A recent decision by the Alabama Department of Revenue Administrative Law Division shed some light on the determination of nexus for purposes of local (city and county) sales and use tax. The decision may be relevant to municipal and county business license tax issues as well.
Alabama can be a difficult state in which to comply with local sales and use tax and business license tax obligations. The difficulty arises primarily from the fact that many localities administer their own taxes and require local registration and filing of returns. The Alabama legislature has addressed sales and use compliance issues with the adoption of a centralized filing system, which should start to be implemented later this year.
An often troublesome dilemma is determining what activities within a locality create nexus requiring tax to be collected and paid to a locality. The leading Alabama case on the subject is Yelverton’s Inc. v. Jefferson County, in which the court held that delivery alone was not nexus-creating for local sales and use tax registration and compliance. Yelverton’s requires a higher level of nexus for Alabama local taxing jurisdiction than Quill Corp. v. South Dakota because of Alabama Administrative Regulation 810-6-3-.51(2) (Regulation), which states that, unless a taxpayer has a physical location, nexus is created by having salesmen soliciting orders in the jurisdiction.
In Van Horn v. Department of Revenue, decided January 3, 2013, the Administrative Law Judge held that a photographer (owner of a single member LLC) who travelled or whose employees travelled to various cities within Alabama to take photographs in those cities for customers did not create nexus for sales and use taxes in each city.
As understood by the Administrative Law Judge, the photography activities did not create nexus nor did limited sales calls within a jurisdiction rise to the level necessary to create nexus. In Van Horn, the LLC owner made single sales presentations in each of four localities. The judge stated that the use of the word "salesmen" in the Regulation indicates more than one salesman and more than a single sales solicitation is required to create nexus. Because of Van Horn's particular facts, even given this holding, it is unclear whether the judge or a court would hold that a single salesman making multiple sales calls within a jurisdiction did not create nexus.
The nexus issue also arises in the business license tax area. Municipalities in Alabama typically levy a license tax on gross receipts of a business derived from within their jurisdiction. Recently many municipalities in Alabama have made an effort to require business licenses from businesses whose only contacts are sales activities. The reasoning in Van Horn may help businesses oppose business licensing requirements based on very limited sales activity within a jurisdiction.
The determination of nexus in Alabama, as elsewhere, is very dependent on the facts and circumstances of the particular situation.