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Statement About Online Retailers and Sales Tax Collection

The Department of Revenue has recently received numerous media inquiries about certain online retailers and sales and use tax collection. State law prohibits the Department of Revenue from commenting on the activities of individual taxpayers. Therefore, the Department is very limited in the information it can provide in response to media inquiries about this matter.

Below is a list of general questions and answers about sales and use tax collection that may be useful to the media as well as the general public. These general answers do not address the application of the laws to any particular retailer or consumer. If you have any additional questions, please contact the Department of Revenue's Director of Communications, Kelly Cortesi, at kelly.cortesi@tn.gov or 615-770-6942.

Click on the question to view the answer.

1. What is the general rule for when an out-of-state business, like an online retailer, has to collect sales or use tax from consumers in Tennessee?

If an out-of-state business, like a catalog company or an online retailer, has a physical presence sufficient to establish "nexus" in Tennessee, then that business must collect sales or use tax on goods delivered to Tennessee customers.

Deciding whether a retailer has "nexus" is a very fact-driven determination. Generally, nexus may be established by having employees or agents in the state, owning or leasing tangible personal property such as an office building in the state or having a warehouse or other real property in the state. Nexus may also be established in Tennessee if an affiliated company conducts certain activities in the state for the out-of-state retailer.

2. Are purchases made from Internet retailers tax-free, if the Internet retailer does not collect sales tax?

No. When someone buys merchandise online or through a catalog and the seller of the products does not collect sales tax, the consumer who bought items must pay use tax on the purchases. You can find more information about use tax here.

3. How does a law Tennessee legislators approved in 2012 provide an exception to the general rule for sales and use tax collection?

The 2012 law (Tenn. Code Ann. Section 67-6-515) says that for taxpayers that meet certain criteria (for instance, having an in-state affiliate that creates at least 3,500 jobs between January 1, 2011, and January 1, 2014, and making a capital investment of at least $350,000,000 during that time), the state would not consider those factors in determining "nexus" in Tennessee. Therefore, those qualifying taxpayers would not have to collect sales and use tax on merchandise sold to state residents. However, those qualifying taxpayers would still have to notify Tennessee customers each year that use tax may be owed on items they bought, and consumers are then required to pay the use tax to the Department of Revenue.

Provisions in the 2012 law will be repealed, and qualifying taxpayers will begin collecting state and local sales tax, on whichever comes first: January 1, 2014, or when the U.S. Congress passes a bill such as the Marketplace Fairness Act, which is currently pending.

4. Does this mean that consumers didn't have to pay any tax on items they bought from taxpayers who met the qualifications of the 2012 law?

No. Consumers still have to pay use tax on merchandise purchased from all out-of-state merchants as well as taxpayers who qualify under the 2012 law. Consumers should have received notification of the use tax they owed from the qualifying taxpayers.

5. If the U.S. Congress does not pass the Marketplace Fairness Act or similar legislation prior to January 1, 2014, does this mean taxpayers who meet the qualifications of the 2012 law must start collecting sales tax January 1, 2014?

Yes, taxpayers who qualify under the 2012 law would be required to start collecting Tennessee state and local sales tax beginning January 1, 2014.

6. How much money does the state expect to collect from qualifying taxpayers that should start collecting state sales tax on January 1, 2014?

The Tennessee General Assembly Fiscal Review committee published a fiscal note to the 2012 law, which says the increase in state revenue for the last six months of fiscal year 2013-2014 is estimated to be $8,775,582, while the increase in local revenue is estimated to be $3,707,418. For fiscal 2014-2015 and subsequent years, the recurring increase in state revenue is estimated to be $17,551,164, while the recurring increase in local revenue is estimated to be $7,414,836.