If you are selling goods or products online and some of your customers are located in Alabama, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Alabama. The new federal law scheduled to be voted on in May 2013 would affect state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state
A more specific statement of what counts as physical presence under Alabama law is available on a webpage of the Alabama Department of Revenue website (under the heading “ARE SALES OF GOODS MADE VIA THE INTERNET TAXABLE?”).
As you might expect, the corollary to the physical-presence rule is that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Note on “Nexus” in Alabama Sales Tax Law
In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential “nexus” between a business and a state, including one type based on the due process clause of the Constitution and another type based on the commerce clause of the Constitution. The type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which, for all practical purposes, is physical presence.
Alabama’s sales tax statute uses the term “nexus” in relation to so-called “remote entities.” “Remote entities” are out-of-state businesses with particular, close links to in-state businesses. They are not to be confused with “remote sellers,” who do not have such links. More specifically, as used in Alabama’s sales tax law, a nexus exists where a remote entity and an in-state entity are closely linked as “related parties,” meaning:
- at least one of the entities is a corporation and corporation stock is attributable to the other person or entity; or
- at least one of the entities is an LLC, partnership, estate, or trust, and there is at least 50% ownership of that entity (or both entities) by the other person or entity, in terms of profits, capital, stock, or value; or
- an individual stockholder or members of the stockholders family owns at least 50% of the value of both entities’ stock.
In short, “nexus” in this sense relates to remote entities that are closely linked through common ownership with Alabama businesses or individuals. When such a nexus exists, Alabama requires the ostensibly out-of-state business to collect sales tax. This type of provision is a common feature of many states’ sales tax laws, although it may not always be referred to in terms of a “nexus.” It is not considered inconsistent with the physical-presence rule.
Additional information is available in a taxpayer notice from the Alabama DOR.
Example 1: You are operating solely out of a warehouse in Boise, Idaho and make a sale to a customer in Tuscaloosa, Alabama—a state where your business has no physical presence: You are not required to collect sales tax from the Tuscaloosa customer.
Example 2: You are operating solely out of a warehouse in Montgomery, Alabama and make a sale to a customer in Decatur, Alabama: You are required to collect sales tax from the Decatur customer.
Example 3: After several years of operating solely out of an office in Boise, Idaho, you open a one-room satellite office just outside of Huntsville, Alabama—a state where previously you had no physical presence. A day later, you make a sale to a customer in Mobile, Alabama: You are required to collect sales tax from the Mobile customer.
Some items sold via the Internet to Alabama customers may be exempt from sales tax under Alabama law. For example, certain agricultural products, such as fertilizer used for agricultural purposes, are exempt from sales tax. Section 40-23-4 of Alabama’s sales tax law lays out in detail many of these exemptions.
Also, each year Alabama has a “tax holiday” running from the first Friday through the first Sunday in August. For more information, see this document from the Alabama DOR.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” The Alabama DOR has a helpful webpage on the state’s use tax which states, among other things, that a use tax will apply to people who make purchases through the Internet where the vendor does not charge tax.
While you might not know it from looking solely at Alabama’s sales and use tax laws, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states around the country, as well as at the federal level. At this time, however, and with the exception of “remote entities” with special, close links to in-state entities or individuals (nexus), Alabama has not enacted any law that would require such retailers to collect sales tax from Alabama customers.
In Alabama, the physical-presence rule continues to apply for Internet retailers. However, because the issue remains contentious, you should consider checking in periodically with the Alabama Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.