[IMGCAP(1)]Last week, the Alabama Department of Revenue challenged the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, which established a physical presence test for sales tax nexus.
On September 9, the Alabama Department of Revenue proposed “Requirements for Certain Out-of-State Sellers Making Significant Sales into Alabama,” which would require out-of-state sellers to collect use tax from Alabama customers if they have substantial economic presence within the state.
Nexus is the minimum amount of contact between a taxpayer and a state, allowing the state to tax the business on its activities. It arises from two clauses in the Constitution. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state the entity it wishes to tax.
Indications are that the rule will be promulgated and go into effect on Jan. 1, 2016, according to Clark Calhoun, partner in Alston & Bird’s State and Local Tax Practice.
“From the comments of the governor on Twitter, it sounds like they’re proceeding with the rules,” he said. “He indicated that despite potential Constitutional problems, they were going to proceed with the rule and wait for someone to sue the state.”
“It’s certainly an interesting stance by both the governor and the Department of Revenue,” said Calhoun. “It’s in direct contravention of existing Supreme Court precedent. Following the hearing, the commissioner said the same thing over Twitter, so it looks like it will pass.”
“It is inevitable that taxpayers will be faced with state action that seeks to manipulate current law, but when thinking about altering an existing Supreme Court precedent, we might want to tread carefully,” he cautioned. “We wouldn’t think this is appropriate in a country that respects the rule of law.”
“The state shouldn’t take it into its own hands to overturn old Supreme Court law,” agreed Matthew Hedstrom, senior associate at Alston & Bird. “They’re basically saying that Quill has a shelf life, and it’s expired. This would be troubling even outside the tax context.”
Presumably, the state’s stance is based on Justice Kennedy’s concurrence in the Supreme Court’s recent Direct Marketing decision, in which he suggested that given the changes in technology since 1992, it is time to revisit Quill.
The proposed regulation would apply to businesses that make at least $250,000 in annual sales and conduct one or more specified activities that indicate substantial economic presence in the state.
“It’s being pitched as the states versus the big retailers, but the way the regulation is drafted it would capture many other companies,” said Calhoun. “We don’t view the threshold as so high that it would only capture large, sophisticated businesses; not that it would be Constitutionally sound if it did.”
The hearing was strictly administrative, according to Calhoun, without any action by the legislature. “By rule, they have to accept comments on the proposal, but they can proceed to pass the regs as they see fit,” he said.
The hope to create new law by contravening old law and waiting to be sued is a strange method, which some might say is beneath the dignity of the state. Whether it is successful or not will depend on the future of the litigation that Alabama is waiting for.
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