United States

Tennessee’s economic sales tax nexus rule on hold

State agrees not to enforce the rule until resolved by litigation

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UPDATE (4/13/2017): The Tennessee Department of Revenue has agreed not to enforce the state’s economic sales and use tax nexus rule following a complaint filed by two remote retailers in Tennessee Chancery Court on March 30, 2017. The department and taxpayers jointly agreed to an injunction of the rule, granted on April 10, 2017. The rule had required registration of out-of-state dealers who made over $500,000 of sales into the state by March 1, and collection and remittance of sales tax by those dealers starting July 1.

Additionally, while the rule became effective on Jan. 1, 2017, the Tennessee general assembly could still reject it by removing it from legislation preventing expiration of permanent rules. Previous reports had indicated strong legislative opposition to the rule, although it is unclear whether any affirmative legislative actions will be taken now that the rule is enjoined.

South Dakota’s economic sales tax nexus statute and Alabama’s economic nexus rule are also pending litigation, with South Dakota’s statute recently overturned by a local circuit court. For a complete picture of the economic sales tax nexus landscape, please read our article, Economic sales and use tax nexus laws.


UPDATE (1/31/2017): The Tennessee Department of Revenue recently published Sales and Use Tax Notice #17-01, Out-of-State Dealer Registration, explaining the new sales and use tax registration and collection procedures regarding out-of-state dealers with no physical presence in Tennessee. Accordingly, those out-of-state dealers with sales in the state exceeding $500,000 in the preceding 12 months must register by March 1, 2017. Collection and remittance of Tennessee sales and use taxes begins for out-of-state dealers on July 1, 2017. Additionally, the department has indicated it will not audit or assess out-of-state dealers for tax periods that occur before the dealer begins to collect the tax if the following circumstances are met:

  1. The dealer registers and begins to collect and remit the tax on or before July 1, 2017
  2. The dealer was not registered for Tennessee sales and use tax purposes prior to Jan. 1, 2017
  3. The dealer was not contacted by the department for an audit prior to registering

Out-of-state dealers that maintain a physical presence in Tennessee and are not currently registered for sales and use tax purposes, should use the department’s standard registration page.

In December, a joint meeting of the Tennessee Senate and House Government Operations Committees issued a ‘no recommendation’ of Tennessee’s remote seller nexus Rule 1320-05-01.129, effectively approving the rule unless contrary legislative action occurs. While it has been reported that assembly persons on both sides of the aisle oppose the rule, there are no current legislative efforts to prevent the rule’s enforcement.


ORIGINAL (10/17/2016): 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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