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A taxpayer that provides transcription services to clients is subject to Tennessee sales and use tax on report fees paid to a third-party software provider. The software provider licenses a speech recognition reporting software to the taxpayer on a transactional, fee-based model. The software provider charges the taxpayer according to the number of reports generated. The report fees are subject to sales and use tax since the charges relate to software electronically transferred to the taxpayer. The sales do not qualify as sales for resale because the taxpayer is considered the user and consumer of the software to provide its services, and does not resell the software to its clients. The taxpayer provides its clients with a client component of the software, which the client downloads to use in dictating a report. The client’s use of the client component is incidental to the true object of the taxpayer’s service. The report fees that the taxpayer charges its clients are not subject to Tennessee sales and use tax since they relate to the taxpayer’s provision of non-taxable transcription services. (Letter Ruling No. 17-01, Tennessee Department of Revenue, February 9, 2017)

(05/17/2017)

On April 27, 2017, a bipartisan group of senators introduced the Marketplace Fairness Act of 2017 (MFA). Similar legislation was introduced in both 2013 and 2015 and failed to be enacted both times. If enacted, the legislation would authorize states meeting certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes. The small seller exception is set again at $1 million of remote sales annually. The only other significant change from the 2015 version is a prohibition of making the effective date during the 4th quarter of the calendar year. For information on the previous versions of the bill, visit Senate Introduces Marketplace Fairness Act of 2015.  

 

On April 27, 2017, a bipartisan group of lawmakers introduced the Remote Transactions Parity Act (RTPA) of 2017. Similar legislation was introduced in 2015 but failed to be enacted. Like the MFA, the legislation would also create sales and use tax collection obligations for remote sellers, but has some differences and additional provisions. Some key differences from the Marketplace Fairness Act include a different definition of a small seller.  The RTPA has a phased in threshold starting at $10million in year one, then $5million, then $1million.  In year 4, there is no threshold.  In addition to the monetary thresholds, any seller that sells on an electronic marketplace is considered a small seller.  A difference from the 2015 version of the bill is an inclusion of a definition of remote seller which specifies when a company is NOT a remote seller which includes physical presences for more than 15 days in a state, leasing or owning real property and using an agent to establish or maintain the market in a state if the agent does not perform business services in the state for any other person during the taxable year.  For more information on the Remote Transaction Parity Act of 2015, visit House Introduces Remote Transactions Parity Act of 2015. (Marketplace Fairness Act of 2017, Remote Transactions Parity Act of 2017)

(05/04/2017)

Tennessee has enacted new economic nexus regulations that establishes sales tax registration and collection requirements for certain out-of-state sellers. The newly enacted rule provides that out-of-state sellers who engage in the regular or systematic solicitation of consumers in Tennessee through any means and make sales to Tennessee consumers exceeding $500,000 during the previous 12-month period have substantial nexus with Tennessee. Sellers meeting this requirement are required to register with the state by March 1, 2017 and affirmatively acknowledge that they will collect and remit sales and use tax to the state beginning July 1, 2017. Unless a later date is established by the department, affected sellers must report and remit tax on sales of tangible personal property and other taxable items delivered to Tennessee consumers, beginning July 1, 2017. Sellers who meet the $500,000 threshold after March 1, 2017 are required to register with the department and begin to collect and remit Tennessee sales and use tax by the first day of the third calendar month following the month in which the dealer met the threshold. In no case will affected sellers be required to collect and remit sales and use taxes to the department for periods before July 1, 2017. Unless otherwise exempt, persons purchasing tangible personal property or other taxable items from any seller that is registered with the department must pay Tennessee sales and use tax on the purchase. Unless otherwise exempt, persons who import tangible personal property or other taxable items into Tennessee and have not paid sales and use tax to the seller must report and pay use tax directly to the department. Tennessee joins Alabama and South Dakota in establishing economic nexus positions. (Rules 1320-05-01-.63 and 1320-05-01-.129, Tennessee Department of Revenue, effective January 1, 2017)

 

