Does Tennessee's distribution-center nexus statute force out-of-state online retailers to collect sales tax even when a subsidiary owns the warehouse?

Subject

Opinion No. 11-71, Out-of-State Dealer's Nexus as a Result of Activities of In-State Distribution Center, October 3, 2011

Plain-English summary

This is a follow-up to Opinion No. 11-52 (issued June 28, 2011). Senator Randy McNally asked four more refined questions about how Tennessee's existing "dealer" definition in Tenn. Code Ann. § 67-6-102(25)(G), which covers entities that "[m]aintain or have within this state, directly or by a subsidiary, an office, distributing house, sales room or house, warehouse, or other place of business," interacts with the Commerce Clause's substantial-nexus requirement.

Question 1. Does maintaining or having an in-state distribution center, directly or through a subsidiary, satisfy the constitutional nexus requirement?

The AG drew the same split that 11-52 walked through. If the retailer directly owns or maintains the warehouse, the retailer's own physical presence in Tennessee is enough, per Quill. If a subsidiary owns or maintains the warehouse, the subsidiary's in-state activities establish nexus for the parent only if those activities "are significantly associated with the [retailer's] ability to establish and maintain a market in this state for the sales" (the Tyler Pipe test). The opinion acknowledged the legal uncertainty: Supreme Court cases on attributional nexus have involved actual solicitation, leaving room for a future ruling that requires solicitation. The AG's office had argued in litigation that solicitation is not essential, but tenable arguments could be made the other way.

Question 2. If nexus exists, does electronic order-taking (phone, Internet) change the result?

No. Order channel does not affect the analysis. The in-state activities at the warehouse are what create nexus. How the order arrives at the retailer is a separate issue.

Question 3. Is there a statutory exemption from § 67-6-102(25)(G) collection obligations?

No specific exemption in the Retailers' Sales Tax Act. But the Commissioner of Revenue, in applying the statute, must make case-by-case determinations of whether imposing the tax is consistent with the Due Process and Commerce Clauses. Tenn. Code Ann. § 67-1-1802(a)(1)(A) gives the Commissioner authority to refund taxes paid against constitutional limits. So while there is no exemption, the constitutional analysis can keep the tax from applying.

Question 4. Can the State waive the obligation by contract or letter ruling?

Cross-referencing Opinion No. 11-55, the AG reiterated that the State cannot contractually waive a statutorily imposed sales tax obligation. But the Commissioner of Revenue has "substantial discretion in determining the best measures to take to enforce Tennessee's tax laws." That discretion is "particularly appropriate where the enforcement of a tax may be debatable." The AG laid out the practical considerations the Commissioner can weigh: competing duties and priorities, the risk that contested litigation will result in significant attorney-fee awards against the State under Tenn. Code Ann. § 67-1-1803(d), and the precedential risk to the State from an adverse decision.

Read together, the opinion essentially gives the Commissioner room to negotiate where the law is contested. It does not authorize a sweetheart deal that ignores tax obligations clearly imposed by the Retailers' Sales Tax Act. But where the law is uncertain (especially in subsidiary-warehouse cases without solicitation), the Commissioner can decide that enforcement is not worth the cost.

This is the context for the Amazon/Tennessee distribution center conversations of 2011. The State and Amazon worked out a delayed-collection arrangement that took advantage of the Commissioner's discretion described here. Opinion 11-71 supplied the legal cover.

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 was overruled in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). Tennessee has since adopted economic-nexus thresholds and marketplace-facilitator legislation. The subsidiary/non-solicitation question this opinion grappled with is largely overtaken by the post-Wayfair framework, which doesn't require physical presence at all. But the discretionary-enforcement principle (Question 4) remains a durable feature of Department of Revenue practice.

Background and statutory framework

The dealer definition. Tenn. Code Ann. § 67-6-102(25)(G) (Supp. 2010): "every person who … [m]aintains or has within this state, directly or by a subsidiary, an office, distributing house, sales room or house, warehouse, or other place of business."

The constitutional framework as it stood in 2011. Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992): physical presence required for substantial nexus on out-of-state seller. Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 250 (1987): affiliate activities can establish nexus if "significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."

Commissioner's constitutional-refund authority. Tenn. Code Ann. § 67-1-1802(a)(1)(A) (Supp. 2010) empowers the Commissioner to refund taxes paid against any clause of the United States Constitution. This gives the Commissioner a case-by-case mechanism to honor constitutional limits even when the statute on its face reaches a transaction.

Cross-reference to Op. 11-55 on contractual waiver. Op. Tenn. Att'y Gen. No. 11-55 (July 11, 2011): the State cannot by contract waive a taxpayer's obligation to pay sales tax where the Retailers' Sales Tax Act unambiguously establishes the obligation.

