Tennessee Economic Nexus Coming July 2017

The Tennessee Department of Revenue has followed the likes of Alabama, Oklahoma, South Dakota, and Vermont by adopting a new sales and use tax rule effective July 1, 2017. Under current nexus statutes, a connection or contact in the form of substantial, frequent or continuous, physical presence within a state establishes nexus. Establishing nexus within a state determines whether an out of state business selling products into a state is liable for collecting sales or use tax on sales into that state.

Sellers are required to register with the Tennessee Department of Revenue for sales and use tax purposes by March 1, 2017; effective July 1, 2017, they must begin remitting Tennessee sales and use tax on taxable items delivered to consumers. Tennessee Rule 1320-05-01-129 states: “Out-of-state dealers who engage in the regular or systematic solicitation of consumers in this state through any means and make sales that exceed $500,000 to consumers in this state during the previous twelve-month period also have a substantial nexus with this state.”

In essence, the statute outlines what qualifies a business for nexus within the state of Tennessee. The $500,000 threshold can be attained at the end of any 12-month period; after the threshold has been met, the dealer has three months to register and being collecting taxes for remittance. The out-of-state dealer is not required to collect tax retroactively.

There are two points to be made by the growing nexus declaration in states:

1. In recent years, many states have analyzed their nexus provisions to expand their reach and mitigate the loss in tax revenue due to the booming online retail industry. A significant problem has been imposed on states due to internet sales growth; therefore, unless states can require sellers who market their products over the internet to collect sales and use taxes the states stand to lose a great deal in tax revenue.

2. If more states follow suit and begin to introduce more “modern” nexus concepts by forcing online retailers to collect and remit sales and use tax for all sales with a lesser threshold the incentive to establish an online business is substantially diminished.

There is a fine line between substantial internet sales (e.g., Amazon) that take advantage of the current tax code; and small businesses whose primary market is online sales, who as a result of this initiative, could be required to file taxes in every state if these “modern nexus concepts” continue to expand states’ reach.

The grey area with online nexus is how far legislation such as the Internet Tax Freedom Act and the Internet Tax Nondiscrimination Act will expand to protect online retailers in a rapidly expanding industry.

Tips for the Taxpayer

Stay up-to-date with state and local tax laws and regulations. If your company has sales exceeding $500,000 annually in Tennessee, make sure you are filing appropriately in states with changing nexus statutes. In an audit, the taxpayer will be responsible for the correct tax remittance. Stay current with your state, county, and city legislation. Look for planning opportunities and exemptions that might be applicable to your company.

 

Wesley Sprecher

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