Tennessee Agrees to Halt Out-of-State Sales Tax Collection Pending Outcome of Litigation Challenging Quill

By Jennifer Weidler Karpchuk

During 2016, Tennessee amended its law to join the growing list of states challenging Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (see past coverage here).  Pursuant to Tenn. Comp. R. & Regs. § 1320-05-01.129(2) (“Rule 129”), out-of-state dealers were required to register by March 1, 2017 and begin collecting sales tax by July 1, 2017.  Essentially, Rule 129 requires an out-of-state seller to collect and remit Tennessee sale and use tax based solely upon solicitation of sales from outside of Tennessee  in excess of the $500,000 statutory minimum in the state.  Thus, Rule 129 is a direct challenge to Quill, as it intentionally runs afoul of the Quill physical presence standard.

During March, a lawsuit was filed in the Davidson County Chancery Court by the American Catalog Mailers and NetChoice (an association of e-commerce retailers) challenging Rule 129 on the basis of Quill.  The complaint seeks a declaratory judgment against the Tennessee Department of Revenue regarding Rule 129.

On April 10, 2017, the Court issued an agreed Order preventing the enforcement of Rule 129 while the lawsuit is pending.  During May, the Department released Notice #17-12, which confirms that the Department will not require taxpayers to collect and remit tax pursuant to Rule 129 while the case is pending.

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