Online Retailer Challenges Alabama Regulation Regarding Nexus

Another challenge to Quill and the physical presence requirement has surfaced. Under Quill_¹, in order for a state to impose a sales tax collection requirement, the taxpayer must have a physical presence within the state.  

On January 1, 2016, Alabama’s Department of Revenue enacted a sales tax rule in which a remote seller with more than $250,000 of sales to Alabama customers in a calendar year is required to collect Alabama sales tax from those customers. This rule applies even though the seller does not have a physical presence in Alabama.  

As we have seen, Quill is under attack in this new era of technology as consumers are purchasing goods from the internet. In this case, Alabama did not pass a law like South Dakota instead the Alabama Department of Revenue enacted a regulation. 
 
Recently, Alabama assessed an online retailer for sales tax for the months of January and February. The online retailer has filed an appeal with the Alabama Tax Tribunal challenging the legal basis for Alabama’s regulation. 

The online retailer does not have a physical presence in Alabama. Further, the retailer does not use independent contractors, brokers or agents in Alabama and does not lease or rent property in Alabama. All of its sales are accepted, processed and shipped from locations outside of Alabama.  

The online retailer’s main argument as to why the Alabama regulation is unconstitutional is the Supreme Court of the United States decision in Quill. In 1992, the Court held that the nexus requirement for sales tax collection is a physical presence in the state. It should be noted that the court in Quill stated Congress controls interstate commerce and could pass a law to overturn the decision in Quill. 

Alabama believes that Quill is outdated due to technology advances and has cost the state a lot of sales tax revenue. Furthermore, Alabama believes that brick-and-mortar stores are at an unfair competitive disadvantage against online or remote sellers.  

Congress has not acted; therefore, the states have taken action into their own hands in the pursuit of overturning Quill. It is likely that the Supreme Court will be addressing the Quill decision in the near future as a result of the law enacted by South Dakota or the Alabama regulation. Congress could still act, but who knows what will be done with the election a few months away. Stay tuned.    

For questions about this regulation or other state and local tax matters, please contact us.

_{1. Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992).}