• The Tennessee Department of Revenue has issued a notice stating it will begin enforcing economic nexus standards October 1, 2019.
  • Out-of-state dealers with no physical presence in Tennessee will have to begin collecting tax on Tennessee sales if the dealer has $500,000 in retail sales to Tennessee customers over the last year.
  • Other states continue to enact their own economic nexus policies in the wake of the Wayfair

Last week, the Tennessee Department of Revenue issued Notice #19-04 and Notice #19-05, which lifted the temporary hold on enforcement of its economic nexus threshold for sales and use tax. The economic nexus rule, enacted by Tenn Comp. R. and Regs. 1320-05-01-.129 or “Rule 129” will go into effect on October 1, 2019.

Rule 129 will force out-of-state dealers with no physical presence in Tennessee to register and begin collecting sales tax if they have made over $500,000 in retail sales to Tennessee customers over the previous year. This means sales for resale will not be counted towards the threshold, but otherwise exempt retail sales will be. Additionally, out-of-state dealers will no longer be able to use the uniform local rate option of 2.25% and must apply the specific local sales tax rate in effect for the city or county jurisdiction into which the sale was shipped or delivered. Under Rule 129, companies must register and begin collecting sales tax on the first day of the third month after it breaks the threshold. Rule 129 will not be applied retroactively. Dealers with no physical presence prior to October 1, 2019, will not be assessed for any period prior to October 1.

Prior to the enactment of Rule 129, the 1992 Supreme Court case Quill Corp. v. North Dakota barred states from collecting sales and use tax from sellers who did not have a physical presence (e.g. employees or property) in their state. With the rise of e-commerce, states became more aggressive in fighting the Quill decision and began establishing their own economic nexus rules. Tennessee adopted its economic nexus rule in 2016, but an injunction set by litigation barred its enforcement. Shortly after, Tennessee also passed legislation specifically delaying enforcement of the rule until the question of economic nexus was officially decided by the courts. Last June, the landmark Supreme Court Case Wayfair v. South Dakota struck down the physical presence requirement for sales and use tax collection set by Quill.

Since Wayfair was decided, many states have moved to enact economic thresholds for sales and use tax. In August 2018, Tennessee issued Notice #18-11, which acknowledged the Wayfair decision but reiterated that its own economic nexus standard was not currently being enforced. The most recent notices, however, will officially begin the era of economic nexus for sales tax in Tennessee.