Important New And Amended ADOR Regulations Now In Effect

State & Local Tax Alert: Alabama Edition

1/3/2014

Replacement Local Nexus Rule: The Alabama Department of Revenue's (ADOR) new local nexus regulation, Rule 810-6-5-.04.02, is now in effect and applies to all transactions occurring on or after January 1, 2014. The ADOR originally had proposed changes to the local nexus rule in April 2013, but its initial draft was withdrawn after the department received numerous comments and questions regarding the proposed rule from several business and professional associations. The initial draft adopted a very broad definition of "local nexus" and would have radically changed the landscape of local sales and use taxes. The department replaced its initial proposal with a revised local nexus rule that was narrower in scope and addressed many of the concerns raised by the business community and tax practitioners. The narrower version was finalized in November 2013.

According to the final regulation, the same standards used in determining whether a business that engaged in interstate commerce is required to remit State of Alabama sales and use tax will now be used in determining whether local sales and use tax must also be collected and remitted. The regulation summarizes the new rule by stating that a seller may avoid the obligation to collect local sales or use tax on a transaction only if the seller's physical presence in the locality would have been insufficient to create a state sales and use tax collection obligation if the transaction had been an interstate transaction. The regulation even cross-references the ADOR's recently amended interstate nexus regulation, Rule 810-6-2-.90.01.

The major and certainly most controversial change involves delivery sales in a vendor's own truck or via a contract (as opposed to a common) carrier. As discussed in our previous Alabama SALT Alert, those deliveries will in and of themselves require the vendor to collect the destination locality's sales tax—even if there is no other indicia of physical presence there, such as an office, warehouse, or soliciting salesmen. The regulation effectively overrides the Court of Civil Appeals' landmark ruling in Yelverton's, Inc. v. Jefferson County, 742 So. 2d 1216 (Ala. Civ. App. 1999), cert. quashed, 742 So. 2d. 1224 (Ala. 1999), several subsequent Administrative Law Division rulings, and even an Attorney General opinion to the contrary.

However, informally, and in a published revenue ruling issued several years ago to a BABC client, the ADOR acknowledged that in certain circumstances, the obligation to collect the local sales and use tax may be shifted from the destination locality to the store location or perhaps warehouse location. But that can be accomplished only by some form of contractual language between the seller and buyer—and only if a common carrier is not used as the mode of delivery.

Conversely, the regulation confirms that if a seller delivers by common carrier and has no physical presence in the destination locality, including soliciting salespersons, then the seller is not obligated to collect the destination locality's sales tax, but a concomitant use tax may be owed by the purchaser/consumer. The final regulation contains several helpful examples and should be consulted by every retailer doing business in Alabama as well as by their tax advisers.

Government Contractor Exemption: Alabama Act 2013-205 provides for the ADOR to grant certificates of exemption from sales and use taxes to contractors and subcontractors licensed by the State Licensing Board for General Contractors. Contractors can use these exemption certificates to purchase building and construction materials for use in the construction of a building or other project for certain (but not all) governmental entities that are exempt from paying sales and use taxes. Exemption certificates will not be issued for highway, bridge, or road projects. For many tax-exempt entities, the new act essentially reinstates former Ala. Code § 40-9-33, which was repealed in 2004, but the act imposes severe penalties for abuse or tax avoidance. The bill was amended in the Senate to delay its effective date so that it applies only to contracts entered into on or after January 1, 2014.

Following the enactment of the government contractor exemption, the ADOR amended two of its regulations affecting contractors and subcontractors who perform construction contracts on behalf of governmental entities: Rules 810-6-3-.77 and 810-6-1-.46. The changes to these regulations took effect last month and apply to the purchase of tangible personal property under contracts entered into on or after January 1, 2014, with qualifying governmental entities.

Through the Alabama Chapters of the Associated Builders and Contractors (ABC) and the Associated General Contractors (AGC), our firm filed comments on the proposed amendments, which thankfully were largely incorporated into the amended regulations. Additionally, ADOR Tax Policy Director Mike Gamble confirmed that the current purchasing agent procedure may continue to be used, for example, with projects involving a tax-exempt government entity not listed in the act as one that qualifies for the new exemption certificate procedure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.