United States: Tennessee Enacts Sales Tax Collection Agreement With Amazon

On March 23, Tennessee Governor Bill Haslam signed legislation providing that Amazon will collect sales tax on purchases by Tennessee customers beginning on the earlier of January 1, 2014 or the effective date of federal legislation that authorizes states to require remote vendors to collect sales tax.¹ This legislation codifies an agreement with Amazon that Governor Haslam announced on October 6, 2011.² Under the agreement, Amazon receives a temporary exemption from collecting sales tax provided its affiliates make a significant capital investment and create 3,500 jobs in the state. The legislation requires that Amazon notify customers of their obligation to remit use tax to the state.

Temporary Exemption

Amazon and many other states have engaged in longstanding, contentious debate over whether the physical presence of Amazon's affiliates in states in which Amazon itself does not have a physical presence nonetheless causes Amazon to have sales tax nexus. As a temporary resolution to this question in Tennessee, the legislation adds a new statute providing a temporary sales tax exemption for a "person" that satisfies very specific requirements. Amazon is the only "person" that is likely to satisfy the requirements contained in the legislation.³ The activities of a person's affiliates in Tennessee, including, but not limited to, the sale of tangible personal property for resale to a person for delivery to the person's customers in Tennessee and outside the state, fulfillment services and any other non2retail activities will not be considered in determining whether the person has a physical presence in Tennessee sufficient to establish sales tax nexus.⁴

The temporary exemption does not apply to an affiliate that operates a retail store or kiosk in Tennessee on behalf of the person where customers make purchases, return or exchange items or place orders of tangible personal property.⁵ Also, the temporary exemption does not apply to an affiliate that uses, whether by direct employment or on a contract basis, personnel in Tennessee to solicit sales of tangible personal property for the person.⁶ Under this provision, the activities of the person's affiliates in Tennessee are limited. Thus, the affiliates cannot engage in retail activities such as operating retail stores or employing sales personnel in the state.

A sale for resale of tangible personal property by a person and its affiliates that is covered by the legislation is not subject to any tax that otherwise would be imposed under either transaction when the property is delivered to a person or the person's customer in Tennessee.⁷ Also, the sale is not subject to an administrative rule⁸ that imposes sales tax on tangible personal property sold by dealers to other vendors where delivery is made for use and consumption.

Investment and Job Creation Requirements

This temporary exemption only applies to a person that has an affiliate that meets the following requirements after January 1, 2011 and before January 1, 2014: (i) places one or more distribution facilities in service; (ii) makes a capital investment of at least $350 million; and (iii) creates at least 3,500 qualified jobs.⁹ After meeting the job creation requirements, the person must maintain at least 3,500 qualified jobs until January 1, 2016.¹⁰

Affiliates and Distribution Facilities

The legislation defines an "affiliate" as a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person.¹¹ A person controls another person if that person holds more than a 50 percent direct or indirect ownership interest in the other person. A "distribution facility" is an establishment where shipments of tangible personal property are stored and processed for delivery to customers and no retail sales of the property are made.¹²

Sunset Provisions

This provision is repealed on the earliest of the following three dates: (i) January 1, 2014; (ii) the date on which the person's affiliate or the third party fails to meet the investment or employment requirements; or (iii) the effective date of a federal law that authorizes states to require that sales tax be collected and remitted even if the taxpayer does not have substantial nexus with the state.¹³ This legislation only applies if the person enters a written agreement under which the person and its retail affiliates will collect Tennessee sales and use tax immediately after the repeal date.¹⁴

Notice Requirements

A person that is covered by this legislation and makes sales through the Internet to Tennessee purchasers must notify the purchasers in a confirmation e2mail that they may owe Tennessee use tax.¹⁵ The message must include an Internet link to the Tennessee Department of Revenue's Web site that allows the purchaser to pay the tax. The legislation provides the language that must be used in the notice. A person subject to these requirements has 60 days to comply.

