In the 1992 case Quill Corp. v. North Dakota, 504 U.S. 298 (Quill), the Supreme Court held that a state cannot impose sales and use tax obligations on an out-of-state business unless the business has a physical presence in the state. Under Quill, if an online retailer did not have a physical presence in a state, it was not required to collect and remit sales tax on a transaction to a customer in that state.
States over the years have been passing laws to level the playing field on sales and use tax collections between online retailers and brick and mortar stores. Also, states have realized the amount of tax revenue they are missing out on as a result of online sales. By 2015, it was estimated that e-commerce sales in the United States totaled $350 billion. The lost tax revenues for the states have the potential to help with budgetary needs of individual states.
In 2016 to-date, 31 sales and use tax nexus bills have been introduced in 15 states including Alabama, Idaho, Illinois, Kansas, Louisiana, Massachusetts, Minnesota, Mississippi, Nebraska, Ohio, Oklahoma, Rhode Island, South Dakota, Utah and Washington. Currently, there are 25 active bills across 13 states. This chart from Multistate Insider provides a list of sales tax nexus bills in the 2016 state legislative sessions.
States are passing laws to challenge the Supreme Court’s holding in Quill because many believe that the Court’s holding from 1992 is outdated with today’s technology advacements. Furthermore, many states believe that there may be an opening in which the Supreme Court would be willing to overturn Quill. This belief is based on Justice Kennedy’s statement in a recent Supreme Court holding (Direct Marketing Assn. v. Brohl, 135 S. Ct. 1124 (2015)) in which he wrote that it was time for the court to reexamine Quill.
Below are examples of certain approaches that states have taken to level the playing field between online retailers and brick and mortar stores:
- “Amazon Law” – States requiring out-of-state retailers to collect sales tax if the state pays commissions to in-state affiliates to refer customers to the retailers’ websites;
- States compelling out-of-state retailers to provide information about their in-state customers, which would allow the state tax authorities to collect the tax directly from the consumers; and
- “Economic Nexus Threshold” – States may adopt regulations creating sales and use tax nexus based on an economic threshold amount. Alabama recently passed similar regulations.
The Alabama Regulation
Under the Alabama regulations, if an out-of-state seller lacks a physical presence in Alabama, but makes retail sales of tangible personal property to state residents, they must collect and remit Alabama sales tax if they have a “substantial economic presence” in Alabama. A substantial economic presence is defined as retail sales in Alabama during the prior calendar year exceeding $250,000, and the seller conducted one or more of the enumerated activities described below.
- Soliciting orders for tangible personal property by means of advertising disseminated primarily to consumers in Alabama and only secondarily to bordering jurisdictions;
- Soliciting orders for tangible personal property by mail, if the solicitations are substantial and recurring and if the retailer benefits from any banking, financing, debt collection, telecommunication, or marketing activities occurring in Alabama or benefits from the location in Alabama of authorized installation, servicing or repair facilities;
- Soliciting pursuant to a contract with a cable television operator in Alabama, orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in Alabama;
- Soliciting orders for tangible personal property by means of a telecommunication or television shopping system which is intended to be broadcast by cable television or other means of broadcasting to consumers in Alabama; or
- Distributing catalogs or other advertising material and by reason thereof receiving and accepting orders from residents within Alabama.
Therefore, a business that made retail sales of more than $250,000 to Alabama customers in the previous year, and advertises or distributes catalogs in Alabama would be required to collect Alabama sales tax despite having no physical presence in the state. That result clearly is at odds with the Supreme Court’s holding in Quill.
Brick and mortar retailers and Amazon.com have lobbied Congress to enact a federal law that would permit states to tax certain out-of-state retailers in exchange for specific tax simplification requirements intended to make it easier for retailers to comply. In 2014, the U.S. Senate passed the Marketplace Fairness Act, but the act was not acted upon by the U.S. House of Representatives.
Will a taxpayer challenge the Alabama regulation? Will other states jump on board with Alabama and adopt an economic nexus threshold for sales and use tax nexus? Will Congress intervene and pass a law to make the nexus rules a moot point? We will have to wait and see.
For questions about this or other state and local tax matters, please contact us.