Does Tennessee's sales tax violate the U.S. Constitution's bans on state taxes on imports and exports?

Subject

Opinion No. 11-67, Retailers' Sales Tax Act and Import and Export Taxes, September 15, 2011

Plain-English summary

Representative John Ragan asked whether Tennessee's Retailers' Sales Tax Act runs afoul of two Constitutional clauses that limit taxation of imports and exports. Article I, § 9, Clause 5 (the Export Clause) says "No tax or duty shall be laid on articles exported from any state." Article I, § 10, Clause 2 (the Import-Export Clause) says "No State shall, without the consent of the congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws."

The AG explained why these clauses do not invalidate Tennessee's sales tax. Two threshold facts kill the challenge.

The Tennessee tax is not on imports or exports. Tennessee's sales tax is a privilege tax on the retail sale of tangible personal property in Tennessee, and the use tax is a privilege tax on the use, consumption, distribution, or storage of tangible personal property in Tennessee. Neither tax is imposed on the act of importing or exporting goods. The trigger is sale at retail or use within Tennessee, not the crossing of any border.

Both clauses cover only foreign commerce. Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69, 78 (1946), and Dooley v. United States, 183 U.S. 151, 154 (1901), establish that the Export Clause and Import-Export Clause apply only to foreign commerce. Neither clause limits a state's ability to tax articles brought into the state from another state. So even a person bringing goods from Kentucky to Tennessee has no claim under the Import-Export Clause; the only constitutional question is whether the tax meets the requirements of the Commerce Clause.

The AG then ran through the Commerce Clause analysis as a backstop. Under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) (as reaffirmed in Quill v. North Dakota), a state tax is constitutional if it is (1) applied to an activity with a substantial nexus to the taxing state, (2) fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Tennessee's sales tax has long survived that test. The Commerce Clause does limit Tennessee's ability to tax purely out-of-state activities, but it does not invalidate the underlying sales-tax structure on import/export grounds.

The AG cross-referenced Quill and Tyler Pipe (both discussed at length in Opinion 11-52) for the substantial-nexus framework that lets Tennessee require sales tax collection by out-of-state sellers that have an in-state physical presence (directly or through affiliates or contractors significantly associated with maintaining a Tennessee market).

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Quill's physical-presence rule was overruled by South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). The economic-nexus framework now applicable in Tennessee is materially different from the Quill framework discussed here. But the Import-Export Clause analysis is undisturbed; Tennessee's sales tax still applies on a privilege-of-sale basis and still does not target imports or exports.

Background and statutory framework

Tennessee's sales tax. Tenn. Code Ann. § 67-6-202(a) levies the tax "on the sales price of each item or article of tangible personal property when sold at retail in this state." The sales tax is a privilege tax on "the privilege of engaging in the business of selling tangible personal property at retail in this state." Rate: seven percent. "Retail sale" is defined in Tenn. Code Ann. § 67-6-102(79).

The use tax. Tenn. Code Ann. § 67-6-203(a) imposes a tax at the same rate on the purchase price of tangible personal property "when the tangible personal property is not sold, but is used, consumed, distributed, or stored for use or consumption in this state," with no duplication of the sales tax. "Use" is defined in Tenn. Code Ann. § 67-6-102(97)(A) as the exercise of any right or power over tangible personal property incident to ownership, except for retail sale in the regular course of business.

The Export Clause. U.S. Const. Art. I, § 9, cl. 5: "No tax or duty shall be laid on articles exported from any state." It restricts the federal government, not the states.

The Import-Export Clause. U.S. Const. Art. I, § 10, cl. 2: "No State shall, without the consent of the congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws." It restricts the states' taxation of foreign-commerce imports and exports.

Foreign-commerce limitation. Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69, 78 (1946); Dooley v. United States, 183 U.S. 151, 154 (1901): both clauses are limited to foreign commerce. Neither restricts a state's authority to tax goods originating in another state.

The Commerce Clause framework. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977): four-prong test (substantial nexus, fair apportionment, non-discrimination, fair relation to state services). D.H. Holmes Co. v. McNamara, 486 U.S. 24, 31 (1988); Commonwealth Edison Co. v. Montana, 453 U.S. 609, 623-624 (1981): interstate commerce can be required to pay its fair share of state taxes. Quill Corp. v. North Dakota, 504 U.S. 298, 311 (1992) (as it stood in 2011): physical presence required for substantial nexus on out-of-state sellers. Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 250 (1987): affiliate or contractor activities can establish substantial nexus if "significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."

Common questions

Does Tennessee's sales tax apply to goods imported from China?

Yes, when those goods are sold at retail in Tennessee. The Import-Export Clause does not bar state taxation of imported goods after they have entered the state and become part of the general mass of property. The sale of the goods to a Tennessee consumer is what triggers Tennessee tax, not the import.

Does Tennessee tax goods exported overseas?

Tennessee taxes the sale at retail in Tennessee. If a Tennessee retailer sells goods to a customer who then exports them, the retail sale was a Tennessee sale, taxed by Tennessee. The Export Clause does not apply because that clause restricts only the federal government, not state taxation of in-state retail sales.

What about goods in transit through Tennessee?

The opinion does not address transit scenarios. Pure transit (goods passing through Tennessee without a Tennessee retail sale or use) typically is not subject to Tennessee sales or use tax under existing statutory definitions and constitutional limits.

What is the difference between the Import-Export Clause and the Commerce Clause for sales-tax purposes?

