Following the lead of Alabama, the Tennessee Department of Revenue (Department) on June 16, 2016, filed a proposed rule (new Rule 1320-05-01.129) that would adopt an economic nexus regulation for sales and use tax purposes. As currently drafted, an out-of-state dealer would be deemed to have substantial nexus with Tennessee if the dealer engages in the regular or systematic solicitation of Tennessee consumers through any means, and makes sales that exceed $500,000 to Tennessee consumers during any calendar year. Out-of-state dealers meeting this threshold would have to register with the Department for sales and use tax purposes, and begin collecting and remitting tax to the Department by July 1, 2017.

The Department will hold a hearing on the proposed rule on August 8, 2016.

Implications

Given that the jurisdictional standards set forth in the new law exceed current Commerce Clause standards for sales and use tax collection purposes as established by the U.S. Supreme Court, it is likely that the law will face legal challenges. More significantly, however, is the possibility that the Court might once again take up the issue and this rule might be the vehicle for it to reconsider the physical presence test in light of Justice Anthony Kennedy's concurring opinion in DMA, indicating that it is "unwise to delay any longer a reconsideration of the Court's holding in Quill."¹ Obviously, if the Court were to hear such a challenge, it may ultimately affect how nexus is determined for remote sales. Similar state action throughout the early 1980's (the so-called "anti-Bellas Hess laws) eventually led to the 1992 Quill decision. However, the economic landscape is far different today, particularly due to the dramatic rise in remote sellers using the global reach of the Internet that was very different than the environment remote sellers faced 20 years ago. Thus, a similar result (i.e., affirmation of the physical presence standard) is no longer a foregone conclusion.

Finally, it is worth noting that, should this trend continue, whereby more states adopt similar requirements, Congress may be forced to act through one of the remote seller nexus bills currently pending in both houses in order to provide some uniformity among the states.² Given that states are enacting a complex variety of sales and use tax nexus requirements, having Congress enact a national, uniform nexus standard for sales and use tax collection may prove to be a better compliance alternative for remote sellers throughout the US. With Alabama's independent enactment of remote seller nexus rules by regulation, South Dakota's and Vermont's legislative enactments and promulgation of the National Conference of State Legislatures (NCSL) model law,³ we anticipate an acceleration of activity by the states in this area through the remainder of 2016 and beyond.

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ENDNOTES

¹ Direct Mktg. Ass'n. v. Brohl, No. 13-1032, 574 U.S. __ (2015) (J. Kennedy concurring).

² See S. 698 "The Marketplace Fairness Act" and H.R. 2775 "The Remote Transactions Parity Act," which would authorize Streamlined Sales Tax Full-Member states, and states that adopt specified simplification provisions to require certain remote seller to collect and remit tax on sales to local customers regardless of whether the seller has in-state physical presence.

³ A copy of which is available on the Internet.