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Tennessee steps closer to taxing out-of-state sellers


 Many out-of-state sellers could be required to collect tax on Tennessee transactions in 2017.

Update 7.5.17: Tennessee lawmakers blocked enforcement of the state's economic nexus rule.

A proposal that would allow Tennessee to tax sales made by certain out-of-state sellers is one step closer to becoming a reality after not being rejected by the Tennessee Government Operations Committee last week. Unless the Legislature moves to block it during the 2017 session, affected sellers will be required to register with the Department of Revenue by March 1, 2017, and start collecting and remitting tax on sales to Tennessee consumers on July 1, 2017.

Under the rule promulgated by the Tennessee Department of Revenue in October, “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.” They’ll therefore be required to collect and remit Tennessee sales and use tax on taxable transactions.

Tennessee is one of a growing number of states actively challenging the status quo — that a state cannot oblige a company to collect and remit sales and use tax unless it has a substantial physical presence there. That precedent was upheld in Quill Corp. v. North Dakota, a 1992 ruling of the Supreme Court of the United States. Critics of the physical presence precedent argue that Quill is outdated, noting that it was decided when ecommerce was in its infancy, before Amazon.com was founded in Jeff Bezos’s garage. The time has come, they say, for it to be overturned.

Since federal lawmakers have been unable to pass legislation that would allow states to tax remote sales, the National Conference on State Legislatures has urged state leaders to “take action in their own legislative chambers to solve the remote sales tax collection problem.” Tennessee is one of several answering that call; similar policies have been adopted in Alabama and South Dakota. All three states hope for the opportunity to argue their cases before the Supreme Court.

Should the Tennessee rule be adopted, as expected, and then challenged by an affected retailer, state officials have concluded that the benefits of a potential win outweigh the costs of a potential loss. As the rule states, “Tennessee is heavily dependent on the sales tax for revenues.” Since it already loses millions of dollars in uncollected remote sales and use tax revenue annually, “requiring collection, litigating, and losing a challenge would not leave the State in any different a position than it is in already.”

It’s important that companies doing business in multiple states know what sales and use tax policies are in place, and what change is coming. Avalara’s nexus survey helps businesses identify where they have nexus. Learn more.


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.