'I dare you. I double-dog dare you.'
This is exactly what Alabama is saying with its new sales and use tax rule (No. 810-6-2-.90.03) which takes effect January 1, 2016. The new rule considers out-of-state sellers who lack an Alabama physical presence, but who have sold more than $250,000 in retail sales of tangible personal property in the previous calendar year and conducts certain activities, to have a substantial economic presence in Alabama for sales and use tax purposes. Consequently, the new rule requires the out-of-state sellers who meet the $250,000 and 'activities' threshold, to register for a license with the Department and to collect and remit tax.
NOTE: The $250,000 threshold is not the only test. The out-of-state seller must also be conducting specific activities as referenced in the Rule. Please see the Rule for all of the details.
The new rule flies in the face of U.S. Supreme Court precedent (Quill Corp v. North Dakota, 504 U.S. 298 (1992)) which requires collection of sales and use tax by companies that have a physical presence in a state.
Many media articles have stated the Alabama Governor and Revenue Commissioner want a large online retailer (i.e., Amazon) to challenge the law and force the U.S. Supreme Court to take the case in the hopes the Court will rule in the state's favor.
Will Amazon make the challenge?
Should Amazon take the bait?
If Amazon does challenge it, there is probably a 50/50 chance of winning. If Amazon doesn't challenge it, Alabama wins and other states will consider enacting similar legislation.
But who does the law hurt? Amazon, maybe not. Amazon used to fight sales tax collection legislation, now it just builds large distribution centers (and collects sales tax) in states to provide faster service to clients and create stronger competition for brick and mortar stores. I can personally confirm that this strategy is working. This Christmas season, I definitely preferred to shop from the comfort of my living room, rather than combat the crowds and traffic at a store for items that may or may not be in stock.
NOTE: Amazon is currently collecting sales tax in 26 states (Alabama is not one of them).
If it doesn't hurt Amazon, then why should it challenge the law and incur the costly legal battle? Simply negotiate incentives to build a large distribution center in Alabama and reap the business benefits of crushing the brick and mortar competition. Perhaps this is exactly what Alabama wants. Perhaps Alabama doesn't care about collecting sales tax from every online retailer, only Amazon or similar companies. Perhaps it would be better for everyone if Amazon simply built distribution centers in every state - it definitely would provide better customer service, and states would receive increased sales tax revenue. If Amazon took this path, perhaps the national debate of taxing remote online retailers would go away.