Haslam's proposed sales-tax rule on internet retailers survives first legislative encounter

Tennessee Governor Bill Haslam talks about education and his budget to the editorial board at the Times Free Press.
Tennessee Governor Bill Haslam talks about education and his budget to the editorial board at the Times Free Press.
photo Tennessee Governor Bill Haslam talks about education and his budget to the editorial board at the Times Free Press.

NASHVILLE - Gov. Bill Haslam's proposed rule requiring out-of-state internet retailers to collect sales tax from their Tennessee customers eked by its first test Thursday in a key legislative panel.

Opponents' efforts to stick the proposal with a "negative recommendation" failed in the Joint Government Operations Committee.

Instead, it came out with no recommendation at all.

While hardly a ringing endorsement, it nonetheless spared Haslam an embarrassing stumble coming out of the gate and also suggests a somewhat smoother path for the rule's continued progress through the 110th General Assembly that begins Jan. 10.

The rule now becomes part of an omnibus bill covering proposed rules across state government. That forces opponents to seek to strip it from an omnibus rules bill in respective House and Senate Government Operation Committees.

And then get they'll have to get the stripper amendment approved on the House and Senate floors to boot.

Haslam wants the tax rule so Tennessee can join Alabama and South Dakota, which have enacted similar laws or rules to compel out-of-state internet retailers like eBay and OverStock.com as well as catalog companies to collect sales taxes.

In-state retailers, which have a physical presence in Tennessee in the form of stores, offices or warehouses, are required to collect state sales taxes which are set at 7 percent and local option levies of up to 2.75 percent.

Haslam has said he knows extending the requirements to sellers with no physical presence in Tennessee will be challenged in federal court. In fact, that's what he and a number of state-based retailers want.

It's all part of an effort by states to force the U.S. Supreme Court to revisit its 1992 Quill Corp. v. North Dakota ruling. Citing the U.S. Constitution's commerce clause, justices held almost a quarter-century ago that businesses must have a physical presence in a state before they can be compelled to collect state and local sales taxes from "remote sellers."

The high court said Congress needed to address the problem. Since then, however, Congress has done nothing. Meanwhile, internet-based commerce has exploded. In 2015, Supreme Court Justice Anthony Kennedy said in an opinion on a somewhat related matter that he would welcome a challenge to the 1992 ruling in light of congressional inaction.

Many retail chain stores and a number of smaller retailers in Tennessee say the current situation puts them at a competitive disadvantage against out-of-state retailers who don't have to collect the nearly 10 percent in taxes if they have no physical presence in the state.

"It is not appropriate for one retailer to gain an advantage over another in not collecting a government tax," state Finance Commissioner Larry Martin told committee members on Thursday. "But today that is what is going on in Tennessee and across the nation.

The Department of Revenue's proposed rule, which would apply to out-of-state internet retailers and catalog sellers with sales exceeding $500,000 annually. That is estimated to generate an additional $160 million in revenue for the state and about $59 million for local governments.

Lobbyists, executives and small business owners made their respective cases in the joint legislative panel.

A one-time small business owner and Senate Government Operations Committee member, Sen. Kerry Roberts, R-Springfield, described his disadvantage when operating a bicycle shop in having to compete against out-of-state companies that didn't have to collect Tennessee sales tax.

It gave them a nearly 10 percent price advantage and often killed his ability to turn a 5 percent profit, he said. Roberts eventually closed his business.

Several lawmakers questioned the proposal, saying that instead of trying to move the issue through a rules change, Haslam should have simply had a bill introduced. It's a major policy change, they argued.

Senate Government Operations Committee Chairman Mike Bell, R-Riceville, said "it seems to me that policy should be handled by the Legislature."

Steve Roth, general counsel for Knoxville-based Jewelry Television, said the proposed rule "creates an illusion we're solving the problem."

It's not, argued Roth, adding retailers "won't be lining up to pay this tax."

He said while Jewelry Television collect sales taxes on items sold to Tennesseans, the company and its counterparts here could be subject to retaliatory laws or rules from other states.

Roth and Carl Szabo, senior policy council for NetChoice, an e-commerce advocacy and lobby group, also told the panel it was take at least six years to get a case before the Supreme Court.

The negative recommendation motion offered by Rep. Mike Stewart, D-Nashville, failed among House members on the joint panel on a voice vote. It failed among senators with two voting no and four others, including Bell, abstaining.

Still, Bell noted later that while the usual options for the panels are a positive, negative or neutral recommendation on a rule, the motion to move it out came with no recommendation at all.

"The discussion will continue," he predicted. "The action that was taken today may very well not be the final action on this."

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