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Challenge to Alabama’s New Nexus Rule: Internet Sales

The state of Alabama passed new regulations that would require out-of-state sellers with no physical presence in Alabama to collect Alabama Use Tax if they have sales to Alabama customers exceeding $250,000. This took effect January 1, 2016.

There has been a longstanding precedent established by the Supreme Court in Quill v. North Dakota that the bright line test of physical presence was required for sales tax nexus. The states have protested that times have changed and we must recognize that they are losing sales tax revenue because their residents are purchasing from out-of-state businesses over the Internet rather than at local businesses where they would have to pay sales tax. Based on the Quill decision, these Internet businesses are not required to collect sales tax in states where they have no physical presence.

The states have been asking Congress to create new laws to level the playing field by requiring out-of-state sellers to have similar sales tax collection obligation as in-state businesses. Congress has proposed the Marketplace Fairness Act, but to date it has not passed.

Recently, Supreme Court Justice Kennedy in a related matter opined that it is time we re-examined the Quill decision.

The State of Alabama took matters into their own hands by passing these new regulations, and by so doing invited a challenge to the physical presence requirement in Quill. It didn’t take long. After two months of the new regulations’ existence, Alabama assessed Newegg, Inc. for failure to collect use tax. Newegg filed an appeal with the Alabama Tax Tribunal. Coincidentally, Newegg had challenged a similar law in Ohio courts involving Ohio’s CAT which is a tax on gross receipts. Newegg similarly does not have physical presence in Ohio, and they lost that case in Ohio court.

Newegg is now challenging the constitutionality of Alabama’s regulations. If they do not succeed in Alabama courts, this could possibly end up being the Supreme Court test case on Sales Tax Nexus for which many have been waiting. The Supreme Court, however, has declined to hear other nexus cases, as they have stated that Congress has the authority to create legislation that would establish a new standard for nexus.

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