The person also must provide each Tennessee customer with a statement of the total sales made to the customer during the preceding calendar year.¹⁶ The person must provide the notice for the 2011 calendar year within 60 days of the effective date of the legislation (March 23, 2012). For the 2012 and 2013 calendar years, if the legislation is still effective, the notice is due on February 1, 2013 and February 1, 2014, respectively. The legislation provides the language that must be contained in the statement. However, the statement must not describe the products purchased.

Commentary

Tennessee is not the first state that has enacted legislation that specifically benefits Amazon in the event certain job creation and capital investment goals are met. In California, legislation which temporarily, and retroactively, repealed implementation of the sales and use tax affiliate nexus and "Amazon" legislation was adopted late last year.¹⁷ In exchange for California delaying implementation of the tax collection requirement, Amazon agreed to drop its referendum challenge to the Amazon legislation enacted in June and to create at least 10,000 full2time jobs and hire 25,000 seasonal employees in California by the end of 2015.¹⁸ The prospective operation of the affiliate nexus and Amazon provisions will depend on whether federal legislation is enacted and implemented by California that authorizes states to require a seller to collect taxes on sales of goods to in2state purchasers without regard to the seller's location.

South Carolina also enacted a nexus safe2harbor provision designed to encourage Amazon to locate a distribution facility in the state.¹⁹ The South Carolina statute provides that owning, leasing or utilizing a distribution facility, including a distribution facility of a third party or an affiliate, within the state is not considered in determining whether the person has a physical presence in the state sufficient to establish nexus for sales and use tax purposes.²⁰ Similar to the Tennessee legislation, the person must make a large capital investment and create a specified number of jobs in the state.²¹ The sunset provisions are similar, but the South Carolina statute is repealed on the earliest of the following three dates: (i) January 1, 2016; (ii) the date the person fails to meet the investment or employment requirements; or (iii) the effective date of federal legislation.²² The statute also requires that the person provide the customer with notice that he or she may owe use tax and send an annual statement of the total sales made to the customer.²³ Thus, the South Carolina and Tennessee statutes are fairly similar. Due to the very competitive environment, other states may reach similar agreements. However, these agreements are troubling because the issue of remote seller nexus is being based on economically driven "hand2shakes" and not on constitutional principles.

Footnotes

^{1 Ch. 624 (H.B. 2370), Laws 2012.}

^{2 Press Release, Tennessee Governor Bill Haslam, Oct. 6, 2011.}

^{3 Id.; Corrected Fiscal Note, H.B. 2370, Tennessee General Assembly Fiscal Review Committee, Feb. 7, 2012.}

^{4 TENN. CODE ANN. § 672625xx(a)(1).}

^{5 TENN. CODE ANN. § 672625xx(a)(2).}

^{6 Id.}

^{7 TENN. CODE ANN. § 672625xx(g).}

^{8 See TENN. COMP. R. & REGS. 132025212.96.}

^{9 TENN. CODE ANN. § 672625xx(b)(1)2(3).}

^{10 TENN. CODE ANN. § 672625xx(b)(4).}

^{11 TENN. CODE ANN. § 672625xx(e)(1).}

^{12 TENN. CODE ANN. § 672625xx(e)(2).}

^{13 TENN. CODE ANN. § 672625xx(c).}

^{14 TENN. CODE ANN. § 672625xx(d).}

^{15 TENN. CODE ANN. § 672625xx(f)(1).}

^{16 TENN. CODE ANN. § 672625xx(f)(3).}

^{17 A.B. 155, Laws 2011.}

^{18 News Release, California Governor Jerry Brown, Sept. 23, 2011.}

^{19 Act 32 (S.B. 36), Laws 2011.}

^{20 S.C. CODE ANN. § 1223622691(A).}

^{21 S.C. CODE ANN. § 1223622691(C). The person must make a capital investment of at least $125 million and create at least 2,000 jobs.}

^{22 S.C. CODE ANN. § 1223622691(D).}

^{23 S.C. CODE ANN. §§ 1223622691(E), 1223622692.}

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