Commissioner's enforcement discretion. Fisher v. Secretary of United States Department of Health, Education and Welfare, 522 F.2d 493, 504 (7th Cir. 1975): the Secretary of the Treasury has substantial discretion in determining the proper measures to enforce federal tax laws. Tusant v. City of Memphis, 56 S.W.3d 10, 18-19 (Tenn. Ct. App. 2001): a court will not issue a writ of mandamus where a public official must exercise discretion or judgment in the performance of an official duty.

Attorney-fee exposure. Tenn. Code Ann. § 67-1-1803(d) allows significant awards of attorney's fees and expenses against the non-prevailing party in tax litigation.

Common questions

What was happening with Amazon in Tennessee in 2011?

Amazon was opening distribution facilities in Chattanooga (and later other Tennessee locations). The state and Amazon entered into a memorandum of understanding that deferred sales tax collection on Amazon's Tennessee sales for a period of time. Critics argued the deferral amounted to a waiver of Amazon's tax obligation; the Commissioner's discretionary-enforcement authority described in this opinion supplied the legal grounding for the arrangement.

What is "attributional nexus"?

A doctrine under which the nexus-creating presence of one entity (a subsidiary, affiliate, or agent) is attributed to another entity (the parent retailer) for tax-jurisdiction purposes. Tyler Pipe and Scripto are the foundational cases. Tennessee's Arco Building Systems case applied attributional nexus to a contractor scenario.

What's the practical impact of Question 4?

It gives the Commissioner cover to negotiate. Where a retailer plausibly argues no solicitation occurred and the subsidiary's warehouse activities don't "establish and maintain a market," the Commissioner can decline to push collection rather than litigate. That outcome looks like a waiver, but it is technically an exercise of enforcement discretion in a constitutionally uncertain case.

Why is § 67-1-1803(d) such a deterrent?

Tennessee allows recovery of attorney's fees by a taxpayer who prevails in tax litigation. The fee award can be substantial. An aggressive Department of Revenue stance on a contested case carries real downside risk if the State loses. The Commissioner weighs that risk in deciding which cases to push.

Is solicitation now required for attributional nexus?

The U.S. Supreme Court has not directly resolved the solicitation question; Wayfair overrode the entire physical-presence framework before that question could be decided. So the answer is academic: the post-Wayfair framework doesn't require physical presence at all, just an economic-nexus threshold.

Citations

• Tenn. Code Ann. § 67-6-102(25)(G)
• Tenn. Code Ann. § 67-6-201
• Tenn. Code Ann. § 67-1-1802(a)(1)(A)
• Tenn. Code Ann. § 67-1-1803(d)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
• Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987)
• Fisher v. Secretary of United States Department of Health, Education and Welfare, 522 F.2d 493 (7th Cir. 1975)
• Tusant v. City of Memphis, 56 S.W.3d 10 (Tenn. Ct. App. 2001)
• Op. Tenn. Att'y Gen. No. 11-52 (June 28, 2011) (cross-reference)
• Op. Tenn. Att'y Gen. No. 11-55 (July 11, 2011) (cross-reference)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-071.pdf

Original opinion text

October 3, 2011
Opinion No. 11-71
Out-of-State Dealer's Nexus as a Result of Activities of In-State Distribution Center

QUESTIONS

1. Do the activities described in Tennessee Code Annotated § 67-6-102(25)(G), under which a person, such as an out-of-state retailer, whether directly or by a subsidiary, maintains or has an in-state distributing house or warehouse, serve as nexus between Tennessee and the out-of-state retailer sufficient under the United States Constitution to require the retailer to collect and remit Tennessee sales tax if the distributing house or warehouse stores and delivers goods to the retailer's Tennessee consumers?

2. If the answer to the first question is yes, is the out-of-state retailer liable for Tennessee sales taxes irrespective of whether the retailer accepts sales orders from Tennessee consumers electronically, whether by telephone or the Internet?

3. Is there any statutory exemption from an out-of-state retailer's obligation under Tennessee Code Annotated § 67-6-201(25)(G) to collect sales tax?

4. If no statutory exemption applies, may the State of Tennessee, by contract or letter ruling, waive the obligation of an out-of-state retailer to collect sales tax?

OPINIONS

1. Consistent with this Office's Opinion No. 11-52 issued on June 28, 2011, if a retailer directly maintains or owns an in-state distributing house or warehouse, then the retailer has a physical presence within the State of Tennessee and, thus, has nexus with Tennessee for Commerce Clause purposes. On the other hand, if the in-state distributing house or warehouse is owned by a retailer's subsidiary, instead of the retailer directly, nexus is established only 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.

