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By Chris Marr
A challenge to Alabama’s online sales tax regulations will move ahead because the rules might not apply to the disputing retailer regardless of what the U.S. Supreme Court does with the “tax case of the millenium” in South Dakota v. Wayfair.
Alabama has been one of the leading states in the “kill Quill” movement—an effort to help states capture sales tax from the growing e-commerce market by overturning the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. That ruling reaffirmed that states can’t impose sales tax collection duties on companies without an in-state physical presence. But the U.S. high court in Wayfair is considering whether that rule remains valid.
The Alabama Department of Revenue had sought a stay of its case against online retailer Newegg Inc. pending the high court’s Wayfair ruling, but the state’s tax tribunal on May 11 denied the motion. The tribunal’s order offered no ruling on whether Quill is still good law or should be overturned, but focused on the particulars of whether and how Alabama’s regulation might apply to Newegg. The court asked the revenue department to provide more factual evidence.
Newegg is challenging an assessment that says it owes tax on sales into the state from January and February of 2016. The state is looking to validate its revenue department regulation that took effect in January 2016 requiring out-of-state sellers to collect and pay use tax on sales into Alabama, despite the fact that they lack a physical presence.
But observers have said from the start that Alabama likely expected to lose its case at the tax tribunal and then appeal up the line—with an eventual goal of reaching the U.S. Supreme Court. Now that the Wayfair case is pending at the high court, it remains to be seen how significant Alabama’s Newegg case will be.
Alabama’s revenue department is still reviewing the tax tribunal order to determine its response, spokesman Frank Miles said by email May 11.
Alabama tax attorney Bruce Ely told Bloomberg Tax he’s “a bit surprised” the tribunal issued an order now, considering the U.S. Supreme Court is expected to rule on Wayfair by the last week of June.
Ely is a partner at Bradley Arant Boult Cummings LLP in Birmingham and also a member of Bloomberg Tax’s State Tax Advisory Board.
Similar “kill Quill” litigation is pending in Indiana, Ohio, Tennessee, Virginia (regarding a Massachusetts regulation), and Wyoming, although some of those cases have been put on hold pending the Supreme Court’s ruling in Wayfair.
The U.S. Supreme Court is expected to rule before the end of June on the Wayfair case, which challenges a similar South Dakota law requiring tax collection by out-of-state sellers that meet certain sales thresholds.
In Quill, the high court said Congress should resolve the matter, and many observers believe the court may do so again after watching the April oral arguments. Several justices were obviously concerned about the potentially extensive compliance-related complications of announcing a new standard or of undoing Quill.
But the Supreme Court’s ruling might not matter to the Alabama case, wrote Chief Judge Jeff Patterson of the Alabama Tax Tribunal in his May 11 order.
If the revenue department’s position “is predicated on the possibility of a future event (the overturning of Quill),” then Alabama must acknowledge the state doesn’t have authority to require Newegg to collect sales and use tax, Patterson wrote.
The state also has argued Newegg is subject to the regulation because it distributes catalogs or advertising materials in the state, which Newegg says is factually incorrect, according to the tribunal order. Patterson gave the state until June 1 to provide more evidence on this point.
The tribunal also excluded the testimony of two experts offered by the revenue department, which the department said was aimed at showing why Quill should be overturned. The department argued it needed to establish their testimony as part of the factual record for future appellate courts to consider, but the tribunal agreed with Newegg that the testimony wasn’t relevant to the matter at hand.
Alabama has long been a frontrunner in the “kill Quill” effort. Then-Gov. Robert Bentley (R) in 2015 said the state welcomed a lawsuit from Amazon.com Inc. or other online retailers to contest the out-of-state seller regulation it was preparing to issue.
Attorneys for Newegg didn’t immediately respond to Bloomberg Tax for comment May 11. Martin Eisenstein and Matthew Schaefer of Brann & Isaacson in Lewiston, Maine, represent the company.
The case is Newegg Inc. v. State of Ala., Dep’t of Revenue, Ala. Tax Trib., No. S. 16-613, preliminary order, motion denied 5/11/18 .
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