The Tennessee Department of Revenue (DOR) followed Alabama, South Dakota and Vermont to become the fourth state to adopt a sales tax economic standard. Effective January 1, 2017, Rule 1320-05-01-.129 deems out-of-state dealers to have substantial nexus if they engage in regular or systematic solicitation of consumers in the state through any means and when their sales into the state exceed $500,000 during the previous 12-month period.
Originally, for a state to impose its taxing powers, substantial nexus was required as set forward with the U.S. Supreme Court case, Quill Corp. v. North Dakota. Substantial nexus can be created by various in-state activities, including having offices, warehouses, employees and independent contractors. In recent years, various states introduced more modern nexus concepts, such as click-through, affiliate and agency nexus in an attempt to expand their reach. The boldest move came from Alabama, which first introduced the controversial economic nexus concept in the sales and use tax arena. Now Tennessee has joined.
The Tennessee DOR filed a notice in 2016 with the Secretary of State summarizing the new regulation:
- The rule becomes effective January 1, 2017; tax collection within this provision doesn’t begin until
July 1, 2017.
- The $500,000 threshold can be met after the end of any 12-month period.
- After the threshold is met, the out-of-state dealer has three months to register and prospectively start collecting and remitting tax.
- Dealers that have already met the threshold must register with the DOR for sales and use tax purposes by March 1, 2017. The dealers must begin collecting and remitting tax to the department by July 1, 2017.
- The out-of-state dealer isn’t required to retroactively collect tax.
- The regulation still needs the Tennessee Legislature’s approval to become permanent.
Any remote sellers currently making sales in Tennessee should consider the new rule’s implications. The rule is set to expire July 1, 2017, if it isn’t approved by the Legislature before then. If not approved, no registration or collection of taxes will be necessary by those out-of-state dealers that meet the threshold. However, if approved, out-of-state retailers should begin preparing to register and collect Tennessee sales and use tax starting July 1, 2017, if they meet the $500,000 threshold.
For more information, contact your BKD advisor.