April 27, 2009

Revenue Estimate for Internet Parity Bill

The "Internet Parity" bill (SB1741/HB1947) will make Tennessee sales and use taxes apply to goods and services sold by internet vendors who use independent contractors or representatives in Tennessee to establish and maintain a market for their business. This is a broadening of the current definiton of "nexus."

The official fiscal note for this bill estimates that it will not significantly increase state revenue. However, the estimate is based on the assumption by the Department of Revenue (DOR) that the bill will not be enough to establish taxability of such sales (nexus). The fiscal note does not specify what precedent DOR cites. It would appear to be the JC Penney case from 1999 that seemed to require a "bricks and mortar" presence to establish nexus. However that decision was clarified and superseded by the AOL and Dillard’s cases in 2002 and 2004, respectively. Both of those cases cited the U. S. Supreme Court's decisions in the Scripto and Tyler Pipe cases to assert nexus under the circumstances described in SB1741/HB1947.

The "Internet Parity" bill is based on a statute passed last year in New York State. Amazon filed suit to challenge that law, but began collecting and remitting sales and use taxes while the matter is being litigated. Their case was dismissed at the first trial level this January. They may appeal. Even if Amazon were to prevail in this case, New York would not have to refund the taxes that have been collected because they were due as use taxes from the purchasers anyway. The only conceivable liability for New York would be the unlikely possibility that the court might award court costs and attorneys fees to Amazon.

New York is estimating $50 to $75 million in revenue per year from this loophole closing. Given that Tennessee's economy is about one-fifth the size of New York's, we can estimate $10 to $15 million annual revenue. Adjusting for Tennessee’s higher sales tax rate (9.4% vs. 8.25%) yields an estimate of $11.4 to $17.1 million annually.

Because of what we are convinced is an erroneous assumption in the fiscal note, we are asking legislators to vote for the "Internet Parity" bill (SB1741/HB1947) and let the courts determine whether it is effective. There is nothing to lose and quite a bit to gain. We are only asking the internet vendors to collect the sales tax from their customers like any other vendor with operations in Tennessee.