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On June 5, 2019, the Tennessee Department of Revenue released updated guidance regarding sales tax collection from out of state dealers. This guidance is in response to the June 21, 2018, US Supreme Court decision in the South Dakota v. Wayfair case which overruled Quill Corp v. North Dakota (1992) and National Bellas Hess v. Department of Revenue of Ill. (1967), and thus erased long standing precedent in the area of sales and use tax collection.
Under those prior cases, a state could not compel a business to collect sales tax if that business had no physical presence in the state. Instead, consumers paid a use tax that is equivalent to the sales tax. However, as noted by the Supreme Court, “Consumer compliance rates are notoriously low” and South Dakota lost “between $48 and $58 million annually.” Moreover, the physical presence rule has been seen to give out of state sellers an unfair advantage.
Tennessee, like South Dakota (the state at issue in the Supreme Court decision) has no income tax and must rely heavily on the sales tax, and therefore had a strong incentive to seek a change in the precedent.
The Supreme Court decided that the nexus requirements of the Commerce Clause were satisfied by South Dakota’s act since the act only applied to sellers that delivered substantial goods or services into South Dakota. It found that South Dakota’s system “includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce” since the South Dakota law has a safe harbor for those that conduct limited businesses, the law isn’t retroactively applied, the Streamlined Sales and Use Tax Agreement was utilized, and free software provided.
As expected, Tennessee has quickly enacted rules to take advantage of this change in the law. Similarly, the Tennessee rule is not retroactive, and does have a sales threshold ($500,000.00 but does not include wholesale sales), and also utilizes streamlined. Of note, however, the new rules require that the dealers know the proper local option sales tax rather than being able to use some uniform number, so out of state dealers will have to refer to the boundary database provided (or more likely use software).
The new rules are here:
