Tennessee lowers economic nexus threshold from $500,000 to $100,000

Retailers with no physical presence in Tennessee are currently required to collect and remit Tennessee sales tax if their annual sales into the state exceed $500,000. Starting October 1, 2020, out-of-state businesses and marketplace facilitators must collect and remit Tennessee sales tax if their annual sales into the state exceed $100,000.

All businesses with a physical presence in Tennessee are required to register to collect and remit sales tax. 

Tennessee has required remote sellers to collect sales tax since July 1, 2019.

States were largely prohibited from taxing remote sales until June 21, 2018, when the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. The decision overruled a long-standing physical presence rule, enabling states to tax businesses with no physical presence in the state.

Economic nexus laws exist in 43 states today, as well as in Washington, D.C., and in parts of Alaska — where there’s local sales tax but no statewide sales tax. Most economic nexus laws provide an exception for small sellers, meaning a remote business must register to collect and remit sales tax only if its sales into the state exceed a certain threshold (the economic nexus threshold). Kansas is the outlier: Making just one sale into Kansas could trigger a sales tax collection obligation.

At $500,000, Tennessee’s current economic nexus threshold is quite high; the only other states with such a high threshold are California, New York, and Texas, all of which have much larger populations. Most states that tax remote sales do so if an out-of-state business has more than $100,000 in sales in the state.

Still, there’s been no call to reduce Tennessee’s economic nexus threshold until recently. So why change it now?

Like so much in life, it comes down to money.

Lowering the threshold to $100,000 is expected to increase state and local sales tax collections by an estimated $17,776,364 in fiscal year 2020–21, and by $23,701,819 in subsequent years. Every dollar is needed.

The coronavirus (COVID-19) caused Tennessee to close the 2019–2020 fiscal year with a $0.5 billion shortfall. The projected shortfall for 2020–21 is $1 billion, which poses “a major challenge” for the state.

And as noted above, changing the threshold to $100,000 puts Tennessee’s economic nexus law in step with economic nexus laws in most other states.

The $100,000 economic nexus threshold will also apply to marketplace facilitators since they’re required to collect and remit Tennessee sales tax on behalf of third-party sellers starting October 1, 2020. The original marketplace facilitator law, signed into law April 1, used the $500,000 threshold.

Expanding the sales tax collection requirement to marketplace facilitators with more than $100,000 in Tennessee sales is expected to increase state and local tax collections by $14,417,567 in fiscal year 2020–21, and by $19,223,423 in subsequent years. 

All told, reducing the economic nexus threshold for remote sellers and marketplace facilitators should generate more than $75 million in state and local sales tax revenue by the end of the 2021–22 fiscal year. That’s because a lot more sales into Tennessee will be taxed.

Many retailers not currently collecting sales and use tax in Tennessee will need to register with the Tennessee Department of Revenue on or after October 1, 2020. Tennessee law requires remote dealers to begin collecting and remitting sales tax by the first day of the third calendar month following the month in which the economic nexus threshold was met.

Think you may meet the economic nexus threshold in Tennessee or another state? This free sales tax risk assessment can help you find out.