Member Article

The Alabama Department of Revenue (“Department”) recently issued a proposed regulation, Prop. Ala. Admin. Code 810-6-5-.05.02 which, if approved, will dramatically alter the obligation of sellers to collect and remit local sales and use tax imposed by Alabama cities and counties. By regulatory fiat, not supported by legislative changes, the Department seeks to reverse decades of tax history and positions. Retailers in Alabama that sell tangible personal property to customers located in counties in which the retailer does not have a physical presence or salesmen will be expected/required to collect the local sales tax of the city and county of the customer.

Consistent with Federal Due Process (as opposed to Commerce Clause) constraints, the proposed regulation provides that sellers must collect local sales and use tax in jurisdictions in which they have sufficient “minimum contacts,” which are defined to include “a physical presence in the local jurisdiction” or instances where “the seller has otherwise purposefully directed business activities toward the consumers of that jurisdiction.” Further outlining what types of activities would, at least in the eyes of the Department, satisfy the requisite minimum contacts standard, the proposed regulation provides the following fifteen examples of activities any of which, if performed within a taxing jurisdiction, will result in nexus:

1. Maintaining “an office, place of distribution, sales or sample room, warehouse or storage space, or any other place of business[;]”
   
2. Having an employee, representative, agent, salesperson, canvasser, solicitor, installer, repairman, or independent contractor operating under seller authority;
   
3. Seller delivery of merchandise to customers, delivery in vehicles owned by a seller affiliate, or delivery in vehicles by carriers acting as a seller agent;
   
4. Owning or leasing real or tangible personal property;
   
5. Distribution of catalogs or advertising materials and subsequent acceptance of orders therefrom;
   
6. Contracting with broadcasters or publishers in the jurisdiction for local advertising;
   
7. Mail solicitation of customer orders;
   
8. Investigation, handling, or assisting in resolution of customer issues or complaints;
   
9. Making repairs or arranging maintenance, service, or warranty-related work;
   
10. Participation in trade shows or convention, or the conduct of seminars to promote business;
    
11. Conducting business by owning, leasing or maintaining tangible personal property or real property in the jurisdiction;
    
12. Providing any king of service or technical assistance on items sold, including qualify control, training, etc.;
    
13. Warehousing, storing, installing, assembling, or manufacturing;
    
14. Any activity to purposefully avail self to benefit of local economic market; or
    
15. Otherwise purposeful direction of business activities toward jurisdiction.

The proposed regulation provides no stated de minimis safe harbor standard and, as indicated in the foregoing examples, broadly imposes local nexus for virtually any activity undertaken by sellers to reach the local markets. This is in sharp contrast to, and is intended to replace, the current regulation addressing this topic, Ala. Admin. Code 810-6-3-.51, which imposes a physical presence test and specifically provides that sellers located outside a locality must collect and remit sales and use tax in cases where they have “salesmen soliciting orders within the municipality” regardless of how delivery is made. The current regulation has been previously relied upon by Alabama courts to prohibit the imposition of local nexus upon sellers based solely upon the mere shipment or delivery of goods within a local jurisdiction. The Department has further indicated that the new regulation will be interpreted so as to impose local sales and use tax nexus on sellers shipping goods into localities through the use of common carriers, although the proposed regulation itself requires the establishment of an agency relationship. In addition, if the new regulation is passed, it is unclear whether the Department will respect statements on bills of sale or bills of lading designating whether the passage of title occurred at the point of shipment or the point of delivery.

This regulation, if implemented and found enforceable by the Alabama courts with respect to intrastate sales of tangible personal property, will make it more expensive for the customers of merchants in cities and counties other than that of the customer. The complexity of dealing with the varying rates of taxes applicable in the various counties and cities will be an additional burden on the merchant.

While the proposed regulation impacts nexus determinations for local sales and use tax purposes, it explicitly does not apply to other taxes and will not obligate business to file returns or pay other local taxes or fees. It remains unclear, however, to what extent the Department will seek to apply the proposed regulation to force the collection and remittance of such tax by out-of-state retailers making interstate sales to customers in local jurisdictions. The expansion of this nexus concept to out of state vendors would be subject to scrutiny under the Commerce Clause of the United States Constitution.

The Department has announced that it is accepting written comments regarding the proposed regulation until June 11, 2013, at which time it will hold a public hearing at it offices in Montgomery, Alabama. It is the Department’s intent to finalize the regulation prior to October 1, 2013.

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For more information, please contact Chris Wilson, Leigh Griffith, or any member of Waller’s Tax team.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED BY FEDERAL TAX LAW.