Payment of Alabama Public Utility License Tax

GAO was asked to determine whether the Veterans' Administration (VA) Medical Centers located in Alabama must pay that portion of their electric bills which represented a 1.8 percent increase of the Alabama public utility license tax. This increase was imposed by statute on the Alabama Power Company, which passed it on to its customers. The pass-through was provided for in an order by the Alabama Public Service Commission (PSC). At the time the order was issued, the public utility license tax, at the rate of 0.4 percent, was part of the expenses which the Alabama Power Company would recover as part of its utility rates as set by the PSC. The tax was later increased to its current rate of 2.2 percent and, under the PSC order, the Alabama Power Company included the 1.8 percent increase as a line item in its customers' bills. Initially, VA centers paid that portion of their bills. Subsequently, VA attorneys stated that the United States was constitutionally immune from paying the tax. The VA centers withheld the amount of the tax increase from their payments in order to recover the tax they had already paid. GAO held that VA centers are not constitutionally immmune from paying the Alabama public utility license tax. GAO held that the legal incidence of the State tax which was levied on a vendor of services to the United States and which was not required by any taxing statute to be passed through to consumer, was on the vendor, not the United States. Futher, the United States is not constitutionally immune from such a vendor tax. Therefore, the utility commission order requiring utility to bill customers for taxes did not transfer the legal incidence of the tax to customers. Accordingly, the VA centers should return to the Alabama Power Company that portion of their utility bills which were erroneously withheld.