Remote sellers making sales into Alabama have until January 1, 2016, to begin collecting sales tax regardless of their physical presence in the state or consider whether there is any impact on financial statement issues as a result of non-collection.
This summer, the Alabama Department of Revenue issued a surprising new regulation, § 810-6-2-.90.03. This rule specifically provides that a remote seller with more than $250,000 of sales into the state that also meets the provisions of the “doing business” statute must register for a license and collect and remit sales/use tax to the state. Notably, the list of activities that are considered “doing business” includes solicitation of sales using cable television advertising; substantial solicitation of sales plus benefitting from any banking; financing; debt collection; telecommunication; or marketing activities occurring in this state; any contact with the state sufficient to allow Alabama to impose a sales and use tax collection requirement under the U.S. Constitution. Ala. Code § 40-23-68(b)(9). The rule goes into effect January 1, 2016.
If this had happened 10 years ago, the response would be simple – Alabama’s economic nexus threshold is clearly unconstitutional under Quill. However, several developments, both legal and environmental, have made the analysis more complex. First, the Alabama legislature has provided an option to remote sellers to use the “Simplified Sellers Use Tax Remittance” process. This program creates almost the simplest tax calculation and remittance process possible: one rate, no exemptions, single jurisdiction filing. Alabama is surely counting on the Supreme Court of the United States to find that this simplified process removes the burden which concerned the Court in Quill. There are, of course, numerous arguments against this scenario; many of them quite strong. Nevertheless, Alabama’s clever, parallel compliance juggernaut does mandate some respect.
Second, Justice Anthony Kennedy clearly feels it is high time for the holding in Quill to be relegated to an era when only academics knew of the internet. One justice’s comments do not mean that sculptors should begin carving Quill’s headstone, but the Court already has at least two justices that do not believe the dormant commerce clause exists at all. Today, there is clearly the highest risk ever of some type of melting of the Quill iceberg.
So what does this mean for remote sellers with Alabama customers? First—of course such sellers could begin collecting, but, some sellers philosophically believe in the underpinnings of Quill and other sellers may find collection, even under the simplified system, financially oppressive and/or administratively difficult. For those sellers that will not or cannot comply, the immediate questions that must be answered are: (1) What are the risks of not collecting; and (2) Do those risks rise to the level of financial statement issues? Obviously the first risk is that with every sale, the seller may be incurring tax liability that it otherwise could have passed on to its customers. How real this risk is dovetails with the second issue. In determining the risk of probable loss (or other financial statement standard), many factors come into play. For example, if the Supreme Court overturned Quill, would it do so prospectively only? Or would the case be completely retroactive as is typical for court decisions? Or, would the Court allow some limited retroactive application to those states that had provided some type of notice to taxpayers—a notice like Alabama’s. What if the rule is challenged through Alabama’s court system, is upheld, and the Supreme Court denies review? Are there other, non-constitutional arguments that would invalidate § 810-6-2-.90.03 so that Quill’s continuing validity is not even an issue. For example, there may be support for finding that the commissioner exceeded her authority in issuing this rule.
Remote sellers have some difficult questions to address. If Alabama is successful in increasing collection by remoted vendors, other states may consider adopting a similar regime. A vendor’s decision regarding Alabama should be a position that it is comfortable asserting in other states as well.
