The Alabama Department of Revenue (“ADOR”) has withdrawn its controversial proposed local nexus rule, Ala. Admin. Code prop. r. 810-6-5-.04.02, and replaced it with a proposal that is narrower in scope and more straightforward. The replacement rule, if finalized in its present form, would essentially parallel the ADOR’s interstate nexus rule, 810-6-5-.90.01. ADOR officials advised the authors that they believe the changes between the initial and the new proposed rules were substantial enough to warrant going through the APA rule-making process anew. The notice of the withdrawal of the proposed rule and its replacement was published in the Alabama Administrative Monthly on July 31, and a public hearing to entertain comments on the replacement local nexus rule has been set for Friday, September 6, in Montgomery. Readers may recall that Alabama is (thankfully) one of the few states that allows each and any municipality and county, if they elect, to both levy and collect—or contract out the administration of—their sales, use, and rental taxes.
The withdrawal and replacement of the ADOR’s proposed local nexus rule comes after several industry groups and professional organizations filed lengthy comments and met with ADOR officials to express concern over the broad scope of and inherent ambiguities in the proposed rule. While many of the concerns of the commentators have been addressed in the replacement rule, there are problem areas that remain. The replacement local nexus rule will be effective and apply to every transactions occurring on or after January 1, 2014, instead of the initial September 1, 2013 date.
In late April, the ADOR issued the initial proposed regulation regarding a seller’s obligation to collect and remit sales and use tax to Alabama counties and municipalities. Along with the proposed local nexus rule, the ADOR also proposed to repeal its longstanding local nexus regulation, Rule 810-6-3-.51, which Alabama courts and the Attorney General have often cited for the proposition that the mere delivery of goods into a local jurisdiction does not by itself establish nexus (a tax collection obligation) for local sales and use tax purposes. See, e.g., Yelverton’s Inc. v. Jefferson Co., 742 So. 2d 1216, 1221 (Ala. Civ. App. 1997), cert. quashed, 742 So. 2d 1224 (Ala. 1999); Diversified Sales, Inc. v. State Dep’t of Rev., Admin. Law Div., Dkt. No. S. 06-937 (Sept. 4, 2007); Opinion of the Attorney General No. 2001-165 (Apr. 26, 2001).
The ADOR’s interstate nexus rule was amended last year to provide that delivery into Alabama by an out-of-state seller creates nexus with Alabama if the seller uses its own trucks or a contract carrier for the delivery. However, delivery by common carrier or via US mail does not by itself create nexus for out-of-state sellers. Because the local nexus rule (if finalized in its present form) will parallel the interstate nexus rule, these same rules will apply to local deliveries, effective January 1. Thus, a local retailer who uses its own trucks or an affiliated contract carrier to make deliveries will have a tax collection obligation in the destination jurisdiction.
The current rule requires a seller to have a salesperson regularly soliciting sales in a local jurisdiction in order to create a tax collection obligation. Neither the proposed rule nor the replacement rule impose any sort of de minimis threshold before a local sales or (seller’s) use tax collection obligation is triggered, and may cause the ADOR as well as local governments—or their contract auditors—to take the position that any sales personnel entering a local jurisdiction on official business, no matter how briefly, would create local nexus even if the retailer was delivering by common carrier or the US Post Office. The lack of a de minimis threshold in the replacement rule will likely be addressed by the business and professional community in the new comment period.
Another problem that business and trade organizations had with the initial proposal was the lack of a ‘hold-harmless’ provision. Such a provision would grant relief to taxpayers who mistakenly relied on the ADOR’s website for sales and use tax rates that turn out to be incorrect. This parallels the Marketplace Fairness Act, which passed the US Senate in May and is now awaiting a vote in the US House of Representatives. That issue has not been addressed in the replacement rule, however, and may indeed require a statutory solution. Nevertheless, having a local nexus rule that parallels the ADOR’s interstate nexus rule will ease administrative burdens on both the ADOR and businesses—but there is work left to be done.