Alabama Department of Revenue Issues Controversial Proposed Regulation Taxing Out-of-State Vendors

State & Local Tax Alert: Alabama Edition

Client Alert

Consistent with Governor Robert Bentley’s public statement last week that he hopes or another internet e-tailer will sue the state of Alabama regarding its position on nexus, the Alabama Department of Revenue issued a proposed rule that would require out-of-state sellers who have no physical presence in the state to nevertheless collect so-called seller's use tax from their in-state customers and remit that tax to the ADOR.

According to Proposed Rule 810-6-2-.90.03 (the “Proposed Rule”), “sellers who lack an Alabama physical presence” will be required to register to collect and remit the tax if they “have a substantial economic presence” in the state. Among other things, having a “substantial economic presence” includes having retail sales of tangible personal property into Alabama that “exceed $250,000 per year based on the previous calendar year’s sales.” The Proposed Rule has an effective date of January 1, 2016.

The Proposed Rule was posted on the ADOR website Monday morning, August 3, while the notice of proposed rulemaking was published on Friday, July 31. In light of the looming deficit in the always cash-strapped General Fund budget (to which this tax would flow) and Justice Anthony Kennedy’s recent statement in Direct Marketing Association v. Brohl (March 3, 2015) that the Court should revisit Quill Corp. v. North Dakota, it shouldn’t be a surprise the ADOR is pushing the envelope here.

As readers may recall, the U.S. Supreme Court announced in its 1992 Quill decision that the traditional “physical presence” test under the Commerce Clause remained the law of the land, although that test would not apply under the Due Process Clause. Despite that ruling, many states have attempted, in a variety of ways, to force remote sellers to collect and remit either sales or use tax from their in-state customers. Professor Robert Robicheaux of the University of Alabama at Birmingham’s Collat School of Business published a study in September 2014 that projected a $127.3 million revenue loss for 2013 and even larger losses in later years due to the inability of the state and local governments to force remote sellers to collect and remit sales or use tax on their sales into Alabama. His projections also included an even larger ripple effect involving lost in-state sales, lost income tax revenue, lost jobs, and lost indirect retail sales.

Determining whether the ADOR can impose such a collection requirement will be a long process. First, the Proposed Rule must become final. Then, the ADOR will face the inevitable legal challenge to the rule’s constitutionality. It would take several years and several courts to even present a test case to the U.S. Supreme Court, and even then, the Supreme Court might deny certiorari if a sufficient number of justices so vote. It should be noted, however, that six of the current justices were not members of the Quill court and two other justices seemed to side with Justice Kennedy’s recent invitation in DMA.

As indicated, the ADOR’s first step is to comply with the requirements of the Alabama Administrative Procedure Act, which include public hearings and comments and, potentially, a review by the Alabama Legislature’s powerful Joint Committee on Administrative Regulation Review, otherwise known as the Legislative Council. The Council can simply ignore the proposed rule and allow it to go final in the form it is submitted to them after any editing by the hearing officer; hold a hearing and recommend changes to the proposed rule; or hold a hearing and vote to suspend it. If it chooses the latter option, however, the Alabama Legislature must pass a joint resolution during the 2016 regular session to affirm the Council’s vote or else the proposed rule is reinstated in final form.

Our firm’s State and Local Tax Practice Group will be monitoring these deliberations and will report as material developments occur. If you have any questions regarding the proposed rule, please contact any of the Alabama members of our SALT Practice Group.