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. These rules have been a matter of some debate in Tennessee, as well as in other states and at the federal level. More particularly, earlier this year, Tennessee enacted special legislation aimed at requiring Amazon.com to start collecting sales tax in Tennessee by 2014.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Tennessee. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
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, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
While the physical-presence rule may seem clear, in the case of Tennessee, as well as quite a few other states, it is necessary to emphasize that in Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was based on the Commerce Clause of the Constitution, which—as described by the Supreme Court—means physical presence. However, many states, including Tennessee, have used the term “nexus” rather than “physical presence” in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
For initial guidance on how physical presence is defined specifically under Tennessee law, you can look at Section 67-6-102(25) 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. (Tennessee’s statutes are available online through a web portal maintained by LexisNexis; it is not possible to provide direct links to individual sections of the Code in this website.)
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:
- the section headed “Who Must Have a Sales or Use Tax Registration?” which states “Retailers from other states that maintain a physical location in Tennessee, whether temporary or permanent, must also hold a Certificate of Registration”
- the section headed “Out-of-state Retailers,” which (a) states that out-of-state retailers must register to collect sales tax if they have “nexus” in Tennessee; (b) presents a list of items constituting “nexus” that are quite similar to the items in bulleted list presented above (and includes “Hav[ing] any other physical presence in Tennessee”); and (c) states that “Mail-order companies that do not have a physical presence, either permanent or temporary, cannot be held responsible for collecting and remitting sales or use tax”
In addition, you can check the DOR’s Sales and Use Tax FAQ page. At one point, the page states “If an out-of-state business, such as a catalog company, has a physical presence, or nexus, in Tennessee (a business, warehouse, sales representative or agency relationship), then that business is required to register to collect sales or use tax on merchandise delivered to a Tennessee customer.” At another point, 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.
As you might expect, 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. In this regard, note that the DOR Sales and Use Tax FAQ page also states “If [an] out-of-state business does not have nexus in Tennessee, the business is not required to collect Tennessee taxes.”
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.
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.
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 and Use Tax FAQ page and Sales and Use Tax Guide, each of which has a section on the sales tax holiday.
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,” among other things, “Purchasing a product from a mail-order catalog or on the Internet and paying no sales or use tax.” Similar statements regarding Internet purchases appear on the DOR’s Sales and Use Tax FAQ page.
Tennessee’s Special Agreement and Law for Amazon.com
Tennessee legislature enacted a new law that has the effect of requiring the major Internet retailer Amazon.com to start collecting and remitting Tennessee sales tax by 2014. The law, which does not mention Amazon by name, is substantially different from laws that have been considered, and sometimes enacted, in various other states, and which are commonly known 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, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.
In essence, the Tennessee law is a legislative counterpart to the Governor’s negotiated agreement with Amazon. The law applies to a “person” (which, in this context, can mean a business entity) with an “affiliate” that places one or more distribution facilities into service in Tennessee before January 1, 2014, makes a capital investment in Tennessee of at least 350 million dollars, and creates in Tennessee at least 3,500 jobs that are maintained through January 1, 2016—and only if the “person” enters into a written agreement that “it” and its affiliates will beginning collecting sales and use tax by January 1, 2014. These conditions effectively limit the laws application to Amazon.com. Following passage of the law earlier this year, Amazon began sending notices to Tennessee customers that they may owe use tax on Amazon purchases—the notices were another requirement of the law.
The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of debate in Tennessee, as well as in other states and at the federal level. However, at this time—and putting aside the special Amazon legislation—Tennessee has not enacted any law that would require out-of-state retailers to collect sales tax from Tennessee customers.
In Tennessee, the physical-presence rule continues to apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Tennessee Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.