Challenge to Tennessee economic nexus rule on hold pending Supreme Court ruling

An economic nexus rule requiring certain out-of-state sellers to collect and remit sales tax in Tennessee despite having no physical presence in the state took effect January 1, 2017. Affected remote retailers — those making make more than $500,000 in sales in Tennessee during the previous 12-month period — were supposed to register with the state by March 1, 2017, and start collecting and remitting July 1, 2017. But the rule was challenged, and to avoid taxpayer confusion, enforcement was delayed pending the lawsuit.

The challenge came from American Catalog Mailers Association (ACMA) and NetChoice. They argue that Tennessee’s rule is unconstitutional because it contradicts the Supreme Court of the United States’ ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). According to Quill, a state cannot impose a sales or use tax collection obligation on a business that has no physical presence in the state. The case is Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue.

Meanwhile, in May 2017, the Tennessee General Assembly got involved. It passed legislation (HB 261) prohibiting the Department of Revenue from collecting any internet sales or use taxes authorized under the department rule [1320-05-01-.129(2)] and permitted under a ruling of any court. In other words, even if Tennessee wins the legal dispute against ACMA and NetChoice, it cannot enforce the rule until it’s been reviewed and approved by the general assembly.

Now, Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue is on hold while the very concept of economic nexus is being reviewed by the Supreme Court of the United States (South Dakota v. Wayfair, Inc.).

South Dakota’s economic law differs from Tennessee’s rule. Nexus is established in South Dakota when in one year, a remote seller has 200 separate taxable sales, or more than $100,000 in taxable sales, delivered into South Dakota. However, both states are endeavoring to base a tax collection obligation on economic activity alone.

Given that similarity, the Tennessee Department of Revenue asked the Chancery Court to hold Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue “in abeyance pending the outcome of South Dakota v. Wayfair, Inc.” Since ACMA and NetChoice were amenable to an abeyance, the court granted it.

The next move belongs to the Supreme Court, which is expected to issue its decision in late June. Within 30 days of the ruling, Tennessee, ACMA, and NetChoice are to schedule a status conference with the court to determine how the case should proceed. See the Agreed order granting defendant’s motion to hold case in abeyance for more details (hat tip to Bloomberg BNA for the document).

The outcome of South Dakota v. Wayfair, Inc. could impact not just Tennessee, but all states attempting to tax sales by out-of-state sellers. It has the potential to totally transform the status quo. Learn more about the case here.