If you are selling goods or products online and have customers located in Tennessee, you should take time to learn about Tennessee’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Tennessee is one of several states that has adopted an Amazon law applicable to larger online sellers.
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state. However, Tennessee has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see Tennessee’s Amazon law, below).
Examples of Physical Presence
Example 1: You are operating solely out of a warehouse in Pierre, South Dakota and make a sale to a customer in Chattanooga, Tennessee—a state where your business has no physical presence: You are not required to collect sales tax from the Chattanooga customer (with the exception of sellers who fall under Tennessee’s Amazon law).
Example 2: You are operating solely out of an office in Murfreesboro, Tennessee and make a sale to a customer in Nashville, Tennessee: You are required to collect sales tax from the Nashville customer.
Example 3: After several years of operating solely out of a warehouse in Pierre, South Dakota, you open a one-room satellite office just outside of Memphis, Tennessee—a state where previously you had no physical presence. A day later, you make a sale to a customer in Knoxville, Tennessee: You are required to collect sales tax from the Knoxville customer.
Tennessee’s Amazon Law
Under a law that went into effect in 2015, larger Internet sellers with no physical presence in the state are required to collect and pay Tennessee’s sales tax under certain conditions. More specifically, an out-of-state dealer must collect sales tax from Tennessee customers if that dealer:
Similar laws have been enacted in other states; they are commonly referred to as Amazon laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws have been enacted to try to reduce this loss.
Tennessee’s Amazon law is codified at T.C.A. 67-6-520. However, you may find it easier to first look at the explanation in the Out-of-State Retailers section of the DOR’s Sales and Use Tax Guide.
Note: In 2012, the Tennessee legislature enacted a law that had the effect of requiring specifically Amazon.com to start collecting and remitting Tennessee sales tax by 2014. That law was codified as T.C.A. 67-6-515.
Physical Presence and Nexus in Tennessee
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Tennessee, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
For initial guidance on how physical presence is defined under Tennessee law, look at Section 67-6-102(23) of the Tennessee Code Annotated (T.C.A.), which provides approximately a dozen definitions for the term dealer. Particularly important are paragraphs (G) and (I). The definition in paragraph (G) refers to maintaining a place of business in the state directly or by a subsidiary.
For further guidance, you can consult several different publications from the Tennessee Department of Revenue (DOR), each of which seems to equate nexus with physical presence. First, consider reviewing the following sections of the DOR’s Sales and Use Tax Guide:
In addition, you can check the DOR’s Sales and Use Tax FAQ page. In answer to the question “What is nexus?” the page states “Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into Tennessee is liable for collecting the tax on sales in Tennessee.” Again here, the DOR seems to equate nexus with physical presence.
Under Tennessee law, certain items are exempt from sales tax, and certain purchasers may not be required to pay sales tax. Most of the important exemptions are covered, in plain English, in the DOR’s Sales and Use Tax Guide. For a more authoritative source, check out the relevant sections of the DOR’s state sales and use tax rules, which are codified as Chapter 1320-5-1 of the Tennessee Administrative Code.
Tennessee also has an annual sales tax holiday from the first Friday in August through to the following Sunday. The holiday covers such things as clothing and school supplies costing less than $100 per item, and computers costing $1500 or less. For additional information, check the DOR’s Sales Tax Holiday webpage and.Sales and Use Tax Guide.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. As the DOR’s Sales and Use Tax Guide states, use tax is normally incurred when: “Purchasing a product from a mail-order catalog or on the Internet and paying no sales or use tax.” The DOR’s Sales and Use Tax FAQ page states that use tax is due “when the user and consumer of taxable merchandise does not pay tax to the supplier.”
Proposed Federal Legislation
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses that don't fall under Tennessee's Amazon law, it is the long established physical presence rule that will apply. However, this is a contentious and evolving area of law so be sure to check in periodically with the Tennessee Department of Revenue to see if the rules have changed.
Updated: April 14, 2016