United States

Tennessee finalizes economic nexus sales tax rule

Registrations to be required by March 2017

TAX ALERT  | 

On Oct. 3, 2016, the Tennessee Department of Revenue (DOR) filed the final version of its economic nexus sales tax rule with the Tennessee Secretary of State. Tennessee Rule § 1320-05-01-.129, Out-of-State Dealers, (Rule 129) is scheduled to become effective following a 90-day period and review by the Tennessee legislature.

Rule 129 establishes an economic nexus standard for remote retailers without physical presence in the state. Those retailers will be deemed to have substantial nexus with Tennessee, and thus requiring Tennessee sales tax collection and remittance, if the remote retailers engage in the regular or systematic solicitation of Tennessee customers and make over $500,000 of sales into the state in the previous 12-month period. Any retailer that would qualify under the new provision must register with the DOR by March 1, 2017, and begin to collect and remit Tennessee sales taxes beginning on July 1, 2017, unless the DOR establishes a later date.

Current economic sales tax nexus laws and challenges

Rule 129 continues the trend of states recently enacting an economic nexus standard for sales and use tax purposes. South Dakota enacted a law in March 2016, requiring remote sellers who have either over $100,000 of sales or 200 or more separate transactions into the state to collect and remit South Dakota sales tax. That law is currently enjoined while the state and three retailers litigate the issue in court. For more information, please read our alert, South Dakota takes aim at Quill.

A few months later, and modeled after the South Dakota law, Vermont passed an economic sales and use tax nexus law becoming effective the later of July 1, 2017, or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quill. For more information on the Vermont law, please read our alert, Vermont continues the assault on Quill.

The Alabama Department of Revenue promulgated an economic sales tax nexus rule that became effective on Jan. 1, 2016. That rule attributes substantial nexus to remote retailers with no physical presence in the state if the retailer makes over $250,000 of sales to Alabama customers and conducts certain other activities. The Alabama regulation is also in litigation, but still currently enforced against Alabama remote retailers. For more information, please read our alert, Alabama’s economic sales and use tax nexus regulation challenged.

Finally, about 10 other states introduced proposed economic sales tax nexus legislation in 2016, with only South Dakota and Vermont having enacted such a law at the time of publishing.

Takeaways

The 2016 calendar year has been one of the most active yet for legislation and regulation directly aimed at challenging the 25-year old physical presence standard adopted in Quill. If the challenge to the South Dakota law is heard in state court, it is expected to move quickly. It is clear that either the South Dakota law or Alabama rule are beginning a path that may lead to the U.S. Supreme Court. With that in mind, it would not be unexpected to see a similar challenge to Rule 129 in the coming months. Pending any changes to the rule, remote retailers making over $500,000 of sales into Tennessee will want to watch closely as the March 1, 2017, registration deadline approaches.

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