Tennessee's online sales tax rule draws legal challenge by catalog mailers, e-commerce groups

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.

NASHVILLE - Associations for online retailers and catalog companies have filed a legal challenge to Tennessee's rule that seeks to compel out-of-state companies with no physical presence here to collect state sales taxes from in-state customers.

Attorneys for American Catalog Mailers and NetChoice, an association of e-commerce retailers, filed the lawsuit Thursday in Davidson County Chancery Court, saying the state's rule runs afoul of a 1992 U.S. Supreme Court ruling limiting states' interstate taxing powers under the U.S. Constitution's Commerce Clause.

The complaint seeks a declaratory judgment against the Tennessee Department of Revenue and Revenue Commissioner David Gerregano over the department's Rule 129, which was adopted last year.

In the complaint, the American Catalog Mailers and NetChoice charge the rule violates the U.S. Supreme Court's Quill Corp. ruling, which held that states could not compel out-of-state retailers with no "nexus" - that is a physical presence such as a store or office - to collect sales taxes on behalf of state or local governments on goods and services sold within that state.

"On its face, Rule 129 runs afoul of the Quill physical presence standard," the suit says. "By the plain terms of the rule, an out-of-state seller may be required to collect and remit Tennessee sales and use tax based solely on soliciting sales from outside of Tennessee and making sales in excess of the statutory minimum of $500,000."

The suit notes "no physical presence is required. As a result, Rule 129 is unconstitutional."

The Supreme Court's Quill decision was the second ruling on the issue of out-of-state sales. It came years before the explosion of internet commerce, which has impacted most states, including Tennessee, that have sales taxes.

Tennessee Attorney General Herbert Slatery's spokeman, Harlow B. Sumerford, said Friday that "this lawsuit is not unexpected. We have been in contact with the Department of Revenue for quite some time on this issue and are prepared to defend the rule."

Republican Gov. Bill Haslam and state officials have been expecting, even welcoming, a legal challenge of the rule. The Haslam administration joined other states in pushing legislation or departmental rules aimed at the internet companies, recognizing they would be challenged in court.

Their purpose is forcing the issue back into the court system and ultimately back before the Supreme Court.

That effort began after Supreme Court Justice Anthony Kennedy said in a somewhat related ruling a few years ago that he believed it time to revisit the Quill decision's impact in the age of internet commerce, especially in light of congressional refusal to address the issue.

South Dakota has enacted a similar policy and catalog, and e-commerce associations have sued the state.

Tennessee's rule began requiring out-of-state retailers with sales of $500,000 or more to begin registering with the state on March 1. While the Revenue Department's rule is technically in effect, it still is in the General Assembly as part of an "omnibus" bill that authorizes any number of different rules stretching across state government.

But unless state lawmakers specifically strip the new e-commerce rule out of the omnibus bill, it will go into effect unless blocked by a judge.

Back in February, Haslam revealed to reporters that parties, whom he didn't identify but presumably are the same trade groups who've now filed the court challenge, fought the Revenue Department's rule through the agency's administrative process.

Haslam said in February the challenge was "not unexpected. Our hope is that the courts will level the playing field for the brick and mortar businesses in Tennessee."

While the rise of e-commerce has dented government budgets in Tennessee and other states, many traditional brick-and-mortar retailers have been put back on their heels. The companies complain they are at a government-imposed competitive disadvantage.

That's especially true in Tennessee, which has one of the highest local and state combined sales tax rates among the 50 states. Tennessee's state sales tax is 7 percent, while local government option taxes can add up to 2.75 percent more.

Contact Andy Sher at asher@timesfreepress.com or 615-255-0550. Follow him on Twitter @AndySher1

Upcoming Events