Tennessee looks to adopt economic nexus, again

Updated 5.14.2019 to include HB 667.

Tennessee was one of the first states to adopt an economic nexus rule requiring certain remote sellers to collect and remit Tennessee sales tax. However, the state can’t tax remote sales until the Tennessee Legislature grants it the authority to do so. There’s a good chance that will happen in 2019.

Until quite recently, states were prohibited from imposing a sales tax collection obligation on remote sellers. This physical presence rule — that a state could only tax sales by a business with a physical presence in the state — was upheld by the Supreme Court of the United States in 1992 (Quill Corp. v. North Dakota) and remained the precedent until the middle of last year.

In 2016, Alabama, South Dakota, and Tennessee each challenged Quill’s physical presence limitation by adopting an economic nexus law or rule. Under economic nexus, an out-of-state seller’s economic activity in a state can be a sufficient basis for a sales tax collection obligation. Tennessee was one such state.

The Tennessee Department of Revenue adopted an economic nexus rule requiring out-of-state businesses to register with the state and collect and remit sales tax if they regularly or systematically solicited sales in Tennessee and had more than $500,000 in sales in the state during the previous 12 months. Remote retailers were to register with the state by March 1, 2017, and start collecting sales tax by July 1, 2017.

However, economic nexus was never enforced in Tennessee due to two roadblocks. The first was a legal challenge by the American Catalog Mailers Association (ACMA) and NetChoice, which argued the rule was unconstitutional. Enforcement was delayed pending the outcome of the lawsuit.

The second roadblock was imposed by the Tennessee Legislature, which prohibited enforcement of the departmental rule until the Supreme Court or Congress granted states the right to tax remote sales and Tennessee lawmakers authorized the department to do the same. Although many Tennessee lawmakers supported (and still support) states’ right to tax remote sales, at the time, many felt the next move belonged to Congress or the Supreme Court.

Congress had ample opportunity to deal with the issue of remote sales tax, but the Supreme Court of the United States got there first. It overruled the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018). States, should they choose to do so, now have the freedom to impose a sales tax collection obligation on remote sellers.

More than 30 states have already taken advantage of that freedom, including California, New York, Texas, and pioneering South Dakota itself. Many are already enforcing economic nexus and reaping tax revenue from remote sales. Tennessee isn’t one of them.

The suit against Tennessee’s economic nexus rule has been dropped, but the Tennessee Department of Revenue cannot enforce economic nexus until the Legislature authorizes it to do so. Several measures that would do just that were introduced earlier this year: Senate Bill 82/House Bill 733, and House Bill 667.

HB 667 would allow the department to enforce its economic nexus rule (with a $500,000 threshold) starting July 1, 2019.

SB 82/HB 733 would require a dealer with no physical presence in the state to collect and remit sales tax if, in the previous 12-month period, the dealer had more than $100,000 in gross revenue from Tennessee sales or 200 or more separate sales transactions in the state. While this differs from Tennessee’s original rule, it mimics the threshold adopted by South Dakota and many other states. It would take effect January 1, 2020.

To simplify sales tax compliance for remote sellers, SB 82/HB 733 would have them collect the state sales tax rate and a flat local rate of 2.25 percent, rather than variable combined rates. Currently, total sales tax rates in Tennessee vary from 7 to 10 percent.

It’s possible that some lawmakers in Tennessee will want to hold out for Congress, which could still intervene. More likely, one of the proposed Tennessee measures will become law this year.

Wondering where you need to collect sales tax? This state-by-state guide can help you identify states where you’re at risk for developing a sales tax collection obligation.