Alabama to enforce remote sales tax collections starting October 1, 2018

Alabama has had a rule requiring certain out-of-state sellers to collect and remit tax on their sales into the state since January 1, 2016, but it’s lacked the authority to properly enforce it. Until now — enforcement begins October 1, 2018.

What’s changed?

To understand why Alabama can now enforce its economic nexus rule (810-6-2-.90.03), it’s first necessary to understand the impact of two decisions by the Supreme Court of the United States: Quill Corp. v. North Dakota (Quill), and South Dakota v. Wayfair, Inc. (Wayfair).

Quill and Wayfair, a recap

Upholding its decision in an earlier ruling (National Bellas Hess v. Department of Revenue of Ill., 1967), the Supreme Court ruled in Quill (1992) that the connection between a state and a business enabling the state to impose a tax collection obligation on the business (nexus) had to be physical.

In the intervening years, many states have adopted policies that push against the physical limitation, basing nexus on relationships with in-state affiliates, web referrals from in-state businesses, and even economic activity. This explains how Alabama could have a rule requiring certain remote sellers to collect tax, but not the authority to enforce it.

That changed June 21, 2018, with the Wayfair decision overruling Quill’s physical presence limitation.

Wayfair hasn’t given states blanket authority to tax all remote sales. However, it has removed the physical presence limitation and provided a path to taxing sales by out-of-state sellers. The court determined the defendants in the case established sufficient nexus with South Dakota based on their “economic and virtual contacts” in the state, or economic nexus.

Alabama

In a statement regarding the pending enforcement of its economic nexus rule, the Alabama Department of Revenue declared: “While this rule technically was effective January 1, 2016, its validity was in question pending the outcome of the Wayfair decision. Because Wayfair removed the constitutional impediments to the rule, it will be enforced going forward.”

The rule affords protection for sellers doing less than $250,000 in business a year in Alabama. Yet it imposes a tax collection obligation on businesses whose retail sales of tangible personal property delivered into the state exceed $250,000 per year (based on sales from the previous calendar year), provided they also conduct one or more of the activities described in Section 40-23-68, Code of Alabama 1975 (e.g., soliciting sales).

Simplified Sellers Use Tax

Alabama has a complicated sales and use tax structure. Local jurisdictions (municipalities and counties) can administer their own local option sales and use taxes, changing local rates and certain rules by ordinance. For example, during the state’s annual sales tax holidays, localities don’t have to participate at the local level.

Compliance is therefore extremely challenging for businesses selling to multiple locations within the state. To simplify sales tax reporting for out-of-state sellers — and to encourage voluntary remittance pre-Wayfair — Alabama enacted the Simplified Seller Use Tax Remittance Act (SSUT). Remote vendors accepted into the program collect, report, and remit a flat 8 percent tax on all taxable sales into the state rather than the actual rates in effect in each jurisdiction.

The department is encouraging remote vendors now seeking to comply with Alabama’s 2016 economic nexus rule to “register for the SSUT and begin collecting no later than October 1, 2018.”

Marketplace sales

In April 2018, Alabama enacted a law imposing new collection and remittance requirements on marketplace facilitators with sales into the state in excess of $250,000. They must register for and comply with the SSUT on sales made through the marketplace by January 1, 2019, or comply with certain notice and reporting requirements for non-collecting sellers.

Although qualifying marketplace facilitators aren’t required to make that choice until January 2019, some of their marketplace sellers may may hit the $250,000 threshold and have to collect and remit starting October 1, 2018.

Thus, according to the Alabama Department of Revenue, facilitators don’t need to wait until January 1, 2019 to collect. If they opt to collect and remit rather than comply with the notice and reporting requirements, they “may begin collecting and remitting taxes on marketplace sales through the SSUT program upon completion of the application and registration process.” This they should do by October 1, 2018.

However, if they decide to comply with the notice and reporting requirements instead, they don’t need to start until January 1, 2019.  

Additional information about Alabama’s new requirements is available from the Department of Revenue. Learn more about South Dakota v. Wayfair, Inc., and its possible impact on your business here.