Wednesday, January 15, 2014

Beware of New Local Tax Nexus Regulation in Alabama

The new year always brings many changes, but this year at least one change in Alabama means more headaches for many businesses. 
In the fall of 2013, the Alabama Department of Revenue issued a new local tax nexus regulation.  The regulation dramatically changes Alabama law on local tax nexus, meaning the contact your business must have with a jurisdiction before you are required to collect and remit its taxes.  The change for Alabama businesses became effective for transactions occurring on and after January 1, 2014.
In the past, the Alabama Department of Revenue had a long-standing regulation that provided a very narrow set of circumstances in which an Alabama business had sufficient contacts with a local jurisdiction to require it to collect and remit that jurisdiction's sales tax on sales to customers in that jurisdiction.   Simply put, if the business did not either (a) have a physical location in the jurisdiction, or (b) have a salesman soliciting sales in that jurisdiction, the business did not have nexus and thus no obligation to collect and remit the local tax.  For many years, in case after case, Alabama's Chief Administrative Law Judge, Bill Thompson, chided the Department for its overly narrow regulation and advised the Department that the only way it could succeed on many of its sales tax assessments attempting to impose a collection liability on Alabama businesses was to amend the long-standing regulation.
Finally, in early 2013, the Department took action, issued a new proposed rule that radically changed the rules of the game.  After significant opposition from the Alabama business community, the Department withdrew the original proposed regulation and issued a new proposed regulation that was somewhat more palatable to the business community. 
Under the new regulation, the same standards used to determine if a business has nexus in interstate commerce will be applied to intrastate transactions.  That means that if an Alabama business delivers goods in its own vehicle or by contract carrier (which differs from a common carrier) to a customer in a jurisdiction in which the business has no other physical contacts, it will be required to collect and remit that jurisdictions' sales tax.  Only if delivery is by common carrier and the business has no physical presence in the jurisdiction and no salesperson soliciting sales there may it avoid the local tax obligation. 
To read the new regulation, Click Here