Tennessee still waiting to enforce its remote sales tax law

Tennessee was one of the first states in the country to adopt an economic nexus rule, imposing a tax collection obligation on retailers based on economic activity in the state rather than physical presence. It did so mere months after South Dakota established an economic nexus policy in May 2016. Yet neither state is enforcing its law.

Both policies were at odds with a long-standing physical presence rule: In 1992, the Supreme Court of the United States held that a state could impose a tax collection obligation only on businesses with a physical presence in the state (Quill Corp. v. North Dakota). Businesses with no physical presence could not be forced to comply with state sales tax laws.

States lined up to challenge the Quill ruling in the intervening years, South Dakota and Tennessee among them (in 2016 and 2017, respectively). Their economic nexus policies differ, but both triggered lawsuits and were placed under an injunction during pendency of action.

In Tennessee, the Legislature created another hurdle. It passed a measure prohibiting the Department of Revenue from collecting any internet sales or use taxes authorized under the economic nexus rule, even if authorized to do so by a court ruling, “until such court’s ruling has been fully reviewed and the rule has been approved by the House and Senate Government Operations Committees.”

One hurdle down

On June 21, 2018, the Supreme Court repealed Quill’s physical presence rule in South Dakota v. Wayfair, Inc. One barrier preventing states from taxing sales by remote sellers has been removed. Yet both South Dakota and Tennessee must overcome other obstacles before each can enforce their economic nexus policies.

In South Dakota’s case, its law was remanded to state courts for further proceedings not inconsistent with the Wayfair ruling and is currently awaiting review by the Circuit Court. Yet state officials are eager for the injunction to be lifted; Governor Dennis Daugaard has called a September 12 special session and state lawmakers are drafting legislation to expedite the enforcement of economic nexus. In the meantime, the South Dakota Department of Revenue is encouraging remote retailers to voluntarily apply for a sales tax license.

The Tennessee Department of Revenue has also addressed this issue (see Notice #18-11). It reminds that dealers with no physical presence in Tennessee are not required to collect Tennessee sales and use tax “until the Department issues public notice stating the specific date and circumstances under which such dealers must begin to collect and remit the tax.” It will not apply its economic nexus rule retroactively.

As in South Dakota, the Department encourages retailers with no physical presence in the state “to voluntarily collect and remit the tax as a convenience to their customers.”

Half the states in the nation have now adopted economic nexus provisions, and more are likely to do so. Some, including Hawaii and Vermont, are already enforcing their laws. New Jersey, Washington, and several other states will enforce economic nexus on October 1, 2018, while Nebraska and Utah are among those planning to enforce it on January 1, 2019.

Learn more about economic nexus and its potential impact on your business at this Avalara Resource Page.