Yet another state is attempting to have large out-of-state retailers collect sales tax from in-state customers by passing an “economic nexus” regulation. Tennessee’s new regulation follows in the footsteps of states like South Dakota, Alabama and Oklahoma who have passed laws in hopes of collecting more sales tax revenue, with the added bonus of seeing Quill v. North Dakota overturned.
Wait, Say that Again in English
If you don’t speak legalese, no worries! Here’s the deal: Right now in the U.S., only online sellers with sales tax nexus (i.e. “significant presence”) in a state are required to collect sales tax from buyers in that state. This is due to a Supreme Court precedent set by the Quill v. North Dakota case way back in 1992. Of course, since 1992, the retail landscape has changed drastically with the advent of eCommerce.
States are seeing large eCommerce companies that don’t have nexus in their states selling to in-state buyers without collecting and remitting sales tax. In those states’ eyes (whether true or not), they are losing out on potential sales tax revenue they would spend on schools, roads, public safety, and other state budget items.
Further, states generally have “consumer use tax” laws on the books. This means consumers are technically required to remit “use tax” on any purchases they make without paying sales tax. But states find it easier to require out-of-state corporations (with no voting power!) to collect sales tax rather than ask citizens to tally up and remit use tax.
So in order to collect more revenue, a handful of states, with Tennessee being the latest, have passed “economic nexus” regulations. These regulations state that not only does a physical presence like an employee, location or inventory in a warehouse create sales tax nexus, but that making above a certain dollar threshold of sales into a state each year also creates nexus. This is a way for states to try and coax more retailers into collecting sales tax from buyers. But, it remains to be seen if these laws are actually Constitutional. Keep an eye on the Supreme Court in the coming months and years for more on this issue.
In the meantime…
What Online Sellers Need to Know about Tennessee’s Economic Nexus Law
According to Tennessee’s new regulation, “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.”
In other words, any company who made sales of more than $500,000 in the past year in Tennessee now have sales tax nexus and are required to register for a Tennessee sales tax permit and collect sales tax from Tennessee customers.
Other rules state that any dealer (which is Tennessee’s term for retail seller) who is already making more than $500,000 in sales in the state must register to collect sales tax by March 1, 2017 and start collecting beginning July 1, 2017. Any dealer who finds in the future that they’ve made $500,000 in sales to Tennessee customers in the past calendar year are required to register for a sales tax permit “by the first day of the third calendar month following the month in which the dealer met the threshold.” (Example: If you meet the threshold in December, you are required to register by March 1st of the following year.)
You can read Tennessee’s economic sales tax regulation here. (Be sure to scroll down to the bottom of page 2.)
Does This Change Anything for Online Sellers?
If you live outside of Tennessee, don’t have sales tax nexus there, and make less than $500,000 in sales in the state of Tennessee you can stop reading. This law won’t affect you.
Large sellers that do make more than $500,000 in Tennessee per year and are not registered to collect sales tax should speak with their CPA . Tennessee has jumped on a bandwagon with South Dakota and Alabama, two states that are trying to tie larger sellers up in lawsuits with the purpose of overturning the precedent set by Quill v. North Dakota. South Dakota has already sued four large online retailers over the collection of sales tax, so it’s up to you as a retailer to determine how to proceed.
In the meantime, check back here as we continue to follow the developments with economic nexus and other sales tax news. Have questions or something to say? Start the conversation in the comments.