TN out-of-state sales tax collection rule draws lawsuit

Attorneys for American Catalog Mailers and NetChoice, an association of e-commerce retailers, filed a lawsuit Thursday in Davidson County Chancery Court challenging Tennessee’s effort to require retailers based outside the state to collect sales taxes from their Tennessee customers, reports the Times-Free Press.

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 (in 1992) 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 spokesman, 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… Their purpose is forcing the issue back into the court system and ultimately back before the Supreme Court.

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