This blog was last updated on June 26, 2021
Alabama Responds to Justice Kennedy’s Concurrence in Brohl: Voluntary Compliance Leading the Way to Economic Nexus in the Sales Tax World
Alabama has enacted new rules to define when out-of-state sellers are required to charge sales tax and when they have the option to voluntarily opt to charge use tax on out-of-state sales. Both of these new rules are in line with Justice Kennedy’s comments in his concurring opinion in Direct Marketing Association v. Barbara Brohl, 575 U.S. ___ (2015)(J. Kennedy concurring), forecasting that states will want to come up with a new way to capture the lost sales tax revenue from sales by out-of-state sellers. By way of background, in Brohl, Justice Kennedy recommended reconsidering the holding in Quill in conjunction with “contemporary Commerce Clause jurisprudence.” He suggested that because of the “changes in technology and consumer sophistication,” Quill’s holding would “inflict extreme harm and unfairness on the States,” by not allowing them to collect sales tax from out-of-state sellers. In his concluding remarks, he strongly suggested that “[t]he legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.” It appears that Alabama is taking up his call to arms. Step 1 – Voluntary Simplification Alabama is quite the case study in sales and use tax complexity. Tax applies at any number of varying jurisdictional levels (state, county, city/police jurisdiction, and/or district.) The rates that apply can differ depending on what you might be selling (agricultural products, manufacturing machinery, amusements, vending, motor vehicles, rentals, etc.) Not only do local rates change in one place or another almost every single month, but localities also have the ability to administer their own tax systems, and can opt to hire a third party administrator or let the state of Alabama take over. The Simplification Program The Simplified Sellers Use Tax Remittance Program became effective on October 1, 2015. This tax remittance is voluntary for “eligible sellers,” which are defined in Rule 810-6-2-.90.02 as those who (1) do not have a physical presence in the state; or (2) are not otherwise required to register with the Department pursuant to Sections 41-4-116 or 40-23-190. In other words, sellers without nexus with the state of Alabama (as nexus is currently defined) are eligible to participate. Participation is directly approved by the Alabama Department of Revenue (ADOR). Under this simplified program, approved sellers are allowed to collect and remit seller’s use tax on taxable sales to Alabama customers at the special flat rate of 8%. According to the ADOR, this 8% rate is designed to replace the traditional standard state rate of 4% as well as all the varying local rates. The 8% rate also applies in lieu of the countless special rates that are normally charged depending on the type of product being sold. From what we understand, remote vendors would still not charge tax on items that are specifically exempt under the law. Participants enjoy several important benefits. First, they are able to retain 2% of the total gross receipts reported to the Alabama Department of Revenue by way of vendor compensation. Second, participants will receive amnesty for any uncollected remote use tax due on sales made to Alabama purchasers for the twelve-month period before the seller joined the program. Finally, because participants are collecting tax a special state-level rate, the requirement for specialized local-level reporting and remittance is eliminated. For more information on the program, please see Act No. 2015-448 located here: http://revenue.alabama.gov/salestax/Act2015-448_Simplified_Sellers_Use_Tax.pdf. Businesses wishing to participate in the program can find an application here: https://revenue.alabama.gov/salestax/SSUT-Application.pdf. Information about the simplified filing requirements can be found here: https://revenue.alabama.gov/salestax/online/ssutinst.cfm. Step 2 – Nexus without Physical Presence Alabama’s new Administrative Rule, 810-6-2-.90.03, effective January 1, 2016, will require those sellers that are outside the scope of Code of Alabama 1975, Section 40-23-68 (i.e. do not have a physical presence) but nonetheless have retail sales of tangible personal property sold into the state totaling more than $250,000, to collect sales tax on transactions properly sourced to the State of Alabama. Determining whether a business meets this threshold requirement is based the previous calendar year’s sales. Sellers that fall under the scope of Section 40-23-68 and would have substantial nexus in the State include those that:
- Deliver within the State by means of vehicle owned by the selling entity;
- Maintain, occupy, or use…an office, place of distribution…or other place of business, or
- Solicit orders for tangible personal property by advertising or sending catalogues within the state.
Prior to Rule 810-6-2-.90.03 taking effect in January, only those sellers that have substantial nexus through having some sort of physical presence in the State of Alabama, such as those listed under Section 40-23-68, are required to collect and remit tax. This new rule, when it becomes effective, requires any remote seller that advertises in the state or has a subsidiary distribution facility within the state to collect tax. Sellers required to charge tax under this expanded nexus requirement will remit in the same way as the sellers with substantial nexus within the state, through the My Alabama Taxes online process. Although not specifically discussed, we suspect that Alabama intends to allow remote sellers with economic nexus through advertising to use the simplified mechanisms discussed above. Of course, it’s extremely likely that this new Alabama economic nexus provision will be subject to legal challenge and quite possibly may be enjoined before it comes into effect in January. However, this rule could generate just the case that Justice Kennedy is looking for and the issue may find its way to the Supreme Court before Congress is able to act upon the remote commerce legislation currently being debated in the House. One thing is clear however – change is in the air!
