Collateral Estoppel Bars Re-Litigation of Constitutionality of Tax Scheme

Addressing a long-standing sales tax dispute between the State Department of Revenue and a foreign corporation doing business in Alabama, the Alabama Court of Civil Appeals held that the doctrine of collateral estoppel precluded the court from revisiting constitutional arguments that the revenue department offered in its attempt to retain sales tax collected from the corporation. State of Alabama Dep’t of Revenue v. Hoover, Inc., No. 2060142 (Ala. Civ. App. Aug. 31, 2007).


After review by both the Alabama Supreme Court and the Court of Civil Appeals in Hoover I, the courts concluded that Alabama Code §40-23-4(a)(11) (1975), which exempts government entities from paying sales tax in transactions in which an Alabama sales tax normally would apply, violated the Commerce Clause of the United States Constitution as a matter of law where the Department applied the statute to exempt only sales made to Alabama government agencies. The Department imposed the tax on sales made within Alabama to other states’ governmental entities. The courts explained that at the summary judgment stage, the state failed to provide adequate evidentiary justification to overcome the “’virtually per se’ rule of invalidity.”

In Hoover II, the Department again tried to retain the sales tax that it collected from the foreign corporation on sales made in Alabama to a non-Alabama government entity, this time offering an affidavit to establish justification for the discriminatory treatment of Alabama and non-Alabama government agencies. The Department argued that its efforts were not barred by collateral estoppel because different tax years were at issue in the two disputes. The trial court entered summary judgment in favor of the corporation.

Because the trial court did not state the basis for the summary judgment, the Court of Appeals assumed that the court found that the Department’s arguments were barred by collateral estoppel and that the Department did not offer sufficient proof of justification for its facially discriminatory application of the tax exemption statute. The Court of Appeals affirmed. It reasoned that even though different tax years were involved in Hoover I and Hoover II, the Department was estopped from re-litigating the constitutionality of the statute because there was no significant change in the “controlling facts or the applicable legal rules” between Hoover I and Hoover II. The court of appeals also concluded that the summary judgment in Hoover I “actually litigated” the commerce clause issue, even though the judgment was based on the Department’s failure to present adequate evidence in support of its justification argument. “[A] summary judgment [] is a conclusive judgment rendered upon a determination that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law.”