Alabama Accepts Justice Kennedy’s Invitation and Adopts Economic Nexus Regulation for Sales/Use Tax

The Alabama Department of Revenue has issued a rule which establishes that an out-of-state seller who lacks physical presence but still makes retail sales of tangible personal property may have substantial economic presence and be required to collect and remit sales tax – but is this constitutional?

In an article from our May 2015 SALT Newsletter, we discussed Justice Kennedy’s concurring opinion in Direct Marketing Ass’n v. Brohl, Executive Director, Colorado Dep’t of Revenue, in which he questioned the ongoing viability of the physical presence requirement for sales and use tax nexus as last upheld by the United States Supreme Court in its Quill decision. Noting the changes in the way that technology allows sellers to reach consumers, Justice Kennedy then invited the legal system to bring a case before the Court so that it could reexamine that decision.

It appears that the state of Alabama has accepted Justice Kennedy’s invitation. On Sept. 17, 2015, the Alabama Department of Revenue issued new, which is applicable for transactions occurring on or after Jan. 1, 2016. That rule establishes that an out-of-state seller who lacks physical presence but who is making retail sales of tangible personal property into the state may have substantial economic presence and be required to register for, collect, and remit Alabama sales/use taxes if those sales exceed $250,000 in the prior calendar year.

This new rule is likely to result in litigation over its constitutionality, and that is clearly anticipated and welcomed by the Alabama Department of Revenue. After the rule was proposed, tax practitioners expressed concern through Twitter that the rule was unconstitutional, and that it is the role of the executive branch follow existing laws and not to make new laws. Alabama Department of Revenue Commissioner Julie Magee joined in the Twitter exchange with the following statements:

“All sorts of things were constitutional or unconstitutional until they weren’t anymore. Sue us. Why would we continue to work under an antiquated court ruling? Look how old Quill was. Times change and things were once constitutional and they’re not constitutional anymore. It is time for some sort of paradigm shift and we can’t continue to remain under the Quill ruling.”

The nexus landscape is always changing, and taxpayers need to monitor constantly that potential impact of those changes on their compliance with state tax laws. The SALT team at HA&W can assist you with evaluating your nexus risks and make recommendations on actions to be taken in order to reduce potential exposure. We continue to monitor these developments and will provide updates in future editions of the SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at for more information.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.