Nexus Not Established Merely by Sporadic Sales Call

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The Administrative Law Division of the Alabama Department of Revenue has ruled that one sales call by a single salesman in a local taxing jurisdiction does not establish nexus with the local jurisdiction for purposes of obligating a retailer to collect and remit that jurisdiction’s sales tax. Van Horn v. Ala. Dep’t of Rev., Admin. L. Div. Dkt. No. S. 12-863 (Jan. 3, 2013). The assessment for city and county use tax was therefore voided.

The taxpayer, Paris John Van Horn, II, operated a sports photography business in Montgomery, Alabama, through a single-member (disregarded) LLC. The taxpayer primarily photographed youth sports teams and individual team members and subsequently sold the photos to the players’ parents, etc. The taxpayer solicited sales largely by telephone from his Montgomery office. He, or one of his employees, would then travel to the location of the teams or players to photograph them. After returning to Montgomery, the taxpayer printed off the photos and delivered them through the U.S. mail or via Federal Express or UPS to the customer. On four separate occasions during the 31-month audit period, the taxpayer made an in-person sales presentation at certain customers’ locations outside Montgomery. The taxpayer paid Montgomery County and City sales tax on sales to customers in Montgomery. He was assessed for city and county use tax by the Alabama Department of Revenue (ADOR) on the sales made to customers located in various municipalities or counties other than Montgomery.

Despite his disagreement with the holding of the landmark nexus case, Yelverton’s, Inc. v. Jefferson County, 742 So. 2d 1216 (Ala. Civ. App. 1997), cert. denied 742 So. 2d 1224 (Ala. 1999), Judge Thompson determined that the case was and remains controlling precedent. In Yelverton’s, a furniture store located in Walker County sold and delivered furniture to customers in neighboring Jefferson County. The furniture store advertised in Jefferson County, but did not have a store location within Jefferson County and did not send salespersons into the County. The Yelverton’s court held that in order to subject the business to Jefferson County sales or use tax, “there must be a [connection] sufficient to provide a business nexus with Alabama – by agent or salesmen, or at a very minimum, by an independent contractor within the State of Alabama.” The Yelverton’s court determined that the ADOR had incorporated the pre-Quill physical presence test into its Regulation 810-6-3-.51(2). The regulation states that “[i]f the seller whose place of business is located outside of the (county) has salesmen soliciting orders within the (county), the seller is required to collect and remit the seller’s use tax on retail sales” in the jurisdiction.

In this case, Judge Thompson ruled that the sales solicited by telephone did not meet the Reg. 810-6-3.51(2) nexus requirement, and thus the taxpayer was not subject to local sales or seller’s use tax in jurisdictions outside of Montgomery. Judge Thompson next addressed whether the sporadic in-person sales presentations would subject the taxpayer to nexus. Again looking to Yelverton’s and Reg. 810-6-3-.51(2), Judge Thompson determined that the taxpayer “clearly solicited business in the four jurisdictions,” but that a single solicitation by a single salesman over such a long period of time was not sufficient to establish nexus. Judge Thompson stated that the regulation uses the plural “salesmen” and thus contemplates situations with more than one salesman and more than one sales call. Consequently, the taxpayer was not subject to the taxing authority of the local jurisdictions, and thus was not liable for the local tax on the photographs he sold to customers in those jurisdictions.

It is unknown whether the ADOR will appeal this ruling. There is a move under way, however, to revisit the controversial local nexus regulation, especially in light of the implementation of the “ONE SPOT,” the one-stop monthly e-filing and payment system for state and all local sales, use, and rental taxes, which becomes effective October 1, 2013.

© January 2013. Bruce P. Ely/ William T. Thistle, II/ Bradley Arant Boult Cummings LLP. All rights reserved. The authors’ firm represented the taxpayer in Yelverton’s and in one of the Administrative Law Division cases that followed.

*Justin B. Cureton contributed to this article and is a third-year law student at Cumberland School of Law at Samford University.