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Tennessee’s effort to collect sales and use taxes from out-of-state retailers has taken another blow.
The state Legislature has prohibited the revenue department from collecting taxes from certain online retailers until such a levy is authorized by a court and subsequently approved by lawmakers. The prohibition came is the form of an amendment passed by the House and Senate during consideration of an omnibus rule-making approval measure ( H.B. 261).
Implementation of the sales and use tax nexus rule at issue has already been stayed by a state court ( Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue , Tenn. Ch. Ct., No. 17-307-IV, order granting injunction 4/10/17 ).
“The Legislature’s actions will hopefully allow the pending Tennessee lawsuit to proceed without the risk of dismissal on the grounds of lack of standing,” Brett R. Carter, a partner with Carter Shelton PLC in Nashville, told Bloomberg BNA May 10. The constitutional issues could then be litigated without being sidetracked by “procedural sideshows,” he said.
“We’ve always thought this issue is probably resolved in the courts and this allows the legal challenge to continue,” Kelly Cortesi, the director of communications for the Tennessee Department of Revenue, told Bloomberg BNA.
The nexus rule was issued last October and would have required remote sellers with at least $500,000 in annual sales to register by March 1, 2017, and begin collecting and remitting sales and use taxes by July 1, 2017. Amazon.com Inc., which has a physical presence in the state, already collects and remits sales and use taxes for Tennessee, but the rule has been estimated to increase annual revenue by at least $160 million.
Proponents of the rule argued that it isn’t imposing a new tax and that it levels the playing field between out-of-state companies and local businesses. Opponents generally said the move is unconstitutional and any such policy decisions should be made through legislation, not administratively.
Carter said that online retailers should “carefully consider” whether the legislative action, together with a notice on registration issued by the DOR in January ( No. 17-01), would allow them to voluntarily register and gain amnesty up until a court has ruled on the matter.
Regarding the amnesty, Cortesi said the tax remains due from the customer, and businesses can still choose to voluntarily collect it and remit it to the DOR. “Businesses that choose to do so and begin by July 1, 2017, will still receive assurance from the Department that it will not audit for prior periods as described in the January 2017 notice,” she said.
Tennessee lacks a traditional income tax and primarily relies on sales and use taxes for revenue, so any changes impacting the latter have fairly significant consequences. It is among several states—including Alabama, North Dakota and South Dakota—that have attempted to use state laws or regulations to challenge the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, which prohibits states from imposing sales and use tax collection obligations on vendors that lack an in-state physical presence.
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