Tennessee to tax out-of-state sales starting July 1, 2019

State tax authorities and lawmakers in Tennessee have been at odds for years over whether the state should require certain out-of-state sellers to collect and remit Tennessee sales tax. They’ve reached consensus at last: Out-of-state businesses with more than $500,000 in Tennessee sales must collect tax on their Tennessee sales starting July 1, 2019.

How we got to now

Tennessee Department of Revenue Rule 1320-05-01-.129 (or Rule 129) imposed a sales tax collection obligation on out-of-state dealers who engage in the regular or systematic solicitation of consumers in Tennessee and make more than $500,000 in sales to consumers in Tennessee during the previous 12-month period. It was to take effect July 1, 2017.

At the time, however, states were only authorized to impose a sales tax collection obligation on businesses with a physical presence in the state. Because it taxed remote sales, Rule 129 was challenged and placed under an injunction pending the lawsuit.

The Tennessee General Assembly also got involved. It passed legislation prohibiting the Department of Revenue from enforcing Rule 129, even if permitted to do so by a court, “until such court’s ruling has been fully reviewed and the rule has been approved by the House and Senate Government Operations Committees.”

States win right to tax remote sales

On June 21, 2018, the Supreme Court of the United States ruled that physical presence is not the sole requisite for sales tax collection. While physical presence in a state continues to trigger a sales tax collection obligation in all states with a sales tax, the court’s ruling in South Dakota v. Wayfair, Inc. authorizes states to tax remote sales based on the seller’s economic activity in the state, or economic nexus.

More than 38 states have adopted economic nexus since the Wayfair ruling, and most are already enforcing it. Like them, Tennessee has an economic nexus rule on the books. However, the Department of Revenue hasn’t been able to enforce it — or even set a clear effective date — because the General Assembly hasn’t authorized it do so.

In August 2018, the Department of Revenue issued a reminder that, despite the elimination of the physical presence rule in Wayfair, a dealer with no physical presence in Tennessee isn’t required to collect Tennessee sales or use tax until the department issues a public notice with a specific start date and details.

Tax on remote sales starts July 1, 2019

Recently enacted House Bill 667 authorizes the Department of Revenue to enforce Rule 129. As of July 1, 2019, out-of-state dealers whose sales to Tennessee consumers exceed $500,000 during the previous 12-month period must collect and remit the sales and use tax.

See the growing list of states that tax remote sales here.

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