Tennessee AG: State Can Require Amazon to Collect and Remit Sales Tax

In a decision with potential ramifications for other states, Tennessee’s Office of the Attorney General recently issued an opinion [1] stating that it was “constitutionally defensible” for a state to require a remote retailer with a distribution facility or subsidiary in the state to collect and remit sales tax to the state. Moreover, while the Attorney General would not specifically comment on Amazon.com's tax status per se, the opinion argued that a remote retailer’s nexus can be established by the actions of other parties, such as affiliates.

“It is heartening to see the growing consensus that Amazon.com’s physical presence in states because of their warehouses and distribution centers — as well as their extensive affiliate networks — requires them to collect and remit sales tax,” said Oren Teicher, ABA CEO. “We are very pleased that Tennessee’s Office of the Attorney General agrees, and with the office’s opinion that employees, affiliates, or independent contractors can constitute a physical presence in and of itself.”

Teicher stressed that online affiliates could be considered either independent contractors or employees, and, more than that, that they act as sales agents. “Amazon.com clearly has nexus in Tennessee,” said Teicher. “With the Attorney General’s opinion in hand, we strongly urge the state revenue department to enforce its existing sales tax laws and require Amazon.com and retailers like it to collect and remit sales tax to the state.”

Last month, Amazon.com threatened to cancel plans to build two new distribution centers in Tennessee if it was not provided with a sales tax exemption. Following the ultimatum, House Finance Chairman Charles Sargent tabled sales tax fairness legislation, HB 136 (SB 529), which he had introduced. HB 136 would have required any remote retailer that maintains or owns a facility, office, distributing house, sales “room,” warehouse, or other place of business — directly or through a subsidiary, agent, or affiliate — to collect and remit sales tax in the state.

Though the proposed legislation was tabled, Sen. Finance Chair Randy McNally (R-Oak Ridge) and Rep. Sargent (R-Franklin) asked state Attorney General Robert E. Cooper, Jr. to weigh in on whether Amazon.com’s proposed warehouses would constitute nexus in the state.

Late last week, the Attorney General’s office issued an opinion that noted “an out-of-state dealer’s use of an in-state distribution center will support 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 this state for the sales.”

The opinion continued, “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….  Physical presence by an out-of-state seller can also arise from the actions of other parties. For example, nexus may be established by activities conducted within the taxing state by a taxpayer’s affiliates or independent contractors.”

Cooper also stated that HB 136 was “constitutionally defensible.”

Sen. McNally told the Chattanooga Times Free-Press [2] that the opinion was “very favorable,” and said, “The Amazon people contended this did not constitute a nexus. It’s clear that the distribution center would constitute a nexus.”

This week, McNally said he would like the governor’s office to seek compromise, where the state would exempt Amazon.com from the requirement to collect and remit sales tax for two years. However, Gov. Bill Haslam, who opposes McNally’s bill, stated he did not like the idea, as reported by the Knoxville News Sentinel [3].