Online Sales Rule Sparks Tennessee Lawsuit

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By Andrew M. Ballard

Tennessee is the latest hotbed for litigation over the collection and remittance of sales taxes by large online retailers.

Washington-based NetChoice and the American Catalog Mailers Association filed a lawsuit in state chancery court March 30 after an administrative challenge to the state’s new nexus rule, finalized late last year, was rejected ( Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue , Tenn. Ch. Ct., No. 17-307-IV, complaint filed 3/30/17 ).

The groups say the rule ( Tenn. Code Ann. 1320-05-01-.129(2)) is unconstitutional because it contradicts precedent set by the U.S. Supreme Court’s 1992 ruling in Quill Corp. v North Dakota, 504 U.S. 298, which prohibits states from imposing sales and use tax collection obligations on vendors without an in-state physical presence.

The regulations at issue require remote sellers with at least $500,000 in annual sales to have registered by March 1. Taxes are to be remitted beginning July 1.

Remote seller regimes in Alabama and South Dakota also have been challenged in court. A South Dakota trial court ruled the state statute unconstitutional in a March 6 decision, which is expected to be appealed before the state Supreme Court April 5.

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‘Plainly Unconstitutional.’

NetChoice and the ACMA’s lawsuit against Tennessee’s rule asserts that it is “plainly unconstitutional” as it “violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State’s taxing authority over companies, individuals, and organizations located throughout the United States, and potentially the world, based solely on their having customers in Tennessee.” The groups ask the court to bar enforcement of the rule.

Steve DelBianco, executive director of NetChoice, told Bloomberg BNA April 4 that the groups had to pursue an administrative challenge before filing the lawsuit.

George S. Isaacson, a partner with Brann & Isaacson in Lewiston, Maine, and one of the attorneys representing the retailers in the Tennessee lawsuit, said the Department of Revenue didn’t provide any grounds for denying the administrative petition in a March 3 letter sent to the groups.

Kelly Cortesi, spokeswoman for the Tennessee DOR, told Bloomberg BNA that because taxpayer confidentiality was protected under state law, she couldn’t comment on the administrative challenge and decision.

Lawsuit Expected

Harlow Sumerford, communications director for the Tennessee office of attorney general, told Bloomberg BNA that the lawsuit was “not unexpected.”

“We have been in contact with the Department of Revenue for quite some time on this issue and are prepared to defend the rule,” Sumerford said. “Our hope is that the courts will level the playing field for the brick and mortar businesses in Tennessee.”

Tennessee’s Legislature also is considering the rules this session as part of omnibus bills (S.B. 53/H.B. 261) that remain in committee. In December 2016, the Joint Operations Committee rejected a motion to give a negative recommendation to the rulemaking.

Setting Precedent

NetChoice and the ACMA also filed the lawsuit against South Dakota in May 2016.

DelBianco said the South Dakota trial court “was very clear that states do not have the right to unilaterally re-write U.S. Supreme Court precedent.”

That ruling will likely be reviewed by the state supreme court soon. Many expect that the South Dakota litigation will advance to the U.S. Supreme Court on a petition for review by the end of this year.

DelBianco told Bloomberg BNA that "[f]urther economic nexus challenges are simply unnecessary now that this is headed to the highest court of the land, wasting taxpayer dollars while eroding respect for the legal system and, in fact, our entire system of government.”

About 15 states have mulled economic nexus bills this legislative session.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C., at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the complaint is at

Text of Tennessee's online retailer rule is at

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