On April 10, 2017, a Tennessee chancery court stayed the enforcement of Rule 1320-05-01-.129 (Rule 129), by which the Tennessee Department of Revenue (Department) adopted an economic nexus standard for sales and use tax purposes, until a lawsuit challenging Rule 129 is decided (April 10th Order).

Under Rule 129, an out-of-state dealer is 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 exceeding $500,000 to Tennessee consumers during the previous 12-month period. Rule 129 requires out-of-state dealers meeting the threshold to register with the Department for sales and use tax purposes by March 1, 2017, and to begin collecting and remitting Tennessee sales tax on sales to Tennessee customers to the Department by July 1, 2017.

On March 30, 2017, two retail groups filed suit against the Department, claiming Rule 129 is unconstitutional under the US Supreme Court's 1992 ruling in Quill Corp. v. North Dakota¹ because it requires out-of-state companies with no physical presence in Tennessee to collect and remit sales tax.² The April 10th Order prohibits the Department from enforcing Rule 129 until the suit is resolved. The April 10th Order, however, does not preclude dealers from voluntarily complying with Rule 129 or the Department from collecting sales tax from dealers that voluntarily comply.

Rule 129 is still subject to approval by the Tennessee Legislature. Although originally receiving no recommendation by the Joint Government Operations Committee late last year, Rule 129 is now being considered with the omnibus rules bills (S.B. 53/H.B. 261), which on April 12, 2017 were recommended for passage by the same committee. While it is expected to approve Rule 129, Rule 129 will, by its own provisions, expire if the legislature does not take action.

Implications

Remote sellers making any retail sales to customers located in Tennessee who registered in anticipation of being required to collect sales tax beginning July 1, 2017, may want to consider closing their account. Those who may meet these filing thresholds should monitor the progress of the litigation and be prepared to collect and remit the Tennessee sales tax once the suit is resolved.

Before a remote seller decides to voluntarily comply with Rule 129, it should be mindful that remote sellers may owe Tennessee's business tax, which is imposed based upon a similar sales threshold.³ The Department currently uses sales tax filings as the primary tool to determine if an entity should be filing returns for and paying Tennessee Business Tax as well. This sales tax registration process for remote sellers will potentially give the Department a new set of entities to review for Tennessee business tax filings. The Department may similarly begin reviewing franchise and excise tax filings of newly registered entities.

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ENDNOTES

¹ 504 U.S. 298 (1992).

² Complaint, Am. Catalog Mailers Ass'n v. Tenn. Dep't of Revenue, No. 17-307-IV (Tenn. Ch. Ct., filed 3/30/2017).

³ Tenn. Code Ann. Section 67-4-702(22)(A) and 67-4-717.