Since Quill in 1992, states should only be allowed to impose taxes on businesses if they have a “physical presence” in the state. For example, having a physical location in state, maintaining inventory, having employees or representatives in the state that solicit sales, would constitute the requisite physical presence. If a company has physical presence, then a state can impose tax on that company.
However, more and more States are enacting an “economic nexus” to impose a tax on businesses. But, what is economic nexus? “Economic nexus” is a presence (or “nexus”) standard in which States are able to impose taxes on businesses that have no physical presence on the taxing State other than having a certain amount of sales on that State.
In 2002, the Multistate Tax Commission (“MTC”) developed the idea of an economic nexus when it allowed substantial nexus in situations where there is no physical presence as long as sales during the tax period are greater than $500,000. States normally set up a threshold gross amount of sales that a business must have in order to create an “economic nexus” with that State. Even though this trend has been growing across the States, it is not a new concept.
However, “economic nexus” plainly contradicts the decision made by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which, the Supreme Court held that a state cannot impose use tax obligations on an out-of-state business unless the business has a physical presence in the state.
Alabama is one of many States that has recently enacted a regulation to tax on out-of-state retailers when they have no physical presence in the State. Under regulation 810-6-2-.90.03, an out-of-state retailer that has no physical presence on the state but makes retail sales in Alabama that exceed $250,000 on a calendar year is deemed to have a “substantial economic presence.”
By acquiring this “substantial economic presence” in the state of Alabama, out-of-state retailers are required to collect and pay taxes in Alabama on sales of tangible personal property. On top of physical presence, the Alabama regulation would treat a business as having substantial economic presence in Alabama if it engages in any of the following activities:
- Soliciting orders for tangible personal property by means of advertising disseminated primarily to consumers in Alabama and only secondarily to bordering jurisdictions;
- 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 Alabama or benefits from the location in Alabama of authorized installation, servicing, or repair facilities;
- Soliciting, pursuant to a contract with a cable television operator in Alabama, orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in Alabama;
- Soliciting orders for tangible personal property by means of a telecommunication or television shopping system which is intended to be broadcast by cable television or other means of broadcasting to consumers in Alabama; or
- Distributing catalogs or other advertising material and by reason thereof receiving and accepting orders from residents within the State of Alabama.
This regulation applies to transactions occurring on or after January 1, 2016. States like South Dakota, Vermont and New York already have an economic nexus standard in place that allows them to tax out-of-state retailers without any physical presence in the State. The threshold for those states ranges between $100,000 to $1 million in sales.
What this means is that an out-of-state business that made retail sales to Alabama customers of more than $250,000 in the previous year will be required to collect and pay sales tax to Alabama despite having no physical presence in Alabama.
With this trend continuing to grow in many States across the nation, States that have enacted those legislations should foresee a constitutional challenge since the “economic nexus” of only providing a threshold amount of sales contradicts the decision made in Quill Corp. In that seminal case, it was held that the states cannot impose sales tax collection and compliance burdens on an out-of-state business merely for having customers on the state.
With many more States proposing similar regulations the Supreme Court should hear a case on “economic nexus.” States are clearly attacking the decision made in Quill and the “economic nexus” standard must be reviewed in order to have uniformity across the States.
About the Author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog . If you have any questions please do not hesitate to contact him via email at JerryDonnini@FloridaSalesTax.com or call 954-642-9390.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Following Wayfair, Wyoming Issues Guidance for Remote Sellers
- Quill Killed! Court Overrules Physical Presence Requirement
- Kill Quill? South Dakota Awaits Supreme Court Answer
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?