United States

Alabama's economic sales and use tax nexus regulation challenged

Remote retailer with no physical presence files notice to appeal

TAX ALERT  | 

On June 8, 2016, Newegg, Inc. filed a notice of appeal with the Alabama Tax Tribunal challenging an assessment of sales and use tax under Alabama’s newly adopted economic sales and use tax nexus regulation. In 2015, the Alabama Department of Revenue promulgated a regulation, effective Jan. 1, 2016, that attributed substantial nexus to remote retailers with no physical presence in the state if the retailer was making over $250,000 in sales of tangible personal property to in-state customers and conducting certain activities connected to the state.

Newegg is an online retailer that exclusively makes sales from an internet website. In its appeal, Newegg asserts that the retailer has no physical presence in the state, and therefore, the state’s sales and use tax assessment is unconstitutional under Quill. Newegg also claims the economic nexus regulation is inconsistent with the state’s sales and use tax statutes, which require a physical presence in the state to be subject to those taxes.

The provisions of the regulation appear to directly contradict the United States Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, which generally requires that an out-of-state seller have some physical presence in a state in order to be subject to a sales tax collection and remittance requirement. This is the second challenge to a state’s economic sales and use tax nexus law, with challenges involving South Dakota’s new law occurring in April 2016. For more information regarding the South Dakota legislation and litigation, please read our article, South Dakota takes aim at Quill.

Remote and online sellers should follow the Alabama and South Dakota litigation closely. With Congress yet to take action on a national approach to remote sales tax collection, these states could be the first of many to impose an economic sales and use tax nexus law on remote sellers.

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