretary of State to do business in Alabama.

If the seller or transferor can provide a sworn Affidavit stating that they meet all of the four requirements listed above, the seller or transferor will be qualified as a "Resident of Alabama" under the Act and the buyer or transferee will not be required to withhold any tax from the proceeds of the sale.

If the seller or transferor is a "Nonresident" and cannot provide the required affidavit, the buyer or transferee is required to withhold and remit to the Commissioner of Revenue on forms provided by the Commissioner, a withholding tax.

In addition to transactions where the seller is a resident of Alabama, ADOR has also specified that the follwings transactions will be exempt from the withholding requirements of the Act:

1. If the property qualifies as a principal residence under the Internal Revenue Code, the exemption from withholding applies for the gain that is excluded from Federal and Alabama Adjusted Gross Income.
   
   
2. The withholding requirements do not apply to residents of Alabama. Alabama residents include both individuals and business entities domiciled in Alabama. Business entities will be considered domiciled in Alabama if they are organized under Alabama law or they have their principal place of business in Alabama.
   
   
3. Beginning August 1, 2008, withholding is not required on transactions prior to January 1, 2009, where the purchase price is less than $800,000. For transactions after December 31, 2008, the purchase price threshold drops to $300,000.
   
   
4. The buyer is not subject to withholding requirements if the seller is a mortgagor conveying the mortgaged property to a mortgagee in a foreclosure or in a transfer in lieu of foreclosure with no additional consideration.
   
   
5. The transaction is not subject to the withholding requirements if the seller or buyer is an agency or authority of the United States or the State of Alabama, or a private mortgage insurance company.
   
   
6. If the seller is an entity that files a composite return with Alabama and remits the tax on the gain on behalf of its members, partners, or shareholder, then the buyer is not required to withhold.
   
   
7. If the seller or buyer is the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation, the withholding requirements do not apply.
   
   
8. Withholding is not required if the seller is a tax exempt organization, and the income from the sale is not subject to Alabama Income Tax.
   
   
9. Withholding is not required if the seller is an insurance company which pays tax on its premium income to Alabama.
   
   
10. Transfers of real property in which gain is realized by the seller, but the gain is completely not recognized by the seller for Alabama Income Tax purposes, such as a like kind exchange, are not subject to the withholding requirements.
    
    
11. Certain transfers of limited interests in real property, including easements, rights of way, mortgages or other instruments that secure indebtedness, or leases (not including capital leases), are not subject to the withholding requirements.

In the event that the Seller does not qualify as a “Resident”, as specially defined under the Act, or the transaction does not fall under one of the exemption categories, the applicable withholding tax needs to be collected and immediately sent to the Alabama Department of Revenue along with the required remittance form/s. The Act provides that any buyer or transferee who fails to withhold such amount shall be personally liable for the amount of the tax. 

The legal burden is on the buyer to collect and remit the withholding tax in applicable transactions. Subdivision (2) of Subsection (b) permits the Commissioner to assess and collect the tax in the same manner as all other withholding taxes imposed by the Alabama Income Tax Code meaning that the Department of Revenue can impose a lien against the property of the buyer or transferee. Parties to a transaction will most likely request the closing attorney or settlement agent to handle the compliance with these new requirements. Beginning August 1, 2008, closing attorneys and settlement agents will have to be prepared to comply with the Act in order to prevent the imposition of a lien on the buyer or transferee’s property.

In addition, it is imperative that all issuing agents add the following Requirement to all Stewart Title Commitments issued within the State of Alabama:

If this is a purchase transaction, we require execution of an Affidavit of Residency or Exemption from Withholding Tax on Sale of Real Property by Nonresidents in compliance with Code of Alabama (1975) Section 40-18-86. If the Seller does not meet the requirements of the Affidavit of Residency or Exemption from Withholding Tax on Sale of Real Property by Nonresidents, a withholding tax will be required to be withheld from the proceeds of the sale and remitted to the Alabama Department of Revenue.

ADOR has formally adopted the forms which are to be used for compliance with the Act.  The forms can be found on ADOR’s website at http://www.ador.state.al.us/ . Once on the website, click the tab entitled “Forms” and a drop down box will appear, from the drop down box, click on Nonresident Withholding Requirement (Act 2008-504). Instructions for completing the forms are also available on the website.

Please note that for all transactions which do not otherwise qualify as exempt transactions, Form NR-AF1, the Affidavit of Seller’s Residence, must be executed by the Seller and remitted to ADOR. This form must be submitted only if the transaction is exempt solely on the basis of the residency of the seller. If the transaction falls within any of the other exemptions listed above, the Affidavit of Seller’s Residence is not required to be submitted to ADOR.

