Tennessee Reduces Sales Tax Nexus

Tennessee Reduces Sales Tax Nexus Threshold to $100,000 for Both Remote Sellers and Marketplace Facilitators

On June 30, 2020, Governor Bill Lee signed legislation (Public Chapter 759) reducing the remote seller sales tax nexus threshold from $500,000 to $100,000 for out-of-state dealers and marketplace facilitators. These provisions apply to dealers with no physical presence in the state of Tennessee who engage in the “regular and systematic solicitation of consumers in the state through any means” and who have “made sales that exceeded $100,000 to consumers in the state during the previous 12 month period.” Such dealers shall begin collecting and remitting by the first day of the 3^rd calendar month following the month in which this threshold is met; however, no dealer shall be required to collect tax for sales made before October 1, 2020.

The legislation conforms Tennessee to the sales threshold that was held to be constitutional by the US Supreme Court in the South Dakota v. Wayfair case in 2018 and replaces Tennessee’s previous remote seller threshold of $500,000 which had been adopted in an administrative agency rule, Rule 1320-5-1-.129. These new provisions will be codified in Tenn. Code Ann. Sec. 67-6-543. The legislation also amends the comprehensive marketplace facilitator and marketplace seller provisions that were enacted via separate legislation earlier this year (Public Chapter 646) to reduce the sales threshold from $500,000 to $100,000, as measured over the previous 12-month period.

The marketplace facilitator and marketplace seller provisions also take effect on October 1, 2020, and will be codified in Tenn. Code Ann. Sec. 67-6-501. Notably, Tennessee did not adopt for either remote sellers or marketplace facilitators/sellers the quantitative threshold of 200 or more transactions that were also held to be constitutional in the Wayfair case. In determining whether the $100,000 threshold has been met, out-of-state dealers and marketplace facilitators should include all retail sales, including exempt retail sales, but should exclude all sales for resale.

The legislation takes effect on October 1, 2020, at 12:01 a.m. The bill does not change the substantial nexus sales thresholds that are in place for other Tennessee taxes, i.e., the Franchise and Excise taxes, and the Business Tax, which remain at $500,000 of receipts from Tennessee-sourced sales.

The Tennessee Department of Revenue has issued two Important Notices, No. 20-23 (Out-of-State Dealers), and No. 20-24 (Marketplace Facilitators), explaining how these new thresholds will be implemented and administered.

Frequently Asked Questions

The TN Department of Revenue has posted Frequently Asked Questions on their website to help taxpayers navigate the new requirements. These FAQs are replicated below and are posted at https://revenue.support.tn.gov/hc/en-us/sections/360009672231-Sales-Tax-Collection-by-Marketplace-Facilitators

What is a “marketplace”?

A marketplace is a physical or electronic place, platform, or forum, including, but not limited to a store, booth, internet website, catalog, or dedicated sales software application where tangible personal property or any of the things or services subject to Tennessee sales tax are offered for sale.

Who is a “marketplace facilitator”?

A marketplace facilitator is a business, including any affiliates, that:

Agrees with a marketplace seller to facilitate the sale of the marketplace seller’s tangible personal property or services through its physical or electronic marketplace; and
Either directly or indirectly, collects the payment from the purchaser and transmits the payment to the marketplace seller.

Who is a “marketplace seller”?

A marketplace seller is a person who makes sales through any marketplace operated, owned, or controlled by a marketplace facilitator.

Who is not a “marketplace facilitator”?

The following businesses are not marketplace facilitators:

Businesses who exclusively provide advertising services;
Businesses who provide payment processing services;
Derivatives clearing organizations, designated contract markets, foreign board of trade, or swap execution facility registered with the CFTC; and
Delivery network companies.

What is a delivery network company?

A delivery network company is a business that maintains an internet website or mobile application that it uses to facilitate delivery services for the sale of local products.

What are delivery services?

Delivery services include the pickup of one or more local products from a local merchant and delivery of the local products to a customer. Delivery services do not include deliveries that require over 50 miles of travel from the local merchant to the customer.

How does a delivery network company elect to be a marketplace facilitator?

A delivery network company elects to be a marketplace facilitator by registering for sales tax with the Department. Delivery network companies who do not elect to be a marketplace facilitator are not required to register for a Tennessee sales tax account or collect Tennessee sales tax.

Collection Thresholds and Sourcing

When must a marketplace facilitator collect and remit Tennessee sales tax?

The marketplace facilitator must collect and remit Tennessee sales tax if the marketplace facilitator made or facilitated total sales to consumers in this state of $100,000 or more during the previous twelve-month period. The marketplace facilitator’s own sales are counted towards the $100,000 threshold. For purposes of applying the $100,000 threshold, marketplace facilitator should include all retail sales, including exempt retail sales, but should exclude sales for resale.

How is the $100,000 marketplace facilitator threshold calculated?

To calculate whether a marketplace facilitator meets the sales threshold, the facilitator should combine its own sales and sales it facilitated for marketplace sellers on its marketplace occurring during the previous 12-month period. If the combination of those sales exceeds $100,000, the marketplace facilitator meets the threshold. For purposes of applying the $100,000 threshold, marketplace facilitator should include all retail sales, including exempt retail sales, but should exclude sales for resale.

How are sales made through a marketplace facilitator sourced for sales tax purposes?

A marketplace facilitator must collect sales of tangible personal property based on the shipped to or delivered to address of the customer. However, sales tax on taxable services should be reported consistent with other service sourcing provisions.

Registration

When should a marketplace facilitator register and begin collecting sales and use tax?

