TACIR acts on Internet sales tax, recommends mandatory collections

In January, the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) met and discussed several items of interest to local governments. In particular, TACIR released its interim report on local revenue sources which includes four recommendations for the Tennessee General Assembly to adopt.
The issue of how to collect and distribute sales tax revenue, whether from internet sales or otherwise, came before the House Finance, Ways, and Means Committee in April 2018.
The County Mayors Association proposed legislation that if passed would have transferred an estimated $100 million in out-of-state sales tax collections from cities to counties. Under the amendment proposed by the County Mayors, the distribution of these voluntary online sales collections would be altered to provide counties 75 percent of the total local share, while cities would receive just 25 percent. A second amendment would redirect an estimated $145 million in state shared sales tax revenues from cities to counties.
City officials adamantly opposed this legislation. And as a result, House Bill 971 by Rep. Charles Sargent / Senate Bill 1075 by Sen. Bo Watson, was sent to TACIR to study the revenue sources for Tennessee cities and counties, as well as the services they provide.
TACIR formed a working group of its local government members to examine these issues. The group suggested the study should focus initially on internet sales tax collections and how it will be distributed in light of the Wayfair case, and on provisions of Tennessee law set to become effective July 1, 2019.
The Supreme Court’s Wayfair decision in June 2018 paved the way for states to require more out-of-state sellers with no physical presence in the state to collect sales tax. Tennessee already has a rule—Tennessee Department of Revenue Rule 129 initiated by the Haslam Administration —that would require out-of-state sellers with more than $500,000 in sales in Tennessee to collect and remit sales tax. However, the Tennessee General Assembly voted not to enforce the rule until the Courts ruled on the matter.
TACIR recommended that based on the Wayfair decision, the state should move to mandatory sales tax collections on out-of-state sales. Because it would eliminate an unfair tax advantage for some out-of-state sellers, wouldn’t apply retroactively, and includes a safe harbor for those who transact only limited business in the state, the General Assembly should allow the Department of Revenue to enforce Rule 129.
In addition to Rule 129 – in 2005, Tennessee adopted a comprehensive re-write of the state’s tax provisions to bring our state’s tax laws into compliance with the Streamlined Sales and Use Tax Agreement (SSUTA). Implementation of these provisions are set to become effective July 1, 2019. Some of those provisions, however, would involve significant changes to Tennessee’s tax laws.
They include three major changes to the state’s sales and use tax laws:
1. Intrastate Sales and Revenue Sourcing. For sales where the sellers and the buyer are both located in Tennessee, the jurisdiction where the goods are delivered is not necessarily the jurisdiction in which the seller is located. Under the SSUTA agreement, the jurisdiction where the goods are delivered would receive the local option sales tax revenue (destination sourcing).
TACIR recommended to avoid complicating sales tax collection for in-state sellers and to avoid shifting revenue away from jurisdictions where infrastructure investments have already been made to support retail, Tennessee should continue to distribute local option sales tax revenue from sales within Tennessee to the jurisdiction where the sale originated, not to its delivery destination.

2. Single Article Cap. Another issue in adopting the SSUTA provisions, is how it affects state and local single article caps. In the early 2000’s, when the state faced a budget shortfall, the state raised the single article cap from $1,600 to $3,200.
However, the state applied a universal 2.75 percent local rate to the dollars between $1,601 - $3,200 and kept all those additional revenues for the state. Under the SSUTA, the state and local single article caps would be limited to only some high value items – motor vehicles, aircraft, watercraft, modular homes, manufactured homes, and mobile homes. A complete program is set to go into effect July 1, 2019, to refund businesses for any additional tax paid because of this change.
Although a single article cap on high value items is not ideal for municipal governments, the alternative of having to identify and refund businesses for additional tax owed would be problematic for municipal governments.
TACIR recommended to avoid the need for such a program, and to avoid raising taxes on the sale of non-exempt high value items, Tennessee should retain its single article sales tax cap for all sales.

3. Uniform Tax Rate and Distribution of Revenues. The SSUTA agreement required the state to adopt a uniform local option sales and use tax rate for out-of-state sellers with no physical presence in Tennessee. The local rate was set at 2.25 percent.
During the January meeting, Commissioners voted to amend TACIR’s report to set the uniform rate at 2.75 percent to avoid any inequities between brick and motor stores and out-of-state venors. Vendors will have the option of a uniform 2.75 percent local rate or using the actual local rate.