Tennessee DOR and Attorney General Approve Unconstitutional “Economic Nexus” Rule
On Monday, October 3, 2016, the Tennessee Attorney General approved for publication by the Secretary of State a new rule promulgated by the Department of Revenue that requires out-of-state sellers who make at least $500,000 in sales to Tennessee customers to register for, collect and remit Tennessee sales and use tax, regardless of whether or not the seller has a physical presence in the state. See Rule 1320-05-01-.129(2) (“Rule 129”). Rule 129 is clearly unconstitutional under the Supreme Court’s holding in Quill Corp. v. North Dakota, 504 U.S. 298, 313-19 (1992), which provides that a state lacks the authority under the “substantial nexus” requirement of the dormant Commerce Clause to require a seller with no physical presence to collect and remit Tennessee sales and use tax.
In fact, the Department’s written response to comments made in connection with its rulemaking hearing on August 8 makes clear that, in promulgating the Rule, the Department is anticipating that Quill may, in the future, be distinguished or abrogated by the Supreme Court. The Department asserts in its response to the comments it received contesting the constitutionality of Rule 129 that “there have been a number of significant developments that cast serious doubt on the continued vitality of Quill’s physical presence rule,” citing the concurring opinion of Justice Kennedy in Direct Mktg. Ass’n v. Brohl, 135 S.Ct 1124 (2015), in which he calls for the Court to revisit Quill. In short, the Department, in adopting proposed Rule 129, is relying not on current law, but on a hoped-for future change in the Quill physical presence standard by the Supreme Court.
It should go without saying that an anticipated change in law cannot be the basis for adopting an administrative rule before such a change ever occurs. As the Supreme Court has repeatedly made clear, even if a lower court (or, plainly, an administrative agency) questions the continuing vitality of a Supreme Court decision, where a “precedent of this Court has direct application in a case,” lower courts “should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.” Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484 (1989). There is simply no lawful basis on which the Department of Revenue can adopt, or the Attorney General can approve, a rule that runs afoul of existing Supreme Court precedent.
Nevertheless, based on the Attorney General’s action in rubber-stamping the Rule, Tennessee’s new “economic nexus” threshold is set to take effect later this year. By its terms, Rule 129 requires remote sellers to register with the Department by March 1, 2017, with a commitment to begin collecting tax by July 1, 2017. It remains to be seen what action the Department will take, if any, against retailers that do not register by the March 1 deadline. We will continue to monitor developments.