When a previously unregistered marketplace facilitator exceeds the $100,000 threshold within a 12-month period, the marketplace facilitator is required to register and begin collecting sales and use tax on the first day of the third month following the month it meets the threshold. This amount includes sales made by the marketplace facilitator and sales the marketplace facilitator facilitated through its marketplace.

How should an unregistered marketplace facilitator register with the Department and report the sales it facilitates?

A marketplace facilitator that meets the sales threshold may register through the online Tennessee Taxpayer Access Point (TNTAP) under “Register a New Business.” A marketplace facilitator may also register with Tennessee by accessing the Streamlined Sales Tax Registration System. The marketplace facilitator should then report and remit the facilitated sales electronically using its TNTAP account.

How should a marketplace facilitator with an active Tennessee registration report its own sales and its facilitated sales?

A marketplace facilitator with an active Tennessee registration should log into its TNTAP account and create a new location ID under its sales tax account to report its facilitated sales. This location ID should be used for reporting and remitting tax the marketplace facilitator collected on facilitated sales only. The marketplace facilitator’s own sales should be reported and the tax remitted under one or more separate location ID’s, as applicable, under the same sales tax account.

Should a marketplace seller who has already registered with the Department close its tax accounts?

Beginning October 1, 2020, a marketplace seller is not required to register as a dealer if all its taxable sales are facilitated by marketplace facilitators who are the retailers for purposes of those sales. However, if it makes any sales other than those facilitated by a marketplace facilitator, for example, through its own website, it may be required to be registered. For instance, if it has a physical presence in Tennessee or its own sales exceeds the $100,000 threshold.

If a marketplace seller meets the sales threshold by combining sales made directly to Tennessee customers and sales made using various marketplace facilitators that are not registered in Tennessee, is the marketplace seller required to collect and remit?

The marketplace seller is required to collect and remit sales tax if the seller meets the $100,000 threshold for all its sales through different unregistered facilitators.

Are remote sellers who sell directly to their customers rather than through a marketplace facilitator required to register with the Department?

Remote sellers with no physical presence in this state who sell directly to Tennessee customers and have Tennessee sales in excess of $100,000 are required to register with the Department and collect tax under Tenn. Code Ann. § 67-6-543(b). Remote sellers with a physical presence in Tennessee are required to register with the Department and collect tax in the same manner as sellers with a location in this state.

Marketplace Seller and Marketplace Facilitator Coordination

Do sales made through a marketplace facilitator count as sales of an out-of-state marketplace seller in determining whether the seller must register for and collect Tennessee sales tax?

Sales made through a marketplace facilitator that is registered with the Department and collecting Tennessee sales tax do not count as sales for the purpose of determining if an out-of-state marketplace seller has a registration and collection requirement under Tenn. Code Ann. § 67-6-543(b), which requires an out-of-state seller to register and collect Tennessee sales tax once its Tennessee sales exceed $100,000.

Are there exclusions as to when a marketplace facilitator must collect and remit sales tax?

Yes, the marketplace facilitator is excluded from having to collect sales tax if it:

Demonstrates that substantially all the marketplace sellers for whom the marketplace facilitator facilitates sales are currently registered to collect Tennessee sales tax. In this case, the commissioner may waive the requirements that the marketplace facilitator collect sales tax. If a waiver is granted, sales tax must be collected by the marketplace OR
The marketplace facilitator and the marketplace seller contractually agree that the marketplace seller will collect and remit all applicable taxes and the marketplace seller:
- Has annual gross sales in the United States of over $1,000,000,000, including the gross sales of any related entities, and in the case of franchised entities, including the combined sales of all franchisees of a single franchisor;
- Provides evidence to the marketplace facilitator that it is registered in this state under 67-6-601; and
- Notifies the commissioner that the marketplace seller will collect and remit all applicable taxes under this chapter on its sales through the marketplace facilitator and is liable for failure to collect or remit applicable taxes on its sales.

How does a marketplace facilitator demonstrate to the Department that substantially all its marketplace sellers are registered and collecting with the Department?

A marketplace facilitator demonstrates that substantially all its marketplace sellers are registered and collecting through its application for waiver from the Department. A marketplace facilitator wishing to request a waiver should contact the Department at (615) 741-0035.

How should a marketplace seller notify the Department if they have a contractual agreement with a marketplace facilitator whereby the marketplace seller will collect Tennessee sales tax?

The marketplace seller should contact the Department at (615) 741-0035 to request an application for waiver if they have a contractual agreement with the marketplace facilitator whereby the marketplace seller will collect Tennessee sales tax.

Can a marketplace seller who is not located or registered in Tennessee purchase tangible personal property tax-exempt from a Tennessee drop shipper to fulfill a Tennessee sale made through a marketplace facilitator?

Out-of-state marketplace sellers who are not required to register in Tennessee may purchase tangible personal property from a Tennessee company to fulfill a sale facilitated through a marketplace without paying sales tax by issuing the seller a Streamlined Certificate of Exemption. Such taxpayers should complete Section 5, Lines G “Resale” and L. “Other.” The seller’s out-of-state registration number should be entered on Line G and the marketplace facilitator that is collecting and remitting Tennessee sales tax should be entered on Line L.
If the marketplace seller is not required to register for tax purposes in any state, it may leave Line G blank and only complete Line L.

Content provided by LBMC State and Local Tax professional, Jay Hancock.

Jay Hancock is the LBMC State and Local Tax Practice Leader. He can be reached at 615-690-1982 or jay.hancock@lbmc.com.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.