Earlier this month, the Alabama Department of Revenue challenged the U.S. Supreme Court’s 1992 ruling in the landmark sales tax case Quill Corp v. North Dakota (1992). The decision from 1992 case regarding sales tax nexus confirmed that in order for an entity to have nexus in a state it must first meet the requirements of a physical presence test. Nexus is the minimum amount of contact between a taxpayer and a state that will allow the state to impose tax on the entity. In Quill, the U.S. Supreme Court overturned the North Dakota Supreme Court’s ruling that Quill’s economic presence in North Dakota generated sufficient nexus to justify imposition of sales and use tax, even though Quill did not physically enter the state Challenges to Quill could be a game-changer for how states are able to subject out-of-state businesses that do not have bricks-and-mortar (physical presence) connections to the state, to assess sales tax on out-of-state businesses. An economic presence threshold could result in businesses being required to collect and remit sales tax in many new jurisdictions where they meet a threshold for sales but never physically enter the state. This economic vs. physical presence shift is enabled by advances in technology and how we do business in the modern day. Businesses no longer need people (payroll) or property (stores, offices) in a state in order to have taxable sales there. This interstate commerce issue hinges on the U.S. Constitution and two overlapping but distinct clauses. The Commerce Clause prohibits certain state powers that interfere with interstate commerce, such as subjecting interstate commerce to multiple states’ taxation. The Due Process Clause of the Fourteenth Amendment requires a minimum connection with a state and a person, property, or transaction to establish nexus (and impose tax). A state may be able to impose sales tax under Due Process yet still be violating the Commerce Clause.
Alabama Nexus Changes
The proposed legislation by the Alabama Department of Revenue would require out-of-state sellers with a substantial economic presence in Alabama to collect sales tax from Alabama customers. Both Alabama’s governor and commissioner have publicly backed the proposition and expect the ruling to pass. Per Governor Bentley, the state will move forward with the new rule and wait for someone to sue the state. The state of Alabama is seeking to shift sales tax revenue into their state. If passed, the law will go into effect on Jan. 1, 2016 and apply to businesses that make at least $250,000 in annual sales and conduct one or more specified activities that indicate substantial economic presence in Alabama.
Have a Barnes Dennig tax representative reach out to you today to discuss the changes in this law and how you and your business might be affected.