ADOR Finalizes Local Nexus Regulation

State & Local Tax Alert: Alabama Edition

Firm Alert

Author(s) ,

The Alabama Department of Revenue has just finalized its new local nexus regulation, Ala. Admin. Code Rule 810-6-5-.04.02, that will apply to transactions occurring on or after January 1, 2014, following its rule-making proceeding and a substantial amount of input from the business and tax practitioner community. Following its efforts last year to broaden its nexus test for interstate transactions (particularly those involving delivery of goods by an out of state vendor into the state), the new regulation explains when a business is required to collect and remit local—county and, if applicable, municipal—sales and use taxes.

According to the newly-finalized regulation, that was published today in the Alabama Administrative Monthly, the same standards used in determining whether a business engaged in interstate commerce will be required to remit State of Alabama sales and use tax will now be used in determining whether local sales and use tax must also be collected and remitted. The regulation summarizes the new rule by stating that a seller may only avoid the obligation to collect local sales or use tax on a transaction if the seller's physical presence in the locality would have been insufficient to create a state sales and use tax collection obligation if the transaction had been an interstate transaction. The regulation even cross-references the ADOR’s recently amended interstate nexus regulation, Rule 810-6-2-.90.01.

The major change will involve delivery sales in the vendor’s own truck or via a contract (as opposed to common) carrier. As discussed in our previous newsletter, unlike current law, those deliveries will in and of themselves require the vendor to collect the destination locality’s sales tax—even if there is no other indicia of physical presence there, such as an office, warehouse or soliciting salesmen. However, informally, and in a published revenue ruling issued several years ago to a client of the authors’ firm, the ADOR has acknowledged that in certain circumstances, the obligation to collect the local sales tax may be shifted from destination locality to the store location or perhaps warehouse location. But that can only be accomplished by some form of contractual language between the seller and buyer, and only if a common carrier is not used as the delivery mode. Conversely, the regulation confirms that if the seller delivers by common carrier, and has no physical presence in the destination locality, then the seller is not obligated to collect the destination locality’s sales tax; but a concomitant use tax may be owed by the purchaser/consumer.

The final regulation includes three examples that were not contained in the proposed regulation, but which the authors believe will be helpful to the reader. As stated above, this regulation becomes effective for sales or use tax transactions occurring on or after January 1, 2014.