Alabama Sales Tax Regulation Ignores U.S. Supreme Court

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A new sales tax regulation in Alabama directly contradicts the bright-line physical presence nexus standard created by the U.S. Supreme Court in Quill Corp. v. North Dakota.  While Congress has debated (and been unable to enact) multiple versions of federal legislation that would limit the application of the physical presence nexus standard for certain retailers, the Alabama Department of Revenue has ignored these impediments by promulgating its own “economic nexus” rule.

The new regulation, which takes effect on January 1, 2016, establishes a bright-line sales threshold for nexus that is similar to Alabama’s recently enacted statute defining when a corporation is doing business for income tax purposes.  However, Alabama is the first state to apply such a bright-line rule for sales tax.

The regulation provides that “out-of-state sellers who … are making retail sales of tangible personal property into the state have a substantial economic presence in Alabama for sales and use tax purposes and are required to . . . collect and remit tax . . . if the seller’s retail sales of tangible personal property sold into the state exceed $250,000” in a calendar year.  The regulation also requires some form of activity that reflects purposeful availment to the Alabama market by a retailer.  However, most of the activities listed in the regulation that will trigger the collection of tax do not require a physical presence in the state.  These activities include solicitation of sales through television or print advertising, such as the distribution of catalogs.  These are the exact types of activities that have been deemed not to create a “physical presence” under the current sales tax nexus rules established by the U.S. Supreme Court.

The Department’s expectation with respect to this new regulation is unclear.  Most retailers meeting the requisite $250,000 sale threshold that do not have a physical presence in Alabama will likely not follow the new rule given its apparent inconsistency with federal law.  It will be interesting to see if the Department of Revenue seeks to enforce the rule against non-compliant retailers, especially given the U.S. Supreme Court’s recent hinting at its willingness to reconsider the rule established in Quill.

If you have questions about your company’s sales and use tax obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6298. 

About Michael Colavito, Jr.

Michael Colavito, Jr. has written 53 post in this blog.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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