While ADOR does provide an Affidavit of Seller’s Residence and a Seller’s Certificate of Exemption, it is requested that in addition to these ADOR documents, you also have the attached Affidavit of Residency or Exemption from Withholding Tax on Sale of Real Property by Nonresidents executed by the seller/transferor at closing due to the fact that it contains an indemnity and hold harmless agreement providing extra protection to those closing the transaction, its agents, approved attorneys and the buyers.   This Affidavit should be obtained in every purchase transaction and it should be made clear to the Sellers that they are swearing and affirming that they are either a resident of Alabama, or that they are a nonresident of Alabama who meets all of the requirements necessary to be deemed a “Resident” under the Act, or that the transaction falls under one of the exemption categories. The Seller should initial in the blank space beside the statement which applies to the transaction in question.

The amount of withholding tax to be withheld is currently dependent on the status of the buyer . If the buyer or transferee is an individual, a withholding tax equal to three percent (3%) of the purchase price or consideration paid for the sale or transfer shall be withheld from the closing proceeds. If the buyer or transferee is a corporation, partnership, or unincorporated association, a withholding tax equal to four percent (4%) of the purchase price or consideration paid for the sale or transfer shall be withheld from the closing proceeds. ADOR has stated that this calculation should be based upon the status of the seller and that during the next legislative session, they will request that the Act be amended to reflect such change. We will notify you immediately of amendment to the Act once it has been approved by the legislature.

The Act does provide for an alternative withholding tax base where the issue of excess withholding on the gain required to be recognized by the seller arises. If the seller determines that the amount to be withheld will result in overpayment of tax on the gain recognized from the sale, the "Nonresident" seller or transferor may provide the buyer or transferee with a signed Affidavit regarding the amount of gain required to be recognized from the sale and the relevant withholding tax will be applied to this amount instead of the purchase price. However, in situations where the amount required to be withheld and remitted exceeds the net proceeds payable to the seller, then the buyer shall remit only the net proceeds that would otherwise be due to the seller.

ADOR has also provided answers to a few questions which we have received from agents and closing attorneys. Please review the following questions and the answers which have been provided by ADOR.

Is withholding required when there are several sellers/transferors, and some of the sellers/transferors are nonresidents?

Yes. The residency of the seller/transferor of the property will be determined separately. Withholding is required only on the purchase price or gain recognized by the nonresident sellers/transferors. In the case of co-owners who are married, ownership is determined separately if one owner is a nonresident.

If a buyer reasonably relies on a seller’s sworn affidavit of residency, will the buyer be liable if it later turns out that the seller does not meet the conditions of deemed residency?

A buyer’s reasonable reliance on a seller’s affidavit should be sufficient. The standard is a “good faith” reliance standard. A buyer will be held liable if he had actual or constructive knowledge that the seller’s affidavit was false or contained erroneous information. The buyer may rely on the seller’s affidavit unless the buyer knows or should know, based on the buyer’s knowledge at the time of closing, that statements made on the affidavit are false. The buyer has no duty to investigate the statements made on a seller’s affidavit.

Must a Certificate of Exemption be filed when the seller is exempt by law from the withholding requirement?

No. The filing with ADOR of an Affidavit of Exemption is not required. However, the buyer should have the seller execute an Affidavit of Exemption and the Affidavit provided by Stewart, in order to document the buyer’s reliance on the seller’s representation of exemption.

Is withholding required on a like-kind exchange of property?

Withholding is not required to the extent that the income from the sale is not subject to Alabama Income Tax.

Do the withholding requirements apply to the sale or transfer of timber located in Alabama by a nonresident of Alabama?

Under Alabama law, standing timber is real property. Once timber is severed from the stump, it becomes personal property. If title to the timber passes before it is severed from the stump, withholding requirements do apply. If title to the timber does not pass until after it is severed from the stump, withholding is required only if the underlying land is sold with the timber.

Can a nonresident seller qualify as a deemed resident in order to be exempt from withholding, if he/she/it satisfies some, but not all of the listed requirements to be deemed a resident under the Withholding Statute?

No. In order to qualify as a deemed resident, all of the qualifying conditions must be met.

Is a single-member limited liability company, whose status is disregarded for federal income tax purposes, considered to be the seller for purposes of the withholding requirement?

The owner or sole member of the single-member LLC is considered to be the seller for purposes of the withholding requirements. Therefore, the buyer must inquire as to the residency of the individual member in order to ascertain whether or not the withholding requirements will apply.

What kind of tax is this? Sales tax? Real Estate Transfer tax?

This is neither a sales tax nor a real estate transfer tax. It is income tax withholding. The principle is similar to income tax withholding by employers. The buyer withholds Alabama Income Tax from the payment to the nonresident seller. The buyer is responsible for providing the seller with a copy of Form WNR-V. The seller will then claim credit for the taxes paid on the appropriate line of the seller’s Alabama Income Tax Return Form for the year. The taxes withheld will be considered as an estimated payment made on behalf of the seller.

Should you have any questions or comments regarding this matter, please feel free to contact:

Ann Harpole
Field Customer Service Representative
Stewart Title Guaranty Company
1110 Montlimar Drive, Suite 620
Mobile, AL 36609
Phone: 251-342-0026
E-mail: Ann.Harpole@stewart.com

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