Tennessee lawmakers block enforcement of remote sales tax

Tennessee is deeply divided on remote sales tax.

On one side of the issue stand Governor Bill Haslam, the Department of Revenue, and numerous lawmakers, including U.S. Sen. Lamar Alexander, a steadfast proponent of allowing states to tax sales by large out-of-state sellers. On the other side stand lawmakers on both sides of the aisle.

Last fall, the Department of Revenue adopted an economic nexus rule (Rule 1320-05-01-.129) requiring out-of-state dealers that regularly or systematically solicit sales in Tennessee and made more than $500,000 in sales during the previous 12 months to register with the department and report and pay tax on all taxable Tennessee sales.

Gov. Haslam applauded the action, saying, “This isn’t a new tax. This is a tax that’s already owed on goods that are just being bought a different way, and it’s just not fair to our local retailers … who pay property tax and collect sales tax and sponsor the Little League baseball team” (The Tennessean).

However, the proposal required approval by the Tennessee Legislature’s Government Operations Committee, which is chaired by Rep. Jeremy Faison. Despite his concern the proposal would draw the state into an unwinnable lawsuit, Faison vowed to give the matter fair consideration. The committee ultimately issued a “no recommendation,” which allowed the rule to proceed barring further legislative action.

In preparation for enforcing out-of-state dealer registration, the Department of Revenue then published Notice #17-01. Out-of-state dealers meeting the reporting requirements were to register with the department by March 1, 2017, and begin collecting sales and use tax July 1, 2017.

Fears that Rule 129 would draw the state into a lengthy legal battle are well-grounded. The economic nexus policy challenges the physical precedent upheld in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the seminal Supreme Court decision preventing states from taxing sales by remote sellers lacking a substantial connection (i.e., physical presence) to the state. The state expected, and indeed welcomed, a legal challenge that could lead it to the Supreme Court of the United States and the eventual overturning of Quill.

Upon learning a legal challenge had, in fact, been filed, Gov. Haslam said his administration supported the policy “knowing we would be sued.” He pointed out that Quill and earlier decisions were made “back when out-of-state sales basically happened through catalogs, when that was 1 percent of the retail world instead of the 25 percent or 30 percent it is now.” Harlow B. Sumerford, spokesman to Attorney General Herbert Slatery, also said his office was “prepared to defend the rule.”

Legal action against Rule 129 was filed on March 30 by the American Catalog Mailers Association and NetChoice, who together charge that the rule is in violation of Quill and is unconstitutional. The Department has been ordered by a Tennessee chancery court to suspend enforcement of the policy until the matter is resolved. The case is Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue.

In addition to the legal challenge, the economic nexus proposal came under fire in the Tennessee Assembly. Last month, lawmakers adopted an amendment to House Bill 261 that “prohibits the Department of Revenue from collecting any internet sales or use taxes authorized under Rule 1320-05-01-.129(2) and permitted under a ruling of any court, until such court’s ruling has been fully reviewed and the rule has been approved by the House and Senate Government Operations Committees.” This puts in statute the requirement of the chancery court.

Gov. Haslam signed HB 261 on May 25. Additional information is available from the Tennessee General Assembly.

Not all who oppose Rule 129 are opposed to taxing remote sales. Sen. Mike Bell believes the current system of taxation is flawed and “unfair to in-state retailers.” However, he supports a federal solution rather than a state one.

To date, Congress has been unable to solve this problem, although Sen. Alexander and others have worked doggedly to do so for years. Alexander has been a primary sponsor of all three versions of the Marketplace Fairness Act, most recently MFA 2017. He says, “The Marketplace Fairness Act is about internet fairness and it is about two words: states’ rights — and no state should have to play ‘Mother, may I?’ with the federal government when deciding whether to collect, or not collect, a state tax is that already owed.”

Right now, the courts, the states, and the federal government are all involved in a long, slow race. It is likely, though not guaranteed, that one of them will solve the perennial problem of remote sales and state sales tax.

To learn more about economic nexus policies and remote sales tax, check out “What economic nexus means for your remote sales.”

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