State of Wayfair: Tennessee Collections on Hold

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Tripp Baltz

Your move, Tennessee lawmakers.

Until the Tennessee Legislature acts, collection of taxes on remote sales in the Volunteer State will have to wait. Back in October 2016, the state’s Department of Revenue issued an economic nexus rule covering remote sellers with more than $500,000 in sales into Tennessee, according to a January 2017 sales and use tax notice.

But the rule—which came with a March 1, 2017, registration date and a sales tax collection date of July 1, 2017—was put on hold by the Legislature and a legal challenge, pending Wayfair. A status conference on the court case, a suit filed by the American Catalog Association, is set for Sept. 4, Leigh Ann Apple Jones, spokeswoman for the state Attorney General’s Office, told Bloomberg Tax.

The June 21 Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—has many states looking to expand their authority over online sales taxation. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster; the statute imposes a tax collection threshold at 200 transactions or $100,000 in in-state sales.

The court stopped short of formally declaring South Dakota’s law valid in the absence of Quill, and the South Dakota Circuit Court still has to bless the state’s economic nexus model before it can become effective. It’s expected to do this month.

In the wake of the groundbreaking decision, dozens of states that haven’t already done so are mulling whether to copy South Dakota’s law.

Legislative Roadblock?

Since most observers expect that the Wayfair ruling signals the end of the case in Tennessee, the biggest roadblock may be the Legislature, which passed a law in 2017 barring the DOR from collecting online sales taxes until such a levy is authorized by a court and subsequently approved by lawmakers. The Tennessee Legislature is scheduled to reconvene its next session Jan. 8, 2019.

Bradley Jackson, president and CEO of the Tennessee Chamber of Commerce & Industry, told Bloomberg Tax Aug. 16 his group recently held discussions with the state revenue director over the timing and form of legislative action, reasonable applicability thresholds, and effective dates for tax collections.

Jackson said there is debate over whether the law requires mere review by lawmakers, the adoption of a resolution, or legislation that passes both houses. He said that given the focus on upcoming elections, action seems unlikely before early 2019.

Meanwhile, the DOR plans to issue guidance on Wayfair soon, Kelly Cortesi, a spokeswoman for the department told Bloomberg Tax Aug. 16.

Questions. So Many Questions

E-commerce companies sent a flurry of questions to the panelists in a Wayfair webinar sponsored by Avalara Inc. Aug. 16.

Panelist Rachel Le Mieux, state and local tax partner at Peterson Sullivan Accounting, said her email box was “blowing up” as she was trying to get through slides about tax collection and remittance issues facing remote vendors.

The panelists asked questions of their own, and got some interesting answers: Slightly more than 50 percent of the participants said they have made sales into states where they don’t collect sales tax, according to a quick survey conducted during the session.

About 47 percent said in one to five states, they exceed the current economic nexus thresholds, and 47 percent said they have contacted their CPA post-Wayfair, asking, “What does this all mean?”

Real Costs in Treasure State

Your business is located in one of the non-sales-tax states. Think you’re exempt from the effects of Wayfair? Not so fast.

Remote sellers in Montana are looking at real costs—about $6,000 per company plus 2 percent on whatever taxes they have to collect—just on the “software side of things” said Patrick Claytor, CEO of Big Sky Fulfillment in Missoula, Mont. The accounting for taxes on sales in other states is going to be a real headache for business that haven’t had to worry about it before.

Claytor told Bloomberg Tax there are also issues for companies with states attempting to force income taxes once a business is registered as a seller in that state. “The basis of all of this is states being able to regulate entities which are not within their jurisdiction,” he said. “‘Fairness’ has been said, but brick and mortar stores are not required to verify the residency of any person shopping in the store and remitting taxes back to the state of residency.”

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