The Import-Export Clause is about international trade and protects foreign commerce from state interference. The Commerce Clause is broader and reaches interstate commerce. Neither clause categorically forbids state sales tax, but both impose limits. For Tennessee's sales tax, the Commerce Clause is the relevant constraint in nearly every modern case.

Does this opinion explain the Wayfair framework?

No. Wayfair was decided in 2018, seven years after this opinion. The opinion discusses the pre-Wayfair Quill framework. Current sales tax nexus analysis in Tennessee is governed by post-Wayfair statutes and the economic-nexus framework.

Citations

• U.S. Const. Art. I, § 9, cl. 5; Art. I, § 10, cl. 2; Art. I, § 8, cl. 3
• Tenn. Code Ann. §§ 67-6-101 et seq. (Retailers' Sales Tax Act)
• Tenn. Code Ann. §§ 67-6-102(79), 67-6-102(97)(A), 67-6-202(a), 67-6-203(a)
• Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69 (1946)
• Dooley v. United States, 183 U.S. 151 (1901)
• D.H. Holmes Co. v. McNamara, 486 U.S. 24 (1988)
• Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)
• Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-067.pdf

Original opinion text

September 15, 2011
Opinion No. 11-67
Retailers' Sales Tax Act and Import and Export Taxes

QUESTION

Does the Retailers' Sales Tax Act, Tennessee Code Annotated §§ 67-6-101 et seq., impose a tax on imports and exports in violation of Article I, Section 9, Clause 5 and Article I, Section 10, Clause 2 of the United States Constitution?

OPINION

No. The Retailers' Sales Tax Act imposes a privilege tax on the retail sale and use of tangible personal property in Tennessee. The Act does not impose a tax on imports from and exports to foreign countries in violation of the United States Constitution.

ANALYSIS

The Retailers' Sales Tax Act, Tennessee Code Annotated §§ 67-6-101 et seq., imposes a tax "on the sales price of each item or article of tangible personal property when sold at retail in this state." Tenn. Code Ann. § 67-6-202(a). The sales tax is a tax on "the privilege of engaging in the business of selling tangible personal property at retail in this state." Id. The rate of the tax is seven percent. Id. "Retail sale" is defined as "any sale, lease, or rental for any purpose other than for resale, sublease, or subrent." Tenn. Code Ann. § 67-6-102(79). The Act also imposes a tax "at the rate of the tax levied on the sale of tangible personal property at retail by the provisions of § 67-6-202 of the purchase price of each item or article of tangible personal property when the tangible personal property is not sold, but is used, consumed, distributed, or stored for use or consumption in this state; provided, that there shall be no duplication of the tax." Tenn. Code Ann. § 67-6-203(a). "Use" is defined as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Tenn. Code Ann. § 67-6-102(97)(A).

Article I, Section 9, Clause 5 (the Export Clause) of the United States Constitution provides, "[n]o tax or duty shall be laid on articles exported from any state." Article I, Section 10, Clause 2 (the Import-Export Clause) of the United States Constitution provides, in pertinent part, "[n]o State shall, without the consent of the congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws."

Neither the Export Clause nor the Import-Export Clause is applicable to purely interstate transactions. Foreign commerce must be involved for either the Export Clause or the Import-Export Clause to be implicated. The Export Clause prohibits the federal government from imposing a tax on exports from a state to a foreign country. The Import-Export Clause prohibits the states from imposing taxes on imports from and exports to a foreign country. Neither of these prohibitions applies to purely interstate transactions. Thus neither Clause prohibits a state from taxing articles brought into it from another state. See Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69, 78 (1946); Dooley v. United States, 183 U.S. 151, 154 (1901).

Although the Export Clause and Import-Export Clause do not apply under the circumstances described, the Commerce Clause may be implicated. States are prohibited from collecting taxes from businesses that do not have sufficient nexus with the taxing state. The nexus requirement stems from the Commerce Clause, not the Export Clause or the Import-Export Clause. Article I, Section 8, Clause 3 of the United States Constitution gives Congress the power "[t]o regulate commerce with foreign nations, and among the several states, and with the Indian tribes." Under the Supreme Court's Commerce Clause jurisprudence, "with certain restrictions, interstate commerce may be required to pay its fair share of state taxes." D.H. Holmes Co. v. McNamara, 486 U.S. 24, 31 (1988); see also Commonwealth Edison Co. v. Montana, 453 U.S. 609, 623-624 (1981). A tax does not offend the Commerce Clause so long as the "tax [1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State." Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 311 (1992), quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). "[T]he 'substantial nexus' requirement is not, like due process' 'minimum contacts' requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce." Id. at 313.

In Quill, the Court reaffirmed the bright-line rule that physical presence in the taxing state is required to establish "substantial nexus" for purposes of requiring an out-of-state seller to collect sales and use taxes. Ownership of property or presence of employees, however, is not the only means of establishing the physical presence necessary for nexus. Physical presence by an out-of-state seller can also arise from the activities of its affiliates or independent contractors provided that these activities "are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales." Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 250 (1987). The imposition of Tennessee's sales and use taxes on out-of-state businesses with respect to items delivered or used in Tennessee is thus constitutionally permissible, provided that "substantial nexus" is established.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

R. MITCHELL PORCELLO
Assistant Attorney General

Requested by:
The Honorable John D. Ragan
State Representative
301 6th Avenue North
G-24 War Memorial Building
Nashville, Tennessee 37243