Physical Presence Not Required for Income Tax Assessment in Alabama

Physical Presence Not Required for Income Tax Assessment in Alabama

July 6, 2023

A March 2023 court decision upheld the Alabama Revenue Department’s decision to amend a former-resident’s tax return, creating a liability to the taxpayer for work performed after permanently moving from the state. The case has implications for both individuals and employers associated with Alabama. In a search for additional revenue, other states may pass similar measures.

Income Source and Residency

The Alabama Tax Tribunal heard the case of Bollinger v. the State of Alabama Department of Revenue where a taxpayer was initially required to work remotely for his employer due to the COVID-19 pandemic and later decided to permanently relocate to Idaho after obtaining approval from his employer. Bollinger gave up his apartment lease and moved in September 2020.

Alabama’s tax code (Ala. Admin. Code r. 810-3-2-.01(3)) assesses tax on nonresident individuals receiving taxable income from property owned or business transacted in Alabama. The March 2023 ruling cited a case to clarify that a taxpayer is engaged in a primary business activity in Alabama when they have regular and legal employment.

After Bollinger received his 2020 W-2, he requested a corrected W-2 showing only his Alabama income prior to his move and said his employer was unable to issue one since they did not have a business presence in Idaho. Bollinger voted in Idaho in 2020 but kept his Alabama driver’s license through 2021. The Department of Revenue argued that Bollinger had not changed his domicile, but the Alabama court’s decision said a driver’s license is not determinative of domicile.

Physical Presence Not Necessary for Residency

After establishing that employment with a company with a presence in Alabama existed, the Alabama Tax Tribunal referenced a 38 year-old U.S. Supreme Court opinion to support its ruling that physical presence in Alabama isn’t necessary to assess tax on income resulting from conducting business in Alabama and was properly taxable.

“…it is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted.”

Burger King Corp. v. Rudzewicz
471 U.S. 462 (1985)

Case Implications

The Bollinger v. Alabama case is another reminder of the tax complexity associated with remote work. Similar to New York’s convenience rule where they assess tax on non-residents who work remotely “at their convenience”—rather than as a requirement of their employer—the Alabama ruling has a double taxation potential for remote workers who’s residential state may not provide a reciprocal tax credit to offset the tax imposed by Alabama.
Alabama employers may also have an obligation to formally establish nexus and file their businesses in states where their remote employees reside. Payroll tax software may need modification to concurrently record tax deductions and filing in multiple states.

Let’s Make This Easier

The REDW State and Local Tax (SALT) team maintains a constant vigil on state tax developments that may affect you. State tax rules continually change, and our team of experts is ready to offer guidance and recommendations for keeping your business compliant. Contact us with any questions.

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