On December 15, 2016, the Tennessee Joint Government Operations Committee held a hearing regarding the governor’s proposal to establish an economic nexus standard for the state sales tax. Under the proposal, remote sellers would be subject to collection obligations in the state if their Tennessee sales exceed $500,000. The rule would require out of state dealers to register with the DOR by 3/1/2017 and to begin collecting and remitting July 1, 2017. Testifying on behalf of the proposal were Larry Martin (Commissioner of Dept. of Finance and Administration), David Gerregano (Commissioner of Revenue); and Herbert Slatery (Attorney General). The proposed regulation was allowed to go forward with a vote of “no recommendation.”

The principal skeptic of the proposed regulation was Rep. Mike Stewart (D-Nashville), who gave the rule a negative recommendation. During the hearing, Stewart noted that the State just passed legislation addressing physical presence with respect to franchise/excise and business taxes. Rep. Stewart observed that “it would seem if we chose to use statutes to get rid of physical presence for other taxes, isn’t what we’re doing here today most appropriately done through the legislation and not a regulation?” This question came up several times during the hearing, and the Department relied on Public Chapter 789 (1988), a 1988 bill, that it says establishes an economic nexus standard for sales tax (to this, Rep. John Ragan (R- Oak Ridge) replied, “We’ve also heard that a 1992 case is old, so I’d say that about the 1988 statute too”). Chairman Mike Bell (R- Riceville) also explicitly stated that the change should be “brought as a statute rather than a rule.” Others were explicit in their belief that this is something the US Congress, and not Tennessee, should do, such as Senator Mae Beavers (R- Mt. Juliet), who said, “I think this is something that federal congress should do. I think this is completely out of our purview and we’ve wasted a lot of tax dollars here in something that is not our decision to make.” In summarizing his thoughts, Rep. Stewart said, “I want to point out that Colorado specifically suggested to the court in a brief that they use this DMA case as the vehicle to overturn Quill, and the fact that the Supreme Court didn’t suggest that, as with Streamlined Sales Tax, which never got off the ground, I’m just not sure that the landscape is really changing, and this regulation would put Tennessee at odds with most other states. We don’t do things to businesses that are unusual or strange, and I worry that this regulation would make us the odd man out. I recognize some states have deviated, but most states stick with physical presence.”

Another issue that came up in the meeting, a question raised by Rep. Ron Lollar (R-Bartlett), was whether the state would “consider giving relief to businesses in the state” upon adoption of the economic nexus standard. Mr. Martin reiterated that this was something the Governor’s office is certainly open to.

From the community, 4 people spoke, 3 against the proposal, and one in favor. Against the proposal was Steve Roth, general counsel of Jewelry Television; Carl Szabo, counsel at Net Choice; and George Gruhn, CEO of Gruhn Guitars Incorporated. In favor was Allen Dotty, co-owner of Cumberland Transit. Bill Fox, of University of Tennessee, also provided a presentation in favor of the proposal.

Finally, Rep. Ragan ended by noting that if the governor would like to proceed with legislation rather than a regulation, the opportunity exists. The filing deadline is not until February. Ragan stated that he thinks “the administration would be well served by suggesting this to some of us willing to carry it. That way we avoid the concern that it is a regulation rather than legislation.”