Federal law preempts Alabama statute denying tax deduction for illegal alien employees


The Eleventh Circuit Court of Appeals held that the section of Alabama House Bill 56 that disallowed an employer a state tax deduction for wages and compensation paid to an alien unauthorized to work in the United States was preempted by federal immigration law ( United States v. Alabama, No. 11-14532 (11th Cir. 8/20/12)). Thus, Alabama was enjoined from enforcing the provision. The court also held many other of the law’s immigration provisions to also be preempted.

The tax deduction provision not only disallowed any deduction under state law, but it imposed a penalty of 10 times the unlawful deduction on any employer who knowingly failed to comply with the prohibition (Ala. Code §31-13-16 (Section 16)). The court found that Section 16 was expressly preempted by 8 U.S.C. Section 1324a(h)(2), which expressly preempts “any State or local law imposing civil or criminal sanctions (other than through licensing and similar laws) upon those who employ, or recruit or refer for a fee for employment, unauthorized aliens.”

Although Alabama did not characterize Section 16 as a licensing law, it nonetheless argued that its law was not preempted. It characterized the withholding of a tax deduction as more like the withholding of a reward from an employer than a sanction.

The court, however, found that Section 16 was a sanction and thus prohibited under 8 U.S.C. Section 1324a(h)(2). The plain meaning of a word is generally used in statutory interpretation, and the court said the plain meaning of the word “sanction” is “a restrictive measure used to punish a specific action or to prevent some future activity,” that notably “may take the form of a reward which is withheld for failure to comply with the law” (slip op. at 29, citing Webster’s Third New International Dictionary).

According to the court, the language of 8 U.S.C. Section 1324a was further evidence that Section 16 was a prohibited sanction as contemplated by the federal statute. Other provisions of 8 U.S.C. Section 1324a use the term “penalties” to refer to punitive civil fines, which the court said demonstrated that the term “sanctions” in 8 U.S.C. Section 1324a(h)(2)  refers to more than simply monetary penalties, such as the disallowance of the wages and compensation deduction contained in Section 16. 

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.


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