On the same day Governor Bentley and state lawmakers reached an agreement concerning the fiscal 2016 budget, the Alabama Department of Revenue (Alabama DOR) adopted a controversial regulation, 810-6-2-.90.03, which will create an economic nexus standard for sales tax purposes. Effective beginning January 1, 2016, the regulation will require a company to collect and remit sales tax to Alabama if its sales in the state exceed $250,000 in the prior calendar year and the seller conducts one or more of the activities stipulated in Alabama Code § 40-23-68. These activities include:

• Soliciting, pursuant to a contract with a broadcaster or publisher located in this state, orders for tangible personal property by means of advertising which is disseminated primarily to consumers located in this state and only secondarily to bordering jurisdiction;

• Soliciting orders for tangible personal property by mail if the solicitations are substantial and recurring and if the retailer benefits from any banking, financing, debt collection, telecommunication, or marketing activities occurring in this state or benefits from the location in this state of authorized installation, servicing, or repair facilities;

• A franchise or licensing arrangement or contract, a franchisee or licensee operating under its trade name;
• Soliciting, pursuant to a contract with a cable television operator located in this state, orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in this state;
• Soliciting orders for tangible personal property by means of a telecommunication or television shopping system which is intended by the person to be broadcast by cable television or other means of broadcasting, to consumers located in this state;
• Maintaining any other contact with this state that would allow this state to require the seller to collect and remit the tax due under the provisions of the Constitution and laws of the United States; or
• Distributing catalogs or other advertising matter and by reason thereof receives and accepts orders from residents, within the State of Alabama.

This regulation is controversial because it conflicts with the United States Supreme Court ruling in Quill Corp. v. North Dakota, which held that a state cannot require a company to collect and remit sales tax without a physical presence. While other states have used affiliate and agency nexus to impose sales tax on remote sellers, this regulation directly contradicts the Quill decision. As a result, it is certain to be challenged.

Early indications from the Alabama DOR suggest that it expects and welcomes any challenges. The Alabama DOR’s confidence in the regulation is likely stemming from Justice Kennedy’s apparent open invitation to challenge the Quill decision in his concurrent opinion in the recent United State Supreme Court ruling in Direct Mktg. Ass’n v. Brohl. Given that Alabama is the first state to officially take such a position, this regulation could be the vehicle that ultimately reverses or upholds Quill. Regardless, taxpayers, especially remote sellers with significant sales to Alabama, should be aware of the regulation and understand their potential sales tax collection obligations.

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