Tennessee Online Retailer Rule Sparks First Challenge

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By Andrew M. Ballard

A recently issued Tennessee rule requiring the collection and remittance of sales taxes by large online retailers has been administratively challenged by NetChoice and the American Catalog Mailers Association.

According to George S. Isaacson, a partner with Brann & Isaacson in Lewiston, Maine, he and other attorneys filed a petition for declaratory order with the Department of Revenue on behalf of the American Catalog Mailers Association (ACMA) and NetChoice, an association of e-commerce businesses. In that petition, dated Jan. 27, the groups argue that the nexus rule (Tenn. Code Ann. § 1320-05-01-.129(2)) is unconstitutional and unenforceable.

Kelly Cortesi, the DOR’s director of communications in Nashville, told Bloomberg BNA Feb. 8 that the department is currently reviewing the petition and has 60 days to decide whether to hold a hearing on the issue.

If the DOR declines to hold a hearing, the petitioner may immediately pursue their challenge in state chancery court, she said.

ACMA and Net Choice also have challenged South Dakota’s new remote retailer tax regime.

Legislature to Consider

The regulations at issue require remote sellers with at least $500,000 in annual sales to register by March 1 and begin remitting taxes by July 1.

Tennessee’s Legislature also is considering the rules this session as part of omnibus bills S.B. 53/H.B. 0261, which remain at the committee stage. In December, the Joint Government Operations Committee rejected a motion to give a negative recommendation to the rulemaking.

The rules have drawn some criticism for the likely cost of compliance for affected retailers, the possibility of retaliation by other states and the expense of likely litigation. Critics also argue that the Legislature, not the DOR, should have enacted the regime.

‘Substantial Nexus.’

In their Jan. 27 petition, the ACMA and NetChoice present arguments similar to those they submitted in comments on the proposed regulations last fall.

The petitioners claim that the rule is contrary to the “substantial nexus” requirement for state sales and use taxes, as set out in the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota. Tennessee must follow existing precedent until such time as the court reverses existing case law, the groups argued.

Therefore, ACMA and NetChoice claim, the rules are unconstitutional and unenforceable.

With the petition, Tennessee joins Alabama and South Dakota as states with active challenges over newly enacted remote seller regimes. Like Tennessee, Alabama enacted its new regime administratively.

The 1992 Quill rule also is under direct attack in other states, which have enacted a flurry of new rules and laws to capture more revenue from online retailers. Once the Tennessee DOR begins to enforce the new regulations, many predict that litigation will likely follow.

Under Quill, a state may only collect sales and use taxes from businesses that have a physical presence within its borders.

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

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

The ACMA and NetChoice petition is at http://src.bna.com/l5JText of Tennessee's online retailer rule is at http://src.bna.com/jlG

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