NetChoice on New Internet Sales Taxes in Tennessee

Carl Szabo

December 21, 2016

Below is testimony from Carl Szabo, Senior Policy Counsel with NetChoice, stating opposition to the Tennessee Department of Revenue Proposed Regulation 1320-05-01-.63; 1320-05-01-.129 – Creating a New Tax Rule. The testimony was given on December 14, 2016 and it can also be found online here.

We ask you to reject the Department of Revenue’s Regulation 1320-05-01-.63; 1320-05-01-.129 (“Rule”) as it creates costs, burdens, and new taxes on Tennessee citizens.

This Rule’s problems began with its introduction and will continue through the expected legal battles. And if the Rule were to survive constitutional challenges, it would impose new burdens on your businesses and citizens.

First, consider problems created by the proposal of this Rule and its anticipated legal challenges:

Upon introduction of the Rule:

  • The Rule is an overreach of executive branch authority
  • Encourages revenue departments in other states to impose similar burdens on Tennessee businesses

During Legal Challenges to the Rule:

  • Will not go into effect for several years, if ever
  • Will cost Tennessee taxpayers in attorney’s fees and court costs
  • May be rendered irrelevant by other state lawsuits or Congressional action

Second, if the Rule survives court challenges, it would:

  • Reduce the ability of Tennessee to protect its businesses from burdens imposed by other states
  • Rely on new revenue extracted from Tennessee residents – not from out-of-state businesses
  • Will generate only minimal new tax revenue
  • Establish a new tax regime that is anything but equal, consistent, or fair

A majority of Tennesseans see this Rule as a new tax

NetChoice conducted a poll of Tennesseans1 this month and found that:

  • Only 21 percent were inclined to support the proposed tax rule
  • 56 percent consider the new rule a statewide tax increase
  • 46 percent think it will adversely affect Tennessee businesses

We found that 69% of your constituents think the current online sales tax collection process is working just fine — where only companies that have physical presence in the Volunteer State must collect state tax from residents.

The Rule is likely to bring burdens on Tennessee businesses from other states

Just by proposing this Rule, Tennessee created a dangerous precedent for other state revenue departments to follow. While the Tennessee Rule would apply only to remote sellers, it encourages other states to create similar rules that would impact Tennessee sellers. We call this the “boomerang effect” of the new tax Rule.

Executive Overreach

The Tennessee legislature did not propose, consider, or enact this Rule; it came entirely from the state’s executive branch. This usurping of power by the Department of Revenue sets a dangerous precedent for the Department’s ability to expand and create new taxes without express authorization from the legislature.

Going back to the boomerang effect, these new executive branch powers could encourage other states’ executive branches to follow Tennessee and unilaterally create new tax rules that impact Tennessee’s businesses.

No revenue would be generated from the Rule for several years, if ever. And the Rule fritters away tax dollars on an unnecessary lawsuit

The Rule will generate no revenue for the state unless and until the US Supreme Court overturns a century of established federal doctrine. In fact, Commissioner David Gerregano stated that the intent of this Rule is to engage the state in a lawsuit.2

Following enactment of the Rule, groups like NetChoice and ACMA intend to seek an injunction and challenge the Rule (the attached letter explains the intent of NetChoice and ACMA to bring a suit).

Immediate injunction of the Rule is likely, since even the state of South Dakota3 has stipulated that its “Kill Quill” law is unconstitutional. 

Once Tennessee’s Rule is enjoined, Tennessee could not enforce the rule. At the same time, Tennessee would be spending state funds trying to defend the Rule in court until it ultimately comes before the US Supreme Court.

If the US Supreme Court chooses not to hear the case, the existing Quill standard would remain in effect and Tennessee’s rule could not be enforced.

It is likely that the US Supreme Court will have already decided on the Quill question even before the Tennessee Rule makes its way through the courts. Already courts are reviewing the legality of a similar law in South Dakota4 and regulation in Alabama.5 This Rule acts as a pile-on with no material benefit to Tennessee while still costing the state.

A “Win” for the Rule erodes state sovereignty

As the Department Commissioner has said, the purpose of the New Tax Rule is to overturn the current Quill standard6 of physical presence. Today, the Quill standard stops tax collectors in California, New York, or Illinois from harassing Tennessee businesses that have no physical presence in those states.

But a “Win” for this Rule would remove the protections of Quill and reduce the ability of Tennessee to protect its businesses from tax collectors across the country, forcing Tennessee businesses to travel across the country to defend themselves in foreign state courts.

State tax collectors would be the true “winners” if this Rule succeeds in overturning the Quill standard. Tennessee citizens and Tennessee businesses would be the losers.

No new money would come into Tennessee

Even if the Rule survived a Supreme Court challenge, no new money would flow into Tennessee. Any sales taxes collected as the result of this Rule would come from the pockets of Tennessee residents — not from out-of- state businesses.

Minimal tax revenue would be generated from the Rule

Today, 19 of the top 20 e-retailers already collect for Tennessee. That includes Amazon, who accounted for 41% of online sales in Q1 2016.

Some Rule advocates are citing a 2009 University of Tennessee8 study to suggest a large windfall of uncollected sales taxes. However, the UT study is woefully out-of-date and fails to account for existing tax collection by Amazon and several other large e-retailers.

So, the question, assuming the Rule survives in court, is whether the minimal tax revenue extracted from Tennessee citizens is enough to justify the legal costs, executive branch overreach, and erosion of state sovereignty?

The Rule creates a new tax that is not equal, consistent, or fair

Tax advocates justify the Rule by saying it “creates a level playing field for all sellers.” However, the Rule would foist disproportionate collection burdens on catalog and online retailers. When a customer enters a gift shop at Nashville International Airport, the store does not ask for that customer’s home address so she can look-up the tax rate and later remit the tax to the customer’s home state.

But the Rule would impose the burden of look-up, tax filing, and audit — if the sale occurs through a phone call, mail order, or the internet. We fail to see how that would be equal, consistent, or fair.

As you can see there are many reasons for the Joint Committee to reject this Rule.

We ask that you reject the Rule and protect Tennessee businesses from out-of-state tax auditors, protect Tennessee citizens from a new tax, and avoid costly litigation the state is likely to lose.

Thank you for considering our views and please let us know if we can provide further information. 


Carl Szabo
Senior Policy Counsel, NetChoice

is a trade association of e-Commerce and online businesses.