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Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

Last Friday, the Alabama Court of Civil Appeals handed the Department of Revenue (Department) a significant loss in their continued attempt to tax non-enumerated services and tangible property provided in conjunction with those services under the sales tax.  See State Dep’t of Revenue v. Omni Studio, LLC, No. 2140889 (Ala. Civ. App. Apr. 29, 2016).  Specifically, the appellate court affirmed the taxpayer’s motion for summary judgment granted by the trial court, which set aside the Department’s assessment on the basis that photographs provided by a photography studio are merely incidental to the nontaxable photography services provided by the studio.  While the prospective effect of the holding in the photography context is unclear due to recent amendments to the photography regulation (effective January 4, 2016), the case is significant in that it strengthens the “incidental to service” (or “true object”) precedent in Alabama and should be seen as a rebuke to the Department for ignoring judicial precedent in favor of their own administrative practices and guidance.

This decision is important in analyzing the taxability of mixed/bundled sales to Alabamans (i.e., where services and some degree of tangible personal property are provided as part of the same transaction).  As with any decision, taxpayers should consider potential refund claims. (more…)




Viral Marketers Beware – In Alabama, Sales Tax Nexus Created for Out-of-State Bookseller Even Though In-State Teachers Not Acting on Behalf of Seller

After a quarter of a century, the school book nexus cases continue to proliferate, delight and mystify.  The latest installment in the saga is from Alabama.  Scholastic Book Clubs, Inc. 2931 v. State Of Alabama Department Of Revenue, Ala. Tax Tribunal, Dkt. No. S. 14-374 (March 25, 2016).  Like the other cases, the question addressed is whether a vendor with no property or employees in the state nevertheless has nexus for sales tax collection purposes because of the activities of unrelated, and uncompensated, teachers in the state.  Like all of the other cases, these teachers received unsolicited catalogs from the vendor and could either discard the materials or distribute them to their students.  Like all of the other cases, if a teacher elected to distribute the materials, the teacher collected completed order forms and payments from the students and mailed the order and payments to the vendor.   Like all of the other cases, the teacher distributed the order once received to the individual students that placed orders.  Also, like all of the other cases the vendor provided bonus points to teachers based on the dollar amount ordered.  The vendor intended the bonus points be used to purchase additional classroom materials – either from the vendor directly or through gift cards to another retailer.

In reaching its decision, the Alabama Tax Tribunal (the Court) restricted its analysis to the historical Quill physical presence standard.  While noting that on the same facts courts in other states have been severely split on the issue of whether physical presence existed for such a vendor, the Court determined that the opinions finding physical presence were more persuasive.  The Court quoted at length from Scholastic Book Clubs, Inc. v. Comm’r of Revenue Servs., 38 A.3d 1183 (Conn. 2012).

As with most of the other bookseller cases in which a court found substantial nexus existed, the Alabama Tax Tribunal focused on the Scripto language negating the importance of labels such as “agent,” “independent contractor,” and “representative.”  This is a red-herring, as the correct analysis should be that regardless of the label, on whose behalf were the teachers acting.  Evidence was introduced that the teachers were acting on behalf of their students, not the vendor.  The Court, however, assumed this bedrock issue away by finding that regardless of on whose behalf the teachers were acting, because the teachers’ activities were substantially associated with Scholastic’s ability to establish and maintain a market in the state, this result was sufficient to establish physical presence for the vendor.  According to the Court, it did not matter that the teachers did not receive any type of compensation from the vendor and did not intend to benefit the vendor.  The only thing that mattered to the nexus analysis was that at the end of the day, the teachers were important to Scholastic’s maintenance of a market in the state.

But that cannot be the correct analysis.  Otherwise, any advertising campaign that relied on word-of-mouth (and similarly any viral marketing campaign) would establish nexus [...]

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Alabama Legislature Rejects (Yet Another) Attempted Digital Tax Expansion

Last month, a much-anticipated bill drafted by the Alabama Department of Revenue (Department) was introduced in the Alabama Senate that would have expanded the definition of tangible personal property to include “digital goods.”  See Senate Bill 242 (introduced February 16, 2016).  Fortunately, the Senate Finance and Taxation Education Committee (Committee) rejected the bill on March 9, 2016, after hearing testimony from Assistant Department Counsel Christy Edwards and extensively questioning her on the bill’s content and motives.  Notably, the Department continues to take aggressive positions in an effort to tax digital goods and services, without the requisite statutory or legislative approval to back it up.

