April 21, 2016

New State Sales Tax Provisions Attempt to Create Nexus for Out-of-State Sellers

Two states are challenging a longstanding constitutional principle established by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that only a seller with a physical presence in a state can be required to collect and remit that state’s sales tax on sales to customers in that state.

Alabama has recently adopted a new regulation and South Dakota has recently enacted a law to provide that, in certain circumstances, an out-of-state seller has an obligation to collect sales tax on sales into those states even though that out-of-state seller does not have a physical presence in the state.

Under Alabama’s new regulation, which took effect January 1, 2016, an out-of-state seller that has a “substantial economic presence” in Alabama has a duty to collect sales tax on sales to customers in that state. An out-of-state seller has substantial economic presence if (1) its sales into Alabama exceed $250,000 per year, and (2) the seller conducts one or more nexus-creating activities described in ALA. CODE § 40-23-68. Some of these nexus-creating activities include:

  • Qualifying to do business or registering with the state to collect tax
  • Having a franchisee or licensee operating in the state under the seller’s trade name
  • Employing a representative for selling, delivering or taking orders in the state
  • Soliciting, pursuant to a contract with a broadcaster, publisher or cable television operator located in the state, orders by means of advertising that is disseminated primarily to customers within the state or distributed over a cable television system in the state
  • Distributing catalogs or other advertising matter and, from this, receiving orders from residents within the state

South Dakota’s new law, which takes effect May 1, 2016, requires an out-of-state seller, with no physical presence in the state, to collect and remit sales tax if its (1) sales into the state exceed $100,000, or (2) number of transactions in the state exceed 200.

South Dakota’s law is designed to set up a case that will get to the United States Supreme Court as quickly as possible. It authorizes the bringing of a declaratory judgment action and requires the circuit court to give the case priority. An appeal would go straight to the state supreme court, which, likewise, is supposed to act expeditiously. Fortunately, the South Dakota law provides that the declaratory judgment action will act as an injunction against enforcement of the law during the pendency of the case, and that an obligation to remit sales tax must not be applied retroactively. If South Dakota prevails in this case, the obligation to collect will be prospective.

South Dakota is sending out notices to businesses advising them of the new law, requesting that they start collecting the tax voluntarily, and suggesting that, if they do not, then they run the risk of being sued in the declaratory judgment action. Retailers across the country with customers in South Dakota need to consider the pros and cons of collecting and remitting sales tax to the state.

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