Alabama Concedes Online Sales Tax Fight With Newegg, for Now

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By Chris Marr

Internet retailer Newegg Inc. won its case against Alabama’s online sales tax regulation, and the state is poised to revise that regulation after the U.S. Supreme Court decides a blockbuster digital sales tax case.

The high court’s decision in South Dakota v. Wayfair —which is expected by the end of June—could reshape sales tax law in the U.S. In particular, the court could strike down or revise the physical presence standard that prevents states from forcing companies without an in-state physical presence to collect sales and use tax. The standard was affirmed in the court’s 1992 decision in Quill Corp. v. North Dakota .

Alabama, South Dakota, and other states have actively campaigned to “kill Quill” by passing tax regulations or statutes that were custom-built to trigger taxpayer lawsuits.

In Alabama’s case, the primary Quill-related lawsuit ended June 14, when the Alabama Tax Tribunal voided the state revenue department’s assessment against Newegg. The department had filed a motion June 1 requesting the tribunal’s final order and agreeing that voiding the assessment was the proper outcome unless and until the Quill standard is revised.

Newegg is a California-based online retailer that specializes in computer hardware and consumer electronics.

Martin Eisenstein, an attorney for Newegg, called the tribunal order and the department’s decision to delay enforcement of its regulation “a victory for all remote sellers.”

Eisenstein and Matthew Schaefer, both of the law firm Brann & Isaacson in Lewiston, Maine, represented Newegg in this case. Their firm specializes in interstate tax disputes and also is representing Wayfair in its case pending at the Supreme Court.

Awaiting Answers in ‘Wayfair’

Wayfair largely will answer the questions we wanted Newegg to answer,” Joe W. Garrett Jr., Alabama deputy revenue commissioner, told Bloomberg Tax June 15. “I don’t think it made sense for us or for the taxpayer to continue the Newegg litigation.”

With this in mind, the department doesn’t plan to enforce its remote seller regulation until revising it to conform with the Supreme Court’s decision in Wayfair, the revenue department’s attorneys wrote in their June 1 filing.

The department had assessed the retailer in 2016 under its new economic nexus regulation, which required out-of-state sellers to collect and remit sales tax to Alabama if they sold more than $250,000 of goods annually into the state. The state estimated Newegg owed $155,000 in taxes for January and February 2016.

In addition to potentially revising its economic nexus regulation, the revenue department will work this summer on drafting a reporting regulation that requires certain out-of-state sellers to report sales to the state and notify customers of their use tax obligations, Garrett said.

The state enacted a law this year to require providers of online marketplaces such as Amazon.com Inc., eBay Inc., and Etsy Inc. to either collect sales tax under Alabama’s simplified remittance program or follow reporting and notification requirements. The new law takes effect Jan. 1, 2019.

‘Quill’ Not Addressed

The tax tribunal found it unnecessary to address Quill or the physical presence standard, as the revenue department might have liked.

Chief Judge Jeff Patterson instead wrote that the Newegg assessment should be voided because Newegg couldn’t be shown to conduct any of the activities referenced in the regulation that would subject it to the collection requirement.

“The Tribunal’s order was narrower than what the Department suggested as the basis for dismissal,” Bruce Ely, an Alabama tax attorney and partner with Bradley Arant Boult Cummings LLP, told Bloomberg Tax June 15. “Judge Patterson wisely decided not to step into the Wayfair/Quill morass.”

The tribunal previously struck the testimony of revenue department witnesses that focused on the modern-day workability of the Quill standard. The department said the testimony was needed to establish a factual record for future courts that would hear the case, as its ultimate goal was to see a higher court strike down Quill. But Newegg argued and the tax tribunal agreed in a May 11 order that the testimony wasn’t relevant to the issue at hand—deciding whether the department’s regulation was properly and legally applied to Newegg.

The case is Newegg, Inc. v. Ala. Dep’t of Revenue , Ala. Tax Trib., No. S. 16-613, 6/14/18 .

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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