In a June 15, 2016 statement, the Alabama Department of Revenue announced it would lead the charge to overturn the physical presence standard for sales and use tax nexus under the U.S. Supreme Court's 1992 decision Quill Corp. v. North Dakota. ADOR's statement was in response to online retailer Newegg, Inc.'s appeal to the Alabama Tax Tribunal challenging a final assessment of seller's use tax, interest and penalties totaling upwards of $185,000. Newegg is reportedly the first company to appeal Alabama's new rule which asserts sales and use tax on the basis of "substantial economic presence" rather than the traditional physical presence standard.
ADOR assessed the use tax against Newegg, Inc. under Rule 810-6-2-.90.03, which targets "out-of-state sellers who lack an Alabama physical presence but who are making retail sales of tangible personal property into the state." According to Rule 810-6-2-.90.03, such sellers will have "substantial economic presence" with Alabama if retail sales of tangible personal property into the state exceed $250,000 per year and the seller conducts certain listed activities in Alabama, such as distributing advertising materials or soliciting orders via a telecommunication shopping system. The new rule became effective January 1, 2016.
According to Newegg, it has no physical presence in Alabama; it neither owns nor leases property in Alabama; all sales are received, processed and filled outside Alabama; and it has no affiliate sales force in Alabama. Newegg argues that Alabama Rule 810-6-2-.90.03 is without force and effect because it does not have a physical presence in Alabama, and therefore, there can be no "substantial nexus" with Alabama as required by the U.S. Supreme Court in Quill.
Quill involved a mail-order company that sold office supplies to customers in North Dakota but had no physical presence there. Its only contacts with the state were solicitations via mail-order catalogues and software licensed to North Dakota customers enabling them to check inventories and place orders. In Quill, the U.S. Supreme Court rejected North Dakota's argument that an out-of-state seller with no physical presence in the taxing state could be subject to sales and use tax there. Instead, the Court retained its bright-line rule from previous decisions that the Commerce Clause of the U.S. Constitution requires the seller's physical presence in order for the taxing state to impose a duty to collect sales and use tax on the seller.
ADOR's response to Newegg's appeal states that Rule 810-6-2-.90.03 was adopted as a direct challenge to Quill. The new rule does so by completely eliminating the physical presence standard of Quill in favor of a "substantial economic presence" standard. Although economic nexus has been adopted successfully by states in the context of the income tax, it has never been successfully adopted in the context of sales and use tax due to Quill. According to Alabama Revenue Commissioner Julie Magee:
The effects of Quill have been detrimental to the states' revenues, have forced in-state retailers to operate at an unfair competitive disadvantage for decades, and have allowed online retailers who are clearly doing business in our state to evade collection responsibility . . . . Until Congress acts, we will continue to lead the charge to overturn Quill.
Magee is probably aware that Justice Kennedy, often considered the important swing vote on the U.S. Supreme Court, seems to agree with her. In the U.S. Supreme Court's 2015 Direct Marketing Association v. Brohl decision, Justice Kennedy wrote in his concurring opinion: "There is 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, even if that business is done through mail or the Internet." Therefore, he continued, "[g]iven these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill."
The time for reconsidering Quill may very well have arrived. Not only is Alabama leading the charge to overturn Quill, but states such as South Dakota and Tennessee are attempting to do away with Quill's bright-line physical presence standard as well. The signal from the states is that they are ready to challenge Quill and, having at least some support on the U.S. Supreme Court, with Newegg's appeal Alabama may finally have its chance.