On April 30, the Alabama Department of Revenue (ADOR) issued a proposed regulation regarding sellers’ obligations to collect and remit sales or use tax to Alabama cities and counties that would radically change the landscape of local sales and use taxes.1 Prop. Ala. Admin. Code r. 810-6-5-.04.02 (a copy of which is available here). Concurrently, the ADOR proposes to repeal Ala. Admin. Code r. 810-6-3-.51, which Alabama courts and the Attorney General have long cited for the proposition that the mere delivery of goods into a local jurisdiction does not by itself establish nexus for local sales and use tax purposes. See, e.g., Yelverton’s, Inc. v. Jefferson County, 742 So. 2d 1216 (Ala. Civ. App.), cert. denied 742 So. 2d 1224 (Ala. 1999). The combination of these two actions will drastically increase the number of retailers the ADOR will consider as having an obligation to collect and remit local sales and use taxes—even when they have no physical presence in the destination locality. The department’s goal is to finalize the regulation so that it will be effective on October 1, the same effective date of the landmark ONE SPOT e-filing legislation.
The proposed nexus regulation provides that a seller can only avoid the responsibility for collecting and remitting local sales and use tax when the seller lacks “minimum contacts” with the local jurisdiction, invoking Due Process Clause terminology. According to the proposed regulation, a seller has “minimum contacts” with a local jurisdiction if it has a physical presence within the jurisdiction or has “purposefully directed its business activities toward the consumers of that jurisdiction.”
The regulation provides an illustrative list of fifteen types of business activities that would establish minimum contacts with a particular local jurisdiction. Among the activities listed is the distribution of catalogs or other advertising materials in the jurisdiction. Another example is contracting with a broadcaster (i.e. a TV or radio station) or publisher for advertising primarily directed toward potential customers in a jurisdiction.
Perhaps most notably, the proposed regulation also identifies the delivery of goods into a local jurisdiction, whether in a seller’s own trucks or (arguably) by common carrier, as a business activity that will establish a collection obligation. ADOR officials have advised us informally that they intend the proposed regulation to create nexus for retailers who merely use a common carrier such as FedEx or the U.S. Postal Service to ship their goods into a locality. The proposal does not discuss whether the practice of specifying in the retailer’s bill of sale or bill of lading that title to the goods passes at the store or warehouse location (rather than at the destination) will continue to be respected.
In a major departure from the current local nexus regulation, this proposed regulation expressly provides that having an employee, independent contractor, salesperson, installer, or repairman in the local jurisdiction “for any purpose” will create a sales or use tax collection obligation. Currently, a seller must have salesmen regularly soliciting sales in the jurisdiction to create a collection obligation. In light of the ADOR’s position that there will be no de minimis threshold before sales or use tax liabilities are triggered by the presence of an employee in the state, it’s probable that the department will take the position that any personnel entering a local jurisdiction on official business, no matter how briefly, will create local nexus.
Unfortunately, the proposed regulation does not contain a hold-harmless provision that would protect a taxpayer who mistakenly relied on the ADOR’s website for sales and/or use tax rates that turn out to be wrong. This omission is in stark contrast to the federal Marketplace Fairness Act, which recently passed the U.S. Senate and now awaits a vote in the House. It is also inconsistent with current Alabama statutory law, which provides that “no penalties or interest for late payment or underpayment of taxes shall begin to accrue until the proper tax rate or levy has been on file at the department for at least 30 days, unless the taxpayer had actual knowledge of the correct tax rate or levy as of an earlier date.” Ala. Code § 11-51-210(e).
The ADOR will accept written comments on the proposed regulation until June 11, when it will hold a public hearing at its offices in Montgomery. Given the significant change from current law, several industry groups are expected to file comments on the proposed regulation, especially those portions that purport to extend a sales and use tax collection obligation to sellers whose only contact with the jurisdiction is the mere delivery of goods there. “The Alabama Retail Association (ARA) is seeking input from retailers across the state on the nexus rule change,” said ARA President Rick Brown.