United States

Alabama: Out-of-State Retailer’s Alabama “Voluntary Sales Force” Establishes Use Tax Collection Obligation

Apr 04, 2016
From KPMG TaxWatch

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Recently, the Alabama Tax Tribunal addressed whether a taxpayer was required to collect and remit Alabama use taxes on sales of books to Alabama students. The taxpayer at issue sold books and other educational materials in Alabama and throughout the United States. Each month, the taxpayer mailed catalogues and order forms to Alabama schools. At their discretion, teachers would distribute the catalogs and order forms to students, compile the orders into a single a master order, and mail the completed order form and money to the taxpayer.  Purchased items were shipped to the attention of the teacher that submitted the order for distribution to the students. “Bonus points” were awarded to teachers based on the value of items ordered by their classroom. The points could be used to purchase items from the taxpayer or obtain gift certificates from select retailers. The taxpayer did not file use tax returns during the period at issue. On audit, the Department took the position that the taxpayer should have collected and remitted Alabama use tax. The taxpayer protested, and the matter eventually came before the Tax Tribunal.

The Tribunal first determined that under Alabama’s statutes, the taxpayer was required to collect and remit Alabama use tax. Although the taxpayer’s activities did not fall within one of nine specific activities that were deemed to create an obligation to collect use tax, the statute also contained a “catchall” provision. Under this provision, sellers were required to collect and remit if they had “any other contact with the state” that would allow the state impose a use tax collection obligation consistent with the Constitution and laws of United States. The Tribunal determined that the taxpayer fell within the purview of this catchall provision. Next, the Tribunal addressed whether requiring the taxpayer to collect and remit would run afoul of the U.S. Constitution. By mailing the catalogues, order forms and promotional materials to Alabama teachers, the taxpayer was directing its sales activities toward Alabama residents, which in the Tribunal’s view was “clearly” sufficient to create nexus under the due process clause. The Tribunal next addressed whether the taxpayer had a physical presence in Alabama as required under the Commerce Clause. Because the taxpayer had no physical presence of its own in Alabama, the Tribunal examined whether the teachers’ activities established physical presence for the taxpayer. While other state courts that had addressed the same question were split on the issue, the Tribunal decided to adopt the rationale of the courts holding that the teacher’s activities created nexus for the taxpayer. Notably, in the Tribunal’s view, the teachers’ activities were significantly associated with the taxpayer’s ability to establish and maintain a market in Alabama. The fact that the teachers had no technical legal relationship with the taxpayer was irrelevant, but nevertheless, the teachers were implied agents of the taxpayer under Alabama law in the estimation of the Tribunal. The Tribunal also addressed the bonus points and whether the teachers were motivated by the possibility of receiving points to solicit sales of the taxpayer’s books. While they may have been, the Tribunal determined that an individual teacher’s motivation for participating in the program was irrelevant. What was relevant, however, was that without the teachers, the taxpayer would have no market in Alabama. In the Tribunal’s view, the teachers were in substance a voluntary sales force that established the requisite physical presence required to compel the taxpayer to collect and remit Alabama use tax. For more information on Scholastic Book Clubs, Inc. v. Alabama Dep’t. Revenue, please contact Scott Jackson at 404-614-8688.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.