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. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Alabama is one of a number of states that has enacted special legislation that effectively forces certain larger, out-of-state Internet retailers to collect and pay sales tax.
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, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
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 (exceptions may exist for large sellers who meet special conditions).
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.
Physical Presence, Nexus, and Remote Entities in Alabama
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Rhode Island, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
A statement of what counts as physical presence under Alabama law is available on a webpage of the Alabama Department of Revenue (DOR) website (under the heading “ARE SALES OF GOODS MADE VIA THE INTERNET TAXABLE?”).
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:
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.
Special Rule for Large Sellers
As of 2016, Alabama sales tax law requires out-of-state sellers who lack a physical presence in Alabama to register for, collect, and remit sales tax under certain conditions. More specifically, if an out-of-state retailer:
then that retailer must collect state sales tax. The DOR has a brief bulletin that describes the rule. The array of potentially relevant activities under Section 40-23-68 is diverse and not easily summarized. You should review the section to determine if any part applies to your business.
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.
Each year Alabama has a back-to-school sales tax holiday running from the first Friday through the first Sunday in August. For more information, see this document from the Alabama DOR. In addition, Alabama has a severe weather preparedness sales tax holiday that has been scheduled on different dates in different years.
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.
Proposed Federal Legislation
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
For most smaller online retailers, the physical presence rule will apply for sales to Alabama customers. However, the issue has been contentious in many places around the country, so you should check in periodically with the Alabama Department of Revenue to see if the rules have changed.
Updated: April 14, 2016