Sales Tax Collection by Out-of-State Dealers

Tennessee Department of Revenue Notice #18-11

On June 21, 2018, the United States Supreme Court issued its decision in South Dakota v. Wayfair, Inc., which overturned the physical presence rule previously set forth in Quill Corp. v. North Dakota. Before the Wayfair decision, a state could not require an out-of-state "dealer" to collect its state sales tax unless the dealer had a physical presence in the taxing state. A "dealer" in Tennessee is defined as an out-of-state seller of tangible personal property or other taxable products purchased by Tennessee consumers and delivered into the state for use, consumption, distribution, or storage in Tennessee. After the Wayfair decision, the physical presence rule for collecting state sales tax no longer exists.

As outlined in Notice #17-01, Tennessee has previously established an economic nexus rule (Rule 129(2)) effective January 1, 2017, which provides that out-of-state dealers with no physical presence in Tennessee who engage in regular and systematic solicitation of consumers in Tennessee and who make sales exceeding $500,000 to consumers in Tennessee during the previous 12-month period have a substantial nexus with the state. Such dealers were required to register for Tennessee sales and use tax purposes by March 1, 2017 and to begin collecting and remitting sales and use tax by July 1, 2017. If the dealer met the $500,000 threshold after March 1, 2017, it was (or is) required to register and collect the tax beginning on the first day of the third month following the month it meets the threshold. However, Notice #17-12 later explained that in May 2017, the Tennessee General Assembly passed legislation that prohibits the Department of Revenue from enforcing Rule 129(2) until the General Assembly reviews the Wayfair decision.

Therefore, the current status of this issue, as outlined recently in Notice #18-11, is that any dealer with no physical presence in Tennessee is not required to collect Tennessee sales and use tax until the Department issues a public notice stating the specific date and circumstances under which such dealers must begin to collect and remit the tax. The Department encourages these dealers to voluntarily collect and remit the tax as a convenience to their customers. Dealers with a physical presence in the state must, as always, collect and remit the tax.

For more information on how this issue may affect you, please contact us at (901) 761-3003.

The Marston Group, PLC