UPDATE: Tennessee has created a new online sales and use tax registration application for out-of-state sellers with no physical presence in Tennessee. Out-of-state sellers with no physical presence in Tennessee that have made sales exceeding $500,000 to Tennessee consumers during the previous 12-month period are required to register by March 1, 2017. By registering, sellers acknowledge that they will collect and remit sales and use taxes to the Department beginning July 1, 2017. Out-of-state sellers with no physical presence in Tennessee that meet the $500,000 threshold after March 1, 2017 are required to register and begin to collect and remit sales and use taxes beginning the first day of the third month following the month in which the dealer met the threshold, but no earlier than July 1, 2017. Out-of-state sellers that have a physical presence in Tennessee are required to register even if their sales to Tennessee consumers are less than $500,000 during a twelve-month period. These sellers are required to register through the Department’s standard registration page. All three types of out-of-state sellers can register online at the Tennessee Department of Revenue website. (Hot Topics, Tennessee Department of Revenue, January 13, 2017)

 

UPDATE: On April 10, 2017, a Tennessee judge granted a request to bar enforcement of the state’s economic nexus legislation until final judgement has been granted on a legal challenge to the Administrative Rule from the American Catalog Mailers Association and NetChoice. Until then, the economic nexus legislation will not be enforced by Tennessee.  

(04/17/2017)

On August 25, 2016, House Judiciary Committee Chairman Robert Goodlatte released a discussion draft of the Online Sales Simplification Act of 2016. The legislation would implement a “hybrid origin” approach for remote sales. Under the legislation, states could impose sales tax on remote sales if the origin state participates in a clearinghouse.In this case, the tax is based on the origin state’s baseand taxability rules. The rate would be the origin state rate, unless the destination state participates. In that case, the rate used would be a single state-wide rate determined by each participating destination state. A remote seller would only remit sales tax to its origin state for all remote sales. Only the origin state would be able to audit a seller for remote sales. Non-participating states would not be able to receive distributions from the clearinghouse. Sellers would be required to provide reporting for remotes sales into participating states to the Clearinghouse so it can distribute the tax to the destination state. We will continue to monitor activity and update when the official bill is introduced.  (Discussion draft of Online Sales Simplification Act of 2016)

(09/08/2016)

On July 14, 2016, Rep. Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016.  Taking the opposite approach of the Marketplace Fairness Act and Remote Transactions Parity Act, this proposed bill would limit the ability of states to require remote sellers to collect use tax. If enacted, the Act would codify the physical presence requirement established by the US Supreme Court in Quill Corp v. North Dakota.  The bill would define physical presence and create a de minimis threshold. If enacted, the bill would preempt click-through nexus, affiliate nexus, reporting requirements and marketplace nexus legislation. The bill would be effective as of January 1, 2017. The bill defines “seller” and provides that states and localities may not:

 

  • Obligate a person to collect a sales, use or similar tax; 
  • Obligate a person to report sales; 
  • Assess a tax on a person; or 
  • Treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

 

Persons would be considered to have a physical presence only if during the calendar year the person: 

 

  • Owns or leases real or tangible personal property in the state; 
  • Has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or 
  • Maintains an office in-state with three or more employees for any purpose.

 

Physical presence would not include: 

 

  • Click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; 
  • Presence for less than 15 days in a taxable year; 
  • Product delivery provided by a common carrier; or 
  • Internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

 

The bill defines seller to exclude marketplace providers; referrers; third-party delivery services in which the seller does not have an ownership interest; and credit card issuers, transaction or billing processors or financial intermediaries.Marketplace Providers are defined as any person other than the seller who facilitates a sale which includes listing or advertising the items or services for sale and either directly or indirectly collects gross receipts from the customer and transmits the amounts to the marketplace seller. (No Regulation Without Representation Act of 2016 (H.R. 5893))

 

UPDATE: This bill failed to pass during the 114th Congressional Session running from January 3, 2015 to January 3, 2017.  Therefore, this bill has died and would need to be reintroduced to be considered and voted on.

(08/23/2016)

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