Alabama court rules on factor-presence nexus law


The Alabama Tax Tribunal recently concluded in two consolidated appeals that it had jurisdiction to consider intangible holding companies’ constitutional challenges of the state’s factor-presence nexus statute because they were as-applied rather than facial challenges.1 The Tax Tribunal cannot declare a statute unconstitutional on its face, but it has authority to consider as-applied constitutional challenges that generally would retain application of the tax statute to other companies.






Reynolds Brands, Inc. (“Reynolds Brands”) is a wholly-owned subsidiary of R.J. Reynolds Tobacco (“R.J. Reynolds”) Company. Reynolds Brands is based in North Carolina and is primarily engaged in managing and licensing intellectual property such as trademarks, trade names and product formulas. During the tax years at issue, Reynolds Brands did not have any property or employees in Alabama, and did not perform any of its business activities related to the intellectual property in Alabama. Reynolds Brands and R.J. Reynolds entered into a licensing agreement where R.J. Reynolds could use the intellectual property of Reynolds Brands and be charged an arm’s-length royalty. The licensing agreement was entered into outside Alabama and Reynolds Brands had no control over where R.J. Reynolds shipped its inventory which included the intellectual property. Reynolds Brands did not file an Alabama corporate income tax return for 2015 since it concluded it did not have a substantial nexus with the state.


The Alabama Department of Revenue asserted that Reynolds Brands was subject to Alabama corporation income tax under the state’s factor-presence nexus statute.2 The statute provides in relevant part that business entities organized outside the state have substantial nexus and are subject to income tax in Alabama if they exceed $500,000 of sales during the tax period.3 If the seller knows that intangible property will be used in multiple states, the seller must apportion the receipts according to usage in each state.4


To support its claim, the Department used a sourcing schedule provided by Reynolds Brands which showed that Alabama sales of products that bore its intellectual property exceeded $500,000. Reynolds Brands appealed the Department’s assessment to the Alabama Tax Tribunal.




Tribunal’s authority to consider constitutional challenges


The Alabama legislature granted the Alabama Tax Tribunal authority to decide the constitutionality of the application of statutes and regulations by the Department to a taxpayer, but it explicitly did not grant the Tribunal the power to declare a statute unconstitutional on its face.5 The Alabama Supreme Court has defined a facial challenge as a “claim that a statute is unconstitutional on its face – that is, that it always operates unconstitutionally.”6 Meanwhile, it has defined an applied challenge as “a claim that a statute is unconstitutional on the facts of a particular case or in its application to a particular party.”7




Tribunal may consider as applied challenge of factor-presence nexus statute


At the Alabama Tax Tribunal, Reynolds Brands argued that the Department’s tax assessment under the factor-presence nexus statute violated both the Due Process Clause and Commerce Clause of the U.S. Constitution because it did not purposely avail itself of the Alabama marketplace. As argued by Reynolds Brands, the mere foreseeability that R.J. Reynolds would sell inventory affixed with Reynolds Brands’ intellectual property in Alabama was insufficient to create constitutional nexus. Reynolds Brands did not license intellectual property to licensees in Alabama. The Department of Revenue contended that Reynolds Brands was challenging the relevant nexus statute on its face, thereby stripping the Tribunal of jurisdiction to hear this case. Reynolds Brands replied that it was simply challenging the constitutionality of the statute as applicable to its specific facts, granting the Tribunal jurisdiction to hear the matter. Reynolds Brands explained that the factor-presence nexus statute could operate constitutionally when applied to a company that purposely avails itself of Alabama’s marketplace.


The Tribunal determined that Reynolds Brands was correct in its argument because its constitutional challenge did not seek to invalidate Alabama’s factor-presence nexus statute. Reynolds Brands’ legal position was predicated upon the argument that the statute is being improperly applied to them in this case because it did not have any say over the sales of products containing its intellectual property once it entered into the licensing agreement with R.J. Reynolds. As a result, Reynolds Brands was arguing that the statute’s definition of “sales” does not apply in this particular case, not that the statute itself can never apply under any circumstances. In support of its decision, the Tribunal explained that even if a ruling were made in favor of Reynolds Brands, it would still leave Alabama’s factor presence nexus statute intact. Because the Department’s jurisdictional challenge was rejected, the Tribunal allowed the consolidated appeals to proceed for consideration of the constitutional arguments.






This ruling is encouraging for taxpayers because it clarifies and confirms that the Alabama Tax Tribunal has jurisdiction to consider as-applied constitutional challenges of tax statutes. The Tribunal determined that Reynolds Brands’ constitutional challenge of the factor-presence nexus statute was limited to its facts and was not a facial challenge of the statute. As a result, taxpayers have the option of raising as-applied constitutional challenges before the Tribunal. By rejecting the Department’s argument that Reynolds Brands was challenging the constitutionality of the statute on its face, the Tribunal strengthened the opportunity for taxpayers to bring constitutional challenges before the Tribunal. This jurisdictional decision should provide useful authority for taxpayers that are seeking to make as-applied constitutional arguments before the Tribunal, as long as they can prove that the arguments being raised do not serve to completely invalidate the particular tax provision being challenged.


It should be noted that the Tribunal’s decision does not mean the death knell of the factor-presence nexus test in Alabama, or anywhere else for that matter. This rule, adopted by Alabama in 2015, endorsed by the Multistate Tax Commission in its model uniformity statutes, and enacted by other states both before and after the Wayfair decision, is not likely to disappear.8 Rather, the substantive controversy which may come before the Tribunal in the future could focus on whether a factor-presence nexus rule can result in a finding of nexus with respect to a company not specifically directing its market-facing activities to that state. It would appear that the activities engaged in by affiliated parties with respect to licensed intellectual property will be closely examined to determine whether such activities can be deemed to have been performed by the licensing business for purposes of nexus, or whether this results in the prohibited double counting of sales subject to the corporate income tax.



1 Reynolds Brands, Inc. v. Alabama Department of Revenue, Alabama Tax Tribunal, Docket Nos. BIT. 19-1160-JP, BIT. 19-1161-JP, BIT. 20-419-JP, Oct. 22, 2021. These are consolidated appeals, but this SALT Alert focuses on the arguments made by Reynolds Brands for the sake of simplicity.

2 ALA. CODE § 40-18-31.2(b).

3 Id. Substantial nexus also is established if a company has over $50,000 of property or payroll in the state or over 25% of total property, total payroll or total sales in the state during the tax period.

4 ALA. CODE § 40-18-31.2(d)(3).

5 ALA. CODE § 40-2B-2(g)(6).

6 Board of Water & Sewer Com’rs v. Hunter, 956 So.2d 403, 419 (Ala. 2006) (quoting Black’s Law Dictionary 244 (8th ed. 2004)) (emphasis added by Alabama Supreme Court).

7 Id.

8 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).





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