Alaska is Not Out in The Cold for Economic Nexus

Erik Wallin
December 6, 2019

When people think of sales and use tax, Alaska is generally not top of mind. Alaska is the “A” in “NOMAD,” an acronym typically used to describe the states that do not impose sales tax. While it’s true that Alaska is one of the few states without a state-level sales tax, many of the state’s cities and boroughs have the authority to levy their own sales tax as they wish. This independent local taxing authority creates a tax regime without required uniformity, consistency or simplicity. Unlike other states that have economic nexus rules, Alaska lacks a central body that could make local tax compliance reasonably manageable. However, this may soon change.

A brief explanation of the Wayfair decision

In Wayfair v. South Dakota, the Supreme Court ruled that states can impose a tax on a remote seller with “substantial nexus” when that imposition does not result in an “undue burden” on that remote seller. Unfortunately, the court failed to define “substantial nexus” and “undue burden.” However, the South Dakota thresholds of $100,000 or 200 transactions per year was held to be sufficient to establish “substantial nexus.” Additionally, the court held that simplifications created by the Streamlined Sales and Use Tax Agreement and the South Dakota prohibition on retroactive liability would not constitute an “undue burden” on remote sellers. So, while the court eliminated physical nexus as a requirement, it failed to provide a bright-line rule for the states to interpret, leading to many unanswered questions. 

A step towards sales tax nexus enforcement 

Since the Wayfair decision, most states have jumped on the “Economic Nexus” bandwagon in order to increase their tax revenues. Alaska is not one of those states. Those tricky undefined words “substantial nexus” and “undue burden” have been left for states to interpret (as many state “Economic Nexus” laws remain unchallenged). Many experts would agree that thresholds of $100,000 or 200 transactions at the least would constitute a “substantial nexus.” However, can local governments in a state like Alaska—without state-level sales tax and no required uniformity—ever not be an “undue burden” when imposing sales tax on remote sellers? 

Through cooperation, some of the cities and boroughs in Alaska are hoping to overcome the hurdle presented by the hazy “undue burden” prong of the Wayfair decision. Recently, the Alaska Municipal League commissioned the drafting of the Alaska Intergovernmental Remote Seller Tax Agreement. This agreement would allow participating cities and boroughs to use a single, statewide (but not run by state government) sales tax administration system. The draft agreement allows Alaska localities to remain independent with respect to their treatment of sales within their local boundaries but would provide a uniform methodology and procedure for remote sellers and marketplace facilitators that have more than $100,000 in sales or 100 transactions into Alaska annually.

One of the more important factors in overcoming the “undue burden” prong of the Wayfair decision is simplification and uniformity. The Alaska Intergovernmental Remote Seller Tax Agreement states as its mission to promote uniformity and compatibility of local sales tax laws to simplify and improve the local tax administration. However, how this goal will be achieved will still need to be fleshed out. 

At this point, the draft of the Alaska Intergovernmental Remote Seller Tax Agreement is merely a preliminary step. The agreement is currently effective with approximately fifteen municipalities (many of the larger cities and boroughs) have signed onto the agreement. It is unclear whether additional cities and boroughs will become signatories to the agreement and move forward toward joining the rest of the country in the adoption of Economic Nexus.

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Author

Erik Wallin

Erik Wallin is a Senior Tax Counsel on the Tax Research Team at Sovos Compliance. Erik has been with Sovos Compliance since 2011, and his main areas of focus are on U.S. Transaction Tax Law which includes special expertise in the taxation of technology and the taxation mechanisms that apply throughout the Colorado home rule jurisdictions. Erik is a member of the Massachusetts Bar, has a B.A. from York College of Pennsylvania, a J.D. from New England School of Law, and an LL.M. in Taxation from Boston University.
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