More remote sellers and marketplaces to collect Tennessee sales tax starting October 1

Effective October 1, 2020, remote retailers must register to collect and remit Tennessee sales tax if their sales into the state during the previous 12-month period exceed $100,000. This is a significant change: The remote seller threshold has been $500,000 since July 1, 2019.

Another big change: Marketplace facilitators with more than $100,000 in sales in the state are required to collect and remit sales tax on behalf of third-party sellers starting October 1, 2020.

As in most states, out-of-state businesses can now establish a sales tax obligation in Tennessee through their sales activity in the state, or economic nexus. Physical presence in a state still triggers nexus, it’s just no longer the sole requirement because the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018).

Although the Supreme Court didn’t impose any requirements on states, it did praise South Dakota for providing an exception for small sellers. Remote sellers are required to register with the South Dakota Department of Revenue only once their sales into South Dakota exceed $100,000 in sales or 200 transactions in the state in the current or previous calendar year (the economic nexus threshold).

With the exception of Kansas, every state’s economic nexus law provides a small-seller exception. However, no two economic nexus thresholds are exactly alike. Details about each state’s economic nexus threshold are available in this state-by-state guide to economic nexus.

For a state with a population of less than 7 million, Tennessee’s original threshold of $500,000 was quite high. The only other states with a $500,000 sales threshold are California (population 39.5 million), New York (population 19.45 million), and Texas (population 29 million). The Tennessee Department of Revenue expects the lower threshold to affect approximately 3,000 remote businesses

When determining whether economic nexus has been established in Tennessee, a remote seller should include exempt sales and exempt services, but not sales for resale. Remote sellers shouldn’t count sales made through an online marketplace as of October 1, 2020. 

The lower threshold also applies to marketplaces. Marketplaces that make or facilitate more than $100,000 in sales to Tennessee customers in the previous 12-month period must collect and remit sales tax on sales made by marketplace sellers starting October 1, 2020. See Sales Tax Collection by Marketplace Facilitators for more details.

The economic nexus threshold change is expected to increase annual sales tax collections by almost $43 million ($31.2 million in state sales tax and $11.7 million in local sales taxes). This money will help Tennessee weather a significant budget shortfall caused largely by COVID-19.

Think you may have economic nexus in Tennessee or another state? Avalara’s free sales tax risk assessment can help you find out.