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Tennessee to institute economic nexus in 2017


 Tennessee's new economic nexus policy takes effect July 1, 2017.

Update 2.2.2018: The American Catalog Mailer's Association and NetChoice are challenging the constitutionality of Tennessee's economic nexus rule. In response to the suit, the Tennessee Legislature enacted House Bill 261, which prohibits the Department of Revenue from collecting any internet sales or use taxes authorized under Rule 1320-05-01-.129 until it's been fully reviewed by the courts and approved by legislative action.

A sales and use tax rule recently adopted by the Tennessee Department of Revenue imposes new tax collection requirements on out-of-state dealers deemed to have a substantial nexus with the state. The new policy challenges the physical presence precedent upheld by the 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota.

Under Tennessee Rule 1320-05-01-.129, out-of-state dealers with a physical presence in Tennessee have a substantial nexus and are required to register with the Department of Revenue and report and pay tax on all taxable sales to Tennessee consumers. That’s standard. More unusual is the second part of the new rule, which reads:

“Out-of-state dealers who engage in the regular or systematic solicitation of consumers in this state through any means and make sales that exceed $500,000 to consumers in this state during the previous twelve-month period also have a substantial nexus with this state.”

Such sellers are required to register with the Department of Revenue for sales and use tax purposes by March 1, 2017. They must begin collecting and remitting Tennessee sales and use tax on taxable items delivered to consumers in Tennessee on July 1, 2017 (“unless a later date is established by the Department by notice”).

Any seller who meets the $500,000 threshold after March 1, 2017, must register with the Department and collect and remit sales and use tax “by the first day of the third calendar month following the month in which the dealer met the threshold.”

Finally, the new rule reminds that if Tennessee sales tax was not charged at the time of sale, Tennessee consumers must report and pay use tax directly to the Department on purchases of taxable items brought into the state. Another new rule (1320-05-01-.63) clarifies registration certificate requirements/policies. The text of both rules is available here.

Tennessee isn’t the first state to adopt this sort of policy and it is unlikely to be the last. Alabama, Oklahoma and South Dakota have all adopted economic nexus policies under which certain out-of-state vendors with a substantial economic presence in the state must collect and remit sales and use tax. Read more about economic nexus and state efforts to kill Quill.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.