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Entity Types Affecting Sales Tax Collection Requirements

  • By Travis Austin
    • Feb 17, 2023
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In the world of State and Local Tax, many factors play important roles in the determination of tax collection requirements. One of those factors includes the structure of the business entity itself.  

At first glance, the thought of entity type affecting sales tax seems an unlikely one.  Even those of us immersed in State and Local Tax, view sales tax as cut and dry regarding collection requirements.  You have nexus due to a combination of sales volume (net or gross) and the number of transactions, or you don’t.  But is it really that simple?  No.  Why, you might ask?  Because nothing in the world of State and Local Tax is ever that simple and straight-forward. 

Affiliate Nexus 

The emergence of the affiliate nexus rules plays a pivotal role in state and local tax.  For those unfamiliar with term, affiliate nexus “refers to a connection between a vendor and another entity that may be related in some way or that performs certain work that can be attributed to the vendor to cause, or presume to cause, the vendor to have nexus in the taxing jurisdiction” (Affiliate Nexus and State Sales Tax (Grabbing Remote Vendors via So-Called “Amazon” Laws) Annette Nellen, CPA, CGMA, Esq.) .   

Examination of Alabama’s laws and statues

Although several states have affiliate nexus rules, this article will focus on the State of Alabama’s laws and statutes.  

Per the State of Alabama with regards to affiliate nexus: 

Two entities are related parties under this section if one of the entities meets at least one of the following tests with respect to the other entity: 

(a) One or both entities is a corporation, and one entity and any party related to that entity in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of Section 318 of the Internal Revenue Code owns directly, indirectly, beneficially, or constructively at least 50 percent of the value of the corporation’s outstanding stock; 

(b) One or both entities is a limited liability company, partnership, estate, or trust and any member, partner, or beneficiary, and the limited liability company, partnership, estate, or trust and its members, partners, or beneficiaries own directly, indirectly, beneficially, or constructively, in the aggregate, at least 50 percent of the profits, or capital, or stock, or value of the other entity or both entities; 

or (c) An individual stockholder and the members of the stockholder’s family, as defined in Section 318 of the Internal Revenue Code, owns directly, indirectly, beneficially, or constructively, in the aggregate, at least 50 percent of the value of both entities’ outstanding stock” (Ala. Admin. Code § 810-6-2-.90.01(7)(a) ]810-6-2-.90.01(7)(a)(a)-(c)).  

Overall, this Alabama statute dictates how entity type in relationship to entity operations can create nexus through affiliation. 

Alabama is not alone with the concept of affiliate nexus.  Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Missouri, Minnesota, New York, North Carolina, Pennsylvania, and Rhode Island also maintain some standard of affiliate nexus regulations.  Therefore, it is important to pay attention to entity type and operations to understand possible state and local tax obligations. 


travis austin
Travis Austin

State & Local Tax Consultant

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