Alabama is the latest state to challenge the US Supreme Court’s 1992 decision in Quill Corp v. North Dakota with an economic presence standard that requires certain out-of-state sellers with substantial economic presence in Alabama to collect and remit sales tax into the state. The standard, which disregards physical presence altogether, applies to transactions occurring on or after January 1, 2016.
In Quill, the Supreme Court held that under the Commerce Clause, an entity must have a physical presence in the state to have substantial nexus. Nexus is the minimum amount of contact between a taxpayer and a state that allows the state to impose a tax on the entity. In this case, the Supreme Court overturned the North Dakota Supreme Court’s ruling that mere economic presence generated sufficient nexus to justify the imposition of use tax, and determined that some amount of physical presence was required.
The Changing Landscape
Twenty-three years later, the Internet and access to technology continue to change our economy. Justice Anthony Kennedy, in his concurring opinion in Direct Marketing Association v. Brohl, suggested that it was time to overturn the long-standing precedent of Quill from the days of mail-order catalogs and landline telephones. Justice Kennedy stated in reference to Internet-based businesses that there’s “a powerful case to be made that a retailer doing extensive business within a state has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty.”
Seizing on Justice Kennedy’s language as evidence that the Supreme Court may be ready to strike down Quill, Alabama formalized a legislative standard that disregards physical presence altogether when it comes to sales tax—becoming the first state to do so.
Businesses that aren’t physically located in Alabama but have customers in the state may be in an awkward position. The new Alabama regulation (Alabama Administrative Code 810-6-2-.90.03) would subject them to Alabama sales tax in contradiction to Quill.
This regulation imposes collection obligations on out-of-state sellers who:
- Engage in the activities listed in Alabama Code Section 40-23-68
- Had $250,000 or more in retail sales sold into Alabama in the previous year
The code includes activities that don’t require physical locations within Alabama, such as:
- Soliciting orders for tangible personal property by mail if the orders are substantial and recurring and if the retailer benefits from banking, financing, and debt collection
- Soliciting orders for tangible personal property through advertising that’s transmitted or distributed over a cable television system in Alabama
- Telecommunication or marketing activities occurring in the state
- Licensing or franchising of trade names
- Distributing catalogs or other advertising matter resulting in orders from Alabama residents
While the constitutionality of this regulation is determined, taxpayers will be faced with the choice of complying with the new rule or risking assessments for sales tax along with interest and penalties.
We're Here to Help
If your company is making sales outside of jurisdictions where you’re physically located, we can help you understand how Alabama or any other state will tax your organization. For more information, contact your Moss Adams professional.