Businesses Selling to Out-of-State Customers Face New Sales Tax Rules
Historically, sales tax nexus was determined based on the amount of physical connection an out-of-state seller had with the state. Over time, some states have adopted provisions that have blurred the lines regarding how much physical presence is actually needed to trigger nexus (e.g., Amazon laws).
A few states have further expanded their nexus provisions to a standard that requires no physical presence. This type of nexus is often referred to as economic nexus. Under these new provisions, an out-of-state seller is deemed to have substantial nexus as a result of the economic benefits the seller receives in the state (e.g., sales to customers located in the state). The most recent state to enact an economic nexus standard is Tennessee.
New regulation impacts dealers with sales in Tennessee
Tennessee has recently issued Rule 1320-05-01-.129, which adopts an economic nexus provision for sales and use tax purposes. This regulation became effective on Jan. 1, 2017, but is awaiting approval by the legislature. To avoid expiration, this regulation must be approved by July 1, 2017.
Under the new regulation, an out-of-state dealer is presumed to have substantial nexus with Tennessee if (1) the dealer engages in “regular or systematic solicitation of Tennessee consumers through any means,” and (2) has more than $500,000 of sales to Tennessee consumers in the past 12 months.
The Tennessee Department of Revenue has issued a notice to taxpayers indicating that dealers should register for sales and use tax by March 1, 2017, and begin collecting and remitting Tennessee sales tax by July 1, 2017.
Other states’ economic nexus provisions
Alabama, South Dakota and Vermont have also enacted similar economic nexus provisions. Below is a summary for each state.
Alabama (Regulation: 810-6-2.90.03) -- Effective: Jan. 1, 2016; economic benefit threshold: $250,000 per year based on previous calendar year.
South Dakota (Statute: Section 10-64-2) -- Effective: May 1, 2016, but there is a temporary injunction pending litigation; economic benefit threshold: $100,000 in the current or previous calendar year.
Vermont (Statute: Section 9701(9)(F)) -- Effective: Later of July 1, 2016 or a court decision/federal legislation to overturn Quill vs. North Dakota; economic benefit threshold: $100,000 or 200 sales transactions in the previous 12 months.
What you need to know
Presumably, the Tennessee legislature will approve the new nexus statute and out-of-state sellers should evaluate their business activities and sales into Tennessee to decide whether economic nexus has been triggered.
Alabama’s regulation has been in effect for about a year, and despite current litigation challenging the regulation, it appears that the state continues to enforce this rule. As such, out-of-state sellers should evaluate their business activities and sales into Alabama to decide whether economic nexus has been triggered.
At this time, there is no requirement to register or collect sales tax in South Dakota or Vermont. Out-of-state sellers should continue to monitor current litigation on the economic nexus issue and the impact on these states.
Out-of-state sellers should also keep in mind that these sales tax nexus provisions could impact other business tax requirements. For example, in Tennessee, out-of-state sellers may also be required to file a business tax return.