How Tennessee’s rule-making process works:
+ The Department of Revenue filed the Notice of Rulemaking Hearing on June 16 with Tennessee Secretary of State Tre Hargett.
+ A public rulemaking hearing will be held Aug. 8.
+ Afterward, the revenue department will 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.
+ The rule would become effective 90 days later. During that period, the state House and Senate’s Government Operations Committees will review the rule.
NASHVILLE — Gov. Bill Haslam wants Tennessee to join a growing group of states seeking to force either Congress or the U.S. Supreme Court to revisit rulings preventing collection of sales taxes from out-of-state online retailers.
State Department of Revenue officials will hold a rulemaking hearing in August on a proposed rule that administration officials hope will tear down that barrier and let the tax dollars roll in.
The rule would require out-of-state online companies with more than $500,000 a year in Tennessee sales to collect and remit sales taxes to the state starting July 1, 2017.
Adopting the rule is a multistep process. If adopted, it's virtually certain to be challenged in court. And that's the primary objective of the strategy being pushed by states like Alabama, South Dakota and now Tennessee.
At least a dozen states are pushing a patchwork of laws or rules they hope will pressure Congress to act or, more likely, force the issue back before the Supreme Court.
"The governor has been out front on this issue and trying to get something through Congress," Haslam press secretary Jennifer Donnals told the Times Free Press in an email.
If Tennessee is successful, Donnals added, "we would also look at reductions on the sales tax on food to be as cost neutral as possible."
At issue are two Supreme Court rulings dealing with "remote" or out-of-state mail order and catalog companies. One is the 1967 National Bellas Hess v. Department of Revenue decision. The other is 1992's Quill Corp. v. North Dakota ruling.
Both held that states can only compel companies with an in-state physical presence, such as a store, office or warehouse, to collect sales taxes from customers. Justices have said collecting sales taxes for multiple states and thousands of local jurisdictions would simply be too difficult, a burden on interstate commerce.
POLL: Should internet retailers have to collect sales tax?
In the Quill ruling, justices said it's up to Congress to address the issue. But that hasn't happened. A bill passed the U.S. Senate in 2013 but went nowhere in the House.
States are making the new push after Supreme Court Justice Anthony Kennedy wrote last year regarding a Colorado case that "dramatic technological and social changes" since 1992 bolstered states' arguments they be allowed to collect the taxes. He added that "the legal system should find an appropriate case" for the court to reconsider the Quill ruling.
Meanwhile, an uneven playing field has bled business from many traditional brick-and-mortar stores, which do have to collect sales tax.
Tennessee revenue officials estimate a loss of $300 million to $450 million in sales tax collections annually. The National Conference of State Legislatures estimates states collectively lost out on $23.3 billion in 2012.
"Tennessee is a sales tax-driven state, and we have to be fair to our local businesses," state Revenue Commissioner Richard Roberts said by email.
Roberts called the status quo "fundamentally unfair" to local retailers. "Just this past year more Americans shopped online over the Thanksgiving-Black Friday weekend than went to stores," he said.
He also said the process will take a year or two to play out, "and dependent on how the process goes or any action from Washington, ultimately this is probably resolved in the courts."
Tennessee has a 7 percent sales and use tax (5 percent on retail food sales). Local governments can levy up to 2.75 percent on top of that. Sales taxes account for 55 cents of every tax dollar Tennessee collects.
The e-commerce industry vehemently opposes the states' actions.
After South Dakota passed a law similar to the proposed Tennessee rule, requiring "remote" sellers to begin collecting sales taxes, industry groups NetChoice and the American Catalog Mailers Association filed suit in a South Dakota state court.
"South Dakota is showing wanton disregard for established Supreme Court precedent," Hamilton Davison, the ACMA's president and executive director, said in an April statement.
Steve DelBianco, executive director of NetChoice, said the law imposes "unconstitutional and unworkable burdens on remote sellers" and added, "Left unchecked, this misguided tax law could set the court for enormous tax and administrative burdens on businesses across the country."
Though proponents say new software can handle addressing multi-taxing jurisdictions' rates, DelBianco said it can be hugely expensive for small businesses.
However, Roland Myers, president and CEO of the Tennessee Retail Association of brick-and-mortar retailers, lauded Tennessee's proposed rule as "a step in the right direction."
He said the group believes "all retailers doing business in Tennessee, regardless of their location," should have to collect and remit state sales taxes, which pay for public education, law enforcement, health care and other needs.
Jason Brewer with the Arlington, Va.-based Retail Industry Leaders Association, said Tennessee's combined top tax rate of 9.75 percent gives online retailers nearly a 10 percent advantage. He said government must "take the thumb off the scale and give everybody a fair shot."
The tax tussle played out in the Tennessee General Assembly in 2011 after online retailing giant Amazon decided in 2010 to locate two giant distribution warehouses in Hamilton and Bradley counties.
Former Gov. Phil Bredesen's administration made a deal with the company that provided public incentives and said Amazon would not have to collect sales taxes even though it had a physical presence in the state.
That infuriated the Tennessee Retail Association, and state lawmakers felt the political heat. Retailers ranging from Wal-Mart to Memphis-based Auto Zone threatened court challenges, and Haslam brokered a 2012 compromise in which Amazon agreed to begin collecting sales taxes in 2014.
In exchange, Haslam agreed to join Amazon in pushing Congress to act on a national solution and require online retailers generally to collect the tax.
Testifying before a U.S. House committee in 2012, the governor said, "This discussion isn't about raising taxes or adding new taxes. This is about states having the flexibility and authority to collect taxes that are already owed by their own in-state residents. [It's] also about leveling the playing field for local brick-and-mortar businesses."
Contact Andy Sher at firstname.lastname@example.org or 615-255-0550. Follow via Twitter @AndySher1.