Earlier today, the Tennessee Department of Revenue (DOR) submitted a new sales and use tax regulation for publication titled “Out-of-State Dealers” (Rule 1320-06-01-.129) that would administratively create an economic nexus threshold. With the submission, Tennessee becomes the most recent addition to the growing list of states seeking to directly attack the Quill physical presence standard. As detailed in our prior blog, both Alabama and South Dakota are already litigating whether their economic nexus standards are sufficient to satisfy the dormant commerce clause substantial nexus requirement. Additionally, at least 11 different bills in eight different states have been introduced in state legislatures so far in 2016. With states continuing to attack Quill from all angles, remote sellers are scrambling to keep up with the increasingly volatile nexus landscape.
The Proposed Regulation
The proposed regulation provides that “[o]ut-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 any calendar year also have a substantial nexus with this state” [in addition to those with a physical presence]. It requires all dealers meeting the economic nexus threshold to register with the DOR by January 1, 2017, if they haven’t already done so. As drafted, the regulation requires out-of-state dealers to report and pay the appropriate tax to the DOR on sales of tangible personal property and other taxable items delivered to Tennessee consumers by July 1, 2017, unless a later date is established by the DOR via notice.
The proposed regulation also requires “[p]ersons who purchase tangible personal property or other taxable items from any dealer that is registered with the Department [to] pay Tennessee sales and use tax to the dealer.” Because out-of-state dealers with economic nexus must register with the DOR by January 1, 2017, their customers will be required to begin paying sales and use tax to them by this date (or earlier if the dealer chooses to register in advance).
Because a rulemaking hearing was requested, a public hearing on the proposed rule has been scheduled for Monday, August 8, 2016 at 1:30 pm CST in Nashville, TN. Public comment can be orally offered at the hearing or submitted in advance of the hearing to the contact listed in the notice. After the hearing, the state administrative procedures statute (Tenn. Code § 4-5-201 et seq.) provides that the DOR can promulgate a rulemaking hearing rule based on the hearing, which will become effective 90 days after it is filed with the Secretary of State. Assuming no charges are made to the effective date (or it is not otherwise delayed by DOR notice), this will likely be just in time for the January 1, 2017 registration deadline.
If the proposed regulation is ultimately approved, mid-large online retailers that are not currently collecting in Tennessee will need to carefully evaluate whether purchases from their Tennessee customer base have exceeded the $500,000 threshold in any calendar year. There will be a significant opportunity to oppose this effort during the rulemaking hearing in early August.
We will be closely monitoring the progress of the proposed rule and encourage any company that may be impacted (or has additional questions) to contact the authors.