Background

On February 28 2015, the Department proposed an amendment to Regulation 810-6-5-.09, which would have amended the rental tax on tangible personal property to include “digital transmissions” (broadly defined to include digital content such as streamed audio and video).  After significant opposition from industry representatives, the Joint Legislative Council (composed of leadership from both chambers) wrote a letter to Commissioner Julie Magee in April 2015 requesting that the proposed regulation be withdrawn.  It cited to the fact that the proposal was overly expansive and would in effect be the imposition of a new tax, a determination that rests with the legislature.  See our prior coverage here.  With hesitation and only after continued pushback from the Legislative Council, the Department withdrew the rental tax regulation amendment on July 7, 2015.

In response to the rejection of the proposed regulation, the Department went through its historic revenue rulings and revoked a number of technology rulings in January 2016, noting they will continue attempting to apply the rental tax to streaming services.  Commissioner Magee cited the revocations as a mere “clarification” that did not change the law.  In her comments to the revocations, Commissioner Magee noted that all taxpayers will be collecting and remitting tax in the future “[e]ither legislatively through a digital goods bill or through audits and assessments.”

Senate Bill 242

The digital goods bill arrived just a few weeks later, sponsored by Senator Trip Pittman.  As introduced, the bill would define “tangible personal property” to include “digital goods.”  For these purposes, digital goods include “[s]ounds, images, data, facts, or information, or any combination thereof, transferred electronically, including, but not limited to, specified digital products and any other service transferred electronically that uses one or more software applications.”  As is readily apparent, this language is extremely broad and arguably includes every service delivered over the internet.  The definition also raised concerns because it borrows from Streamlined language (“transferred electronically”; “specified digital products”), but Alabama is not a Streamlined state and does not define those terms elsewhere in the legislation or Code.  As drafted, the bill would have become effective immediately upon passage.

After cancelling a scheduled Committee hearing earlier this month, citing the need for revisions, the sponsor and Department entered the March 9 public hearing with a substitute bill.  Instead of defining “digital [...]

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Financial Statement Countdown for Remote Sellers Selling into Alabama

Remote sellers making sales into Alabama have until January 1, 2016, to begin collecting sales tax regardless of their physical presence in the state or consider whether there is any impact on financial statement issues as a result of non-collection.

This summer, the Alabama Department of Revenue issued a surprising new regulation, § 810-6-2-.90.03. This rule specifically provides that a remote seller with more than $250,000 of sales into the state that also meets the provisions of the “doing business” statute must register for a license and collect and remit sales/use tax to the state. Notably, the list of activities that are considered “doing business” includes solicitation of sales using cable television advertising; substantial solicitation of sales plus benefitting from any banking; financing; debt collection; telecommunication; or marketing activities occurring in this state; any contact with the state sufficient to allow Alabama to impose a sales and use tax collection requirement under the U.S. Constitution. Ala. Code § 40-23-68(b)(9). The rule goes into effect January 1, 2016.

If this had happened 10 years ago, the response would be simple – Alabama’s economic nexus threshold is clearly unconstitutional under Quill. However, several developments, both legal and environmental, have made the analysis more complex. First, the Alabama legislature has provided an option to remote sellers to use the “Simplified Sellers Use Tax Remittance” process. This program creates almost the simplest tax calculation and remittance process possible: one rate, no exemptions, single jurisdiction filing. Alabama is surely counting on the Supreme Court of the United States to find that this simplified process removes the burden which concerned the Court in Quill. There are, of course, numerous arguments against this scenario; many of them quite strong. Nevertheless, Alabama’s clever, parallel compliance juggernaut does mandate some respect.

Second, Justice Anthony Kennedy clearly feels it is high time for the holding in Quill to be relegated to an era when only academics knew of the internet. One justice’s comments do not mean that sculptors should begin carving Quill’s headstone, but the Court already has at least two justices that do not believe the dormant commerce clause exists at all. Today, there is clearly the highest risk ever of some type of melting of the Quill iceberg.

So what does this mean for remote sellers with Alabama customers?  First—of course such sellers could begin collecting, but, some sellers philosophically believe in the underpinnings of Quill and other sellers may find collection, even under the simplified system, financially oppressive and/or administratively difficult. For those sellers that will not or cannot comply, the immediate questions that must be answered are: (1) What are the risks of not collecting; and (2) Do those risks rise to the level of financial statement issues?  Obviously the first risk is that with every sale, the seller may be incurring tax liability that it otherwise could have passed on to its customers. How real this risk is dovetails with the second issue. In determining the risk of probable loss (or other financial statement standard), [...]

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