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Alabama Issues Remote Sellers Use Tax Assessments, Newegg Inc. Appeals

Ever since Alabama’s new economic nexus regulation went into effect, litigation over its constitutionality has been expected given that Alabama Commissioner Julie Magee and Governor Bentley said as much when announcing it (Rule 810-6-2-.90.03, effective January 1, 2016).  It appears that they finally got their wish. On June 8, 2016, Newegg Inc. (Newegg) filed a Notice of Appeal in the Alabama Tax Tribunal challenging the Alabama Department of Revenue (DOR) Notice of Final Assessment of Sellers Use Tax (Assessment) that was entered on May 12, 2016. The Assessment is for seller’s use tax, interest and penalties for the months of January and February 2016 (the Assessment Period), which represent the first two months the new regulation was in effect.

The Alabama litigation comes on the heels of the litigation in South Dakota, which also involves Newegg and other retailers. Although the critical issue in both is whether economic nexus is constitutional, given that the Alabama imposition is through a regulation and not a statute, the arguments in each state’s litigation may not be parallel.

DOR Explanation of the Assessment

The DOR asserts that under the new regulation Newegg has a “substantial economic presence” in Alabama.  According to Newegg, the DOR “has offered no basis for its determination” that the regulation’s requirements were satisfied during the Assessment Period. Specifically, Newegg notes that the DOR “conclusion appears to be based solely upon the fact that Newegg had ‘significant sales into Alabama,’ i.e., more than $250,000 of retail sales to Alabama customers.”

Newegg’s Grounds for Appeal

Newegg requests that the Tax Tribunal cancel the Assessment, citing the following grounds as the primary basis:

  1. The application of the new regulation to Newegg (and the Assessment) are unconstitutional because Newegg did not (and does not) have the necessary physical presence required to satisfy the “substantial nexus” standard for sales and use taxes under the Commerce Clause, as described by the US Supreme Court in Quill.
  2. The new regulation is invalid because retailers must “lack an Alabama physical presence” for it to apply. Therefore, it conflicts with both the Alabama sales and use tax statutes and the US Constitution, each of which requires a physical presence in the state by (or on behalf of) the retailer.
  3. The application of the new regulation to an internet retailer with no physical presence in Alabama is inconsistent with the authorizing seller’s use tax statute. Specifically, none of the provisions of the sales and use tax statutes (or any other provision in the Alabama Code) authorize the DOR to impose seller’s use tax collection obligations on internet retailers with no physical presence in the state.

The State of Nexus in Other States

The Alabama litigation represents the third prominent nexus case that involves Newegg.  Not only is the company involved in South Dakota (see our prior coverage of the South Dakota lawsuits here), but it is also one of the three taxpayers involved in the Ohio Commercial Activity Tax (CAT) litigation (
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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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