NASHVILLE, Tenn. (Legal Newsline) - Tennessee Attorney General Robert Cooper, in an opinion Tuesday, says a proposed bill requiring out-of-state companies to collect sales tax on purchases made by the state's residents is "constitutionally defensible."
The attorney general's opinion was requested by state Sen. Randy McNally, R-Oak Ridge, and Rep. Charles Sargent, R-Franklin.
McNally, also the Senate Finance Committee Chairman, introduced a bill this legislative session that could force out-of-state dealers, like Amazon, to collect sales taxes on items sold to Tennessee residents.
The lawmakers asked the attorney general the following questions, among others:
- Under what circumstances would an out-of-state dealer's use of an in-state distribution center to ship goods sold by the out-of-state dealer serve as sufficient nexus under the Commerce Clause of the U.S. Constitution to require the out-of-state dealer to collect Tennessee sales tax on its retail sales to Tennessee customers?
- Also, if enacted, would the attached amendment to Senate Bill 529/House Bill 136 of the 107th General Assembly be constitutionally defensible under the Due Process and Commerce Clauses of the U.S. Constitution?
According to the Chattanooga Times Free Press, Amazon, the largest online retailer in the United States, is spending nearly $140 million to build distribution centers in the state, with plans to build more.
The newspaper says the distribution centers will create thousands of full-time and seasonal jobs.
In doing so, some argue that the company will have a physical presence in the state.
Cooper, in his opinion filed Tuesday, said an out-of-state dealer's use of an in-state distribution center supports a finding of nexus if the in-state distribution center's activities are "significantly associated" with the out-of-state dealer's ability to establish and maintain a market in Tennessee for the sales.
In 1992, the U.S. Supreme Court reaffirmed its "bright-line" rule that an out-of-state seller cannot be required to collect sales and use tax on goods purchased by in-state customers when the seller's only connection with the customers is by common carrier or mail.
While the Court found that the Due Process Clause would allow a state to require a mail-order business with no in-state physical presence to collect sales and use tax, the Court held that physical presence is required under the Commerce Clause to establish a "substantial nexus" sufficient to tax such a mail-order business.
"If an out-of-state seller owns an in-state warehouse or distribution center or has employees in the state, that would constitute a physical presence by the out-of-state seller sufficient to establish nexus," Cooper wrote.
The attorney general said the legislation, as currently drafted, would be constitutional defensible.
According to the Times Free Press, the proposed bill was postponed until next January.
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