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Purchasers of building supplies used to construct storm or tornado shelters are able to claim a refund of Tennessee sales and use tax paid on the items. The items must be purchased between July 1, 2011 and December 31, 2011, used in a primary residence, and the sales price per item cannot exceed $3,200. Building supplies include trash bags, boxes, construction tools, hardware, sheetrock, drywall, insulation, paint and paint materials, flooring, and other necessary building materials determined by the Tennessee Department of Revenue. The total refund for any one residence cannot exceed $2,500. Only one refund application is allowed per residence, and the application needs to be filed on or before February 1, 2012. (S.B. 267, Laws 2011, effective June 6, 2011, and applicable as noted)


Tennessee Governor Bill Haslam signed legislation codifying the terms of an agreement between the state and Amazon. Under the agreement, Amazon has agreed to begin collecting and remitting Tennessee sales and use tax beginning in 2014. Although this bill was geared towards the agreement with Amazon, the exclusion from tax collection responsibilities will apply to any other business that meets the requirements under the legislation. The bill states that the activities of distribution facilities operated by a company’s affiliates in Tennessee are not considered in determining whether a company has a physical presence establishing nexus in the state. This exclusion does not apply to affiliates that operate a retail store or kiosk at which customers make purchases, return or exchange items or place orders for tangible personal property; or use personnel to solicit sales of tangible personal property, either by direct employment or on a contract basis. The agreement will only apply to a person that has an affiliate that places one or more distribution facilities in service, directly or through a third party, after January 1, 2011 and before January 1, 2014; makes, or causes to be made, through a third party, a capital investment of at least $350 million after January 1, 2011 and before January 1, 2014; creates at least 3,500 qualified jobs after January 1, 2011 and before January 1, 2014; and maintains at least 3,500 qualified jobs until January 1, 2016. The provisions in the bill will be repealed on the earliest of the following: January 1, 2014; upon an affiliate’s failure to satisfy the above investment or job creation requirements; or the effective date of any federal legislation authorizing the state to require remote sellers to collect and remit tax. The provisions in the bill only apply if the person enters a written agreement pursuant to which the person and its affiliates will collect Tennessee sales and use tax beginning immediately after the earliest of the events described above.

In exchange for the exclusion from tax collection, a reporting requirement is imposed on any qualifying retailer. This provisions requires any retailer that does not establish nexus with Tennessee pursuant to the above provisions and that makes sales to Tennessee purchasers to notify the purchaser in a confirmation email that the purchaser may owe Tennessee use tax on the total sales price of the transaction and include in the email an internet link to the Department of Revenue’s website that allows the purchaser to pay the use tax. The notice must include language that is substantially similar to wording provided in the bill. Any person who becomes subject to these requirements will have 60 days to comply with the requirements. The person must also provide to each purchaser a statement of the total sales made to the purchaser during the preceding calendar year. The person shall provide notice for calendar year 2011 within 60 days after the effective date of the act and by February 1 of each subsequent year. “Total sales” means the total purchase price of all sales of tangible personal property delivered in Tennessee, including shipping and delivery charges. The statement must include language that is substantially similar to wording provided in the bill. The statement must not contain any other information that would indicate, imply, or identify other details of the items purchased, which is considered confidential information. The statement may be provided by mail or email. (H.B. 2370, Laws 2012, effective March 26, 2012)


The activities of schools and teachers in Tennessee are sufficient to create sales and use tax nexus for a mail-order bookseller that sells books through marketing materials distributed in schools. Reversing the lower court’s awarding of summary judgment to dismiss the case on behalf of Scholastic Books, a Tennessee Court of Appeals found that the bookseller’s contact with Tennessee customers is not merely mail-order. The bookseller is using Tennessee schools and teachers to facilitate sales of books. The bookseller sends marketing materials and order forms to schools. Teachers then distribute the materials to students, collect orders and payment, and submit the orders and payment to the bookseller. The court stated that the issue in this case is not whether Tennessee teachers are considered agents of the bookseller. Rather, the issue is whether substantial business activities have been carried out on the bookseller’s behalf in Tennessee, thus creating nexus. The bookseller’s connections with the state are sufficient to create nexus because the bookseller has created a de facto marketing and distribution mechanism within Tennessee schools in order to sell books. The bookseller asserted that it uses no public services in Tennessee, but the state’s schools and teachers are largely funded by taxpayer dollars.

On June 25, 2012, the Tennessee Supreme Court denied review of the bookseller’s application for discretionary review in this case. On September 20, 2012, the bookseller asked the U.S. Supreme Court to review the decision.  (Scholastic Book Clubs, Inc. v. Farr, Tennessee Court of Appeals, No. M2011-01443-COA-R3-CV, January 27, 2012; Scholastic Book Clubs, Inc. v. Commissioner of Revenue Services, U.S. S.Crt. No. 18425 (June 26, 2012); Scholastic Book Clubs, Inc. v. Roberts, U.S. Supreme Court, Dkt. 12-374, petition for certiorari filed September 2012)


The Tennessee Department of Revenue has issued a letter ruling stating that the monthly fee charged by an out-of-state software vendor to Tennessee taxpayers for online access to customer relationship management (CRM) software is not subject to Tennessee sales and use tax. The vendor initially has its employees travel to Tennessee to perform a system requirements analysis for the taxpayer. The vendor then configures the software to fit the taxpayer’s specific needs at its location outside of Tennessee. The CRM software resides at all times on the vendor’s out-of-state servers. Taxpayers are not permitted to install or transfer the software application onto its computers. While the retail sale, lease, licensing or use in Tennessee of computer software (regardless of method of delivery) is subject to sales and use tax, the vendor in this case is providing access to software housed on an out-of-state server. Any such sale in this case occurs outside of Tennessee. No sale or use of tangible personal property occurs in Tennessee when the taxpayer accesses the software over the internet because the vendor does not transfer title, possession, or control of the software to the taxpayer at any time. Additionally, the provision of access to the software does not constitute a taxable service for Tennessee sales and use tax purposes. The CRM software application falls under the category of data processing and information services, which are excluded from the definition of taxable “telecommunication services” under Tennessee law. Because the vendor is not making sales of tangible personal property and is not providing a taxable service, no part of the transaction can be considered taxable. While the modification of software constitutes the sale of tangible personal property in some cases, no such sale occurs in this case because the modification is not connected to a taxable sale of software. Charges for the analysis of the taxpayer’s system requirements are also not taxable because it is a non-taxable service and is not connected to the taxable sale of software. (Letter Ruling No. 11-58, Tennessee Department of Revenue, October 10, 2011)


The Tennessee Attorney General has issued an opinion stating that a retailer that directly maintains or owns a warehouse or distribution facility in Tennessee has nexus in the state for Commerce Clause purposes. If a subsidiary of the retailer owns the in-state facility, nexus is only established for the retailer if the subsidiary’s in-state activities are significantly associated with the retailer’s ability to establish and maintain a market in Tennessee for its sales. When nexus is established, the out-of-state retailer is liable to collect and remit sales tax in Tennessee, whether or not the order is received electronically. (Opinion 11-71, Tennessee Attorney General, October 3, 2011)



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