Living on a Prayer! Economic Nexus Sneaks Out of Legislature Into Tennessee Courts

It was. Then, it wasn't, and then it was again. That's about the only way to describe the last couple of days for the Department of Revenue's Economic Nexus Rule in Tennessee.

The omnibus rules bill had been sitting around all legislative session like a chunk of kryptonite to Superman. The bill which held the fate of over 300 rules and regulations of the Tennessee state government also had one little smart bomb tucked away in there ... ticking ... and ticking ... and finally it went off yesterday when an amendment was introduced and passed carving out the Tennessee sales tax economic nexus rule from the omnibus bill. It was over ... or so we thought. Recognizing the urgency of the issue, the bill was immediately referred back to committee with economic nexus on life support.

The regulation had finally made it into an amendment, an amendment that could mean the collection of over $160 million in use tax dollars from Tennessee consumers ... or not. While the hope had always been that it would eek its way out of the legislature, it wasn't going to be that easy.

So today the legislative sponsors went into damage control and crafted an amendment that would withdraw Amendment 1, which put the silver bullet in economic nexus and would instead breath life back into the rule but put it in a holding pattern waiting for a court decision. Under Amendment 5, the regulation can only be enforced following a court decision.

The department of revenue shall be prohibited from collecting any internet sales or use taxes authorized under department rule 1320-05-01-.129(2) and permitted under a ruling of any court, until such court's ruling has been fully reviewed and rule 1320-05-01.129(2) has been approved by the government operations committees of the house of representatives
and the senate pursuant to § 4-5-226.

The hook that made this happen was that Amendment 1 would have defeated the rule, and there would have been no rule for Netchoice and the Catalog Marketer's Association to challenge. No rule ... no lawsuit, and with that little epiphany, the legislature found a way to save face, allow the rule to survive but withhold the right to ultimately approve the rule if it withstands constitutional scrutiny.

If you are keeping score at home, the economic nexus rule was approved, but pursuant to an agreement of the Department of Revenue and now the enactment of legislature, it cannot be enforced against consumers. The Department will not turn away the tax dollars if voluntarily remitted, but there is no requirement for online retailers to collect the tax.

This creates a couple of issues:

1. Did the amendment really save the rule? Arguably, the amendment did not because there is no legislative authority to enforce the rule. Based on that, is there really a rule in the first place that can be challenged in Court? I believe a pretty good argument can be made that the answer to that question is ... NO.

2. For those who voluntarily come forward, the Department has said that it will not audit or assess those taxpayers for prior periods. Notice 17-01. There may be some incentive to come forward and get what is in essence amnesty. Worst case scenario, online retailers do not have to collect sales tax in the interim, and there is amnesty for earlier periods, so you just start collecting when the court decision is final. And, if the State loses, there is no requirement to collect the tax, and the online retailer has amnesty. The Notice does not seem to limit the amnesty to whether the state wins or loses, so coming forward just to register may be a no lose proposition.

Ya know?