NASHVILLE — A proposed Tennessee Revenue Department rule that would require out-of-state retailers to begin collecting Tennessee sales taxes on items sold here is pitting state-based retailers who use the internet, catalogs and cable to sell across the country against traditional brick-and-mortar stores that don't.
At a departmental hearing on the proposed rule Monday, opponents testified against the plan to require remote sellers with no physical presence in Tennessee to begin collecting sales taxes from in-state buyers in 2017.
States like Tennessee require in-state retailers to collect state and local sales taxes. But two U.S. Supreme Court decisions, the second one rendered back in 1992 before the explosion of the internet and internet commerce, bar states from requiring sellers with no physical presence in their state to collect sales taxes.
While representatives for traditional brick-and-mortars didn't testify, they filed letters in support of the proposed rule, which would require out-of-state vendors who sell to Tennesseans to charge state and local sales taxes that can hit 9.75 percent.
Opponents' chief concern is that other states may retaliate.
"While the rule appears to be targeted only at out-of-state sellers, it could actually cause a boomerang effect that would bring real and serious harm to retailers and businesses right here in Tennessee," said a group of five businessmen and businesswomen in a letter to the Department of Revenue.
They warned the Haslam administration's proposed regulation "would encourage other states to impose similar obligations on Tennessee businesses that sell to customers in other states — a situation that could lead to a chaotic patchwork of tax regulations and laws that reach beyond state borders and into Tennessee."
Among those signing the letter of opposition was Tony Kornrumpf with Hoops Enterprise LLC in Chattanooga, which sells software over the internet. Also signing the letter was Susan Hyder with Cleveland-based HyderHangout and George Gruhn of Gruhn Guitars, a Nashville-based seller of vintage guitars.
Gruhn testified against the rule in the hearing.
Meanwhile, the heads of the Tennessee Retail Association, the Tennessee Grocers & Convenience Store Association and six East Tennessee chambers of commerce, including Cleveland/Bradley County Chamber of Commerce President and CEO Gary Farlow, wrote in favor of the proposed rule.
"The sustainability of Tennessee businesses depends on fair competition and a level playing field," the officials wrote. "However, as long as out-of-state, online-only retailers are able to avoid collecting sales tax, local businesses risk losing customers and the underlying strength of our state economy is compromised."
The group argued that "online-only retailers should not have a 10 percent advantage over the local brick-and-mortar businesses that serve as the backbone of our communities and our economy."
Both letters were among many sent by pro-and-con sides over the proposed rule.
Tennessee is one of at least a dozen states that are either contemplating or have already enacted new regulations or laws aimed at remote sellers such as online, mail order and catalog companies as well as cable channels to begin collecting sales taxes on goods sold to their residents.
The two U.S. Supreme Court decisions bar states from requiring companies with no physical presence or "nexus" in a state to collect the levy based on confusion and impediments to interstate commerce because of thousands of local taxing jurisdictions.
The second decision — Quill v. North Dakota — came in 1992, before the explosion of internet commerce, and left the issue to Congress to resolve. Congress has never taken it up, and U.S. Supreme Court Justice Anthony Kennedy stated in another decision last year he thought it time to revisit Quill.
Hence the rush by states like Tennessee to pass laws or rules they know will be challenged in court. They want to get the issue back before the nation's highest court.
Tennessee officials estimate the state loses about $300 million to $450 million in sales tax collections annually due to internet commerce.
The National Conference of State Legislatures estimates states collectively lost out on $23.3 billion in 2012.
Steve Roth, vice president and general counsel for Knoxville-based Jewelry Television, argued before hearing officer Lauren Fields, the Revenue Department's associate general counsel, that if the rule goes through, "it will create yet another difficult situation for companies like JTV in other parts of the country."
Rule proponents say today's computer software make issues like navigating as many as 13,000 sales-tax jurisdictions far easier than it once was. But Roth and others argued that the software is expensive and can cost small sellers as much as $750,000.
Internet giant eBay also opposes the proposed rule.
Tennessee Revenue Commissioner Richard Roberts declined to discuss the proposed rule after Monday's hearing.
The Revenue Department will now respond to comments and then file the rule with the state attorney general's office for approval. If the attorney general approves, the rule will be filed with the secretary of state.
It would be effective 90 days later.
But during that period, the state House and Senate's government operations committees will review the rule and have the ability to block it.
Contact staff writer Andy Sher at email@example.com or 615-255-0550. Follow on Twitter @AndySher1.