States Prepare to Battle for Online Sales Tax Revenue

In spite of a Congressional promise to consider Internet sales tax legislation this year, states are preparing to fight for online sales tax revenue.

In a gentleman’s agreement that enabled the enactment of the Trade Facilitation and Trade Enforcement Act of 2015, federal lawmakers promised to vote on Internet sales tax in 2016. If states are wary of that promise, it’s because they’ve been trying to get Congress to take on the issue since the spring of 2013, when the Senate passed the Marketplace Fairness Act of 2013. Since then, no concrete steps have been taken.

Numerous states are therefore working on their own initiatives, and they’re ready to do battle to see that they stand. The National Council of State Legislatures (NCSL) stands behind them. As Alabama Department of Revenue Deputy Commissioner of Revenue Joe Garrett put it, “States are no longer pushing around the edges. Now there is a frontal assault on Quill.” (The 1992 Supreme Court ruling in Quill Corp. v. North Dakota prevents states from imposing sales tax on vendors with no physical presence.)

Last fall, the Alabama Department of Revenue adopted Sales and Use Tax Rule Number 810-6-2-.90.03, Requirements for Certain Out-of-State Sellers Making Significant Sales into Alabama. It took effect October 22, 2015, and applies to transactions occurring on or after January 1, 2016. This notice explains the new rule as follows:

“Pursuant to this rule, an out-of-state seller with a substantial economic presence in Alabama will be required to collect and remit Alabama tax on its sales into the state, regardless of whether it has an Alabama physical presence. The rule imposes a collection obligation on out-of-state sellers who engage in one or more of the activities listed in Code of Alabama 1975, Section 40-23-68, activities subjecting out-of-state sellers to the state’s sellers use tax levy, and who had $250,000 or more in retail sales sold into Alabama in the previous year.

Out-of-state sellers may satisfy the rule’s requirements by collecting, reporting and remitting tax on sales made into Alabama pursuant to the provisions of Article 2, Chapter 23 of Title 40, Code of Alabama 1975, or by participating in the Simplified Sellers Use Tax Remittance Program.” [Emphasis mine.]

Alabama fully expects this policy to be challenged. According to Mr. Garrett, “We’re confident that some remote sellers will not comply and therefore it will lead to litigation. We have been very open about what we’re doing.” The state is prepared to go all the way to the United States Supreme Court to defend its policy (WSJ).

Alabama is not alone. Challenges to the status quo are underway in several states, including:

• Louisiana, HB 30 (approved by the Senate, pending debate in the House)
• South Dakota: SB 106 (enrolled and awaiting executive approval)
• Utah: SB 182 (introduced)

Colorado, which opted to impose a use tax notification requirement on out-of-state sellers rather than a remote sales tax, was gratified last month when the Tenth Circuit Court of Appeals ruled that its use tax notification requirements are legal.

If other states successfully implement remote sales tax policies, the landscape will change for many businesses. Read Kill Quill: What’s the fallout for sellers if states succeed?

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