Following a series of negotiations with Amazon.com last year regarding the retailer’s plan to build two of its distribution centers in the state, the Tennessee legislature last week passed House Bill 2370/Senate Bill 2232, a new sales tax law that establishes the requirements for determining whether affiliates have physical presence in Tennessee sufficient to establish nexus with the state for sales tax purposes.
The newly passed legislation provides that certain activities of a business’ affiliates in Tennessee, including the sale of tangible personal property for resale and other non-retail activities, may not be considered in determining whether the business has a physical presence in Tennessee sufficient to establish nexus for sales and use tax purposes. This provision would not apply, however, to an affiliate that performs, within Tennessee, the following retail activities on behalf of a business: (1) operates a retail store or kiosk at which customers make purchases, return or exchange items or place orders of tangible personal property; or (2) uses personnel to solicit sales of tangible personal property.
The new law only applies to a business having an affiliate that: (1) places a distribution facility in service after January 1, 2011, and before January 1, 2014; (2) makes, or causes to be made, a capital investment of at least $350 million after January 1, 2011, and before January 1, 2014; and (3) creates at least 3,500 qualified jobs after January 1, 2011, and before January 1, 2014. Qualified jobs are defined as permanent positions that provide an individual with employment for 12 consecutive months for at least 37.5 hours per week, with minimum health care benefits under current Tennessee law.
Notably, Tennessee’s new affiliate law will be repealed as of the earliest of: January 1, 2014; the failure of the business’s affiliate or the third party to meet the requirements of the law; or the effective date of a law enacted by the U.S. Congress that authorizes Tennessee to require that its sales tax be collected and remitted even if the taxpayer does not have substantial nexus with that state. The new law will only apply if the business entered into a written agreement pursuant to which it and its retail affiliates would collect state sales and use tax beginning immediately after the earliest of these events.
These provisions afford Internet retailers and specifically, Amazon.com, who meet the above criteria to avoid collecting sales tax on purchases made to Tennessee residents until January 1, 2014. After January 1, 2014, all companies that meet the affiliate definition will be required to collect and remit sales tax. In sum, the legislation ensures that if a federal sales tax nexus bill does not pass by 2014, Amazon.com—and possibly other online retailers—will be required to collect sales tax.
In addition to the foregoing provisions, the law also contains a new notice requirement. A person or business that does not establish nexus with the state under the new law, but that still makes online sales to Tennessee residents must notify the purchaser via email that the purchaser may owe Tennessee use tax on the total sales price of the transaction and must include a link in the email to the Department of Revenue’s website that would allow the purchaser to pay the use tax. Additionally, sellers must provide a year-end statement of goods purchased and delivered into Tennessee by February 1st of each year (and within 60 days after the enactment date of this law for purchases made in 2011).