2. In cases where nexus can be established, the fact that the retailer accepts purchase orders electronically will not affect the retailer's liability for collecting and remitting Tennessee sales taxes.

3. The Retailers' Sales Tax Act does not contain a specific exemption relative to an out-of-state retailer's obligation to collect sales taxes under Tennessee Code Annotated § 67-6-201(25)(G). In applying this and other provisions of the Act, however, the Commissioner is required to consider whether imposition of the tax is consistent with any other provision of law, including the various clauses of the United States Constitution, as interpreted by authoritative court decisions.

4. As a general rule, the State of Tennessee cannot contractually waive a taxpayer's obligation to pay sales taxes where the Retailers' Sales Tax Act unambiguously establishes an obligation to pay such taxes. Nonetheless the Commissioner of Revenue possesses substantial discretion in determining the best measures to take to enforce Tennessee's tax laws. The exercise of such discretion is particularly appropriate where the enforcement of a tax may be debatable. In such instances, enforcement must be balanced with the Department's other competing duties and priorities and weighed against the possibility that a contested legal proceeding could result in the State's payment of significant legal fees and expenses to the taxpayer pursuant to Tennessee Code Annotated § 67-1-1803(d) as well as the establishment of precedential authority detrimental to the interests of the State.

ANALYSIS

1. In a follow-up request to Opinion No. 11-52, you have asked whether the activities described in Tennessee Code Annotated § 67-6-102(25)(G), specifically the ownership or maintenance of an in-state distributing house or warehouse by an out-of-state retailer or its subsidiary, are sufficient to create nexus between Tennessee and the out-of-state retailer. As your request points out, the Retailers' Sales Tax Act defines a dealer to be any person who, inter alia, "[m]aintains or has within this state, directly or by a subsidiary, an office, distributing house, sales room or house, warehouse, or other place of business." Tenn. Code Ann. § 67-6-102(25)(G) (Supp. 2010).

In accordance with the general discussion set forth in Opinion No. 11-52, if the retailer itself owns or maintains an in-state warehouse or distribution center, the retailer's physical presence within the State of Tennessee would be sufficient to establish nexus for Commerce Clause purposes. See Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992). On the other hand, if a subsidiary owns or maintains an in-state warehouse or distribution center, these in-state activities will establish nexus for the parent retailer only if they "are significantly associated with the [retailer'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).

As our previous opinion points out, "the United States Supreme Court cases dealing with this issue have involved actual solicitation activities by the in-state affiliate or contractor, thus leaving room for the argument that actual solicitation is required to establish attributional nexus." Op. Tenn. Att'y Gen. No. 11-52, p. 4 (June 28, 2011). Although this Office has argued on behalf of the State of Tennessee that solicitation activities by the in-state affiliate or contractor are not essential to a finding of nexus, we also have recognized that "tenable arguments can be made that actual solicitation activities are necessary to support a finding of nexus." Id. Accordingly, the current Supreme Court jurisprudence in this area does not firmly establish whether a subsidiary's ownership or maintenance of an in-state distributing center or warehouse would be sufficient to create nexus where the subsidiary is not engaged in actual solicitation activities.

2. In cases where nexus does exist, the retailer is liable for collecting and remitting Tennessee sales taxes regardless of the method by which the retailer accepts orders for goods sold to Tennessee customers. If the retailer's in-state activities are sufficient to establish nexus, the fact that orders are placed by electronic means, such as by telephone or the Internet, does not affect the retailer's state sales tax obligations.

3. The Retailers' Sales Tax Act does not contain a specific exemption for out-of-state retailers that are subject to Tennessee Code Annotated § 67-6-102(25)(G). It should be noted, however, that in applying this and other provisions of the Act, the Commissioner of Revenue necessarily must make case-by-case determinations not only of whether certain taxpayers fall within the statutory framework created by the Legislature, but also whether the Commissioner has the authority to impose sales tax obligations on taxpayers consistent with the Due Process and Commerce Clauses of the United States Constitution. See, e.g., Tenn. Code Ann. § 67-1-1802(a)(1)(A) (Supp. 2010) (empowering Commissioner to refund taxes paid against any clause of the United States Constitution).

4. With regard to your final question, we refer you to recent Attorney General Opinion No. 11-55, in which this Office stated that, where legislation unambiguously imposes state sales tax obligations relative to specific transactions, the State of Tennessee cannot contractually waive a taxpayer's obligation to pay the tax. See Op. Tenn. Att'y Gen. No. 11-55 (July 11, 2011). In reiterating this principle, however, and in accord with our answer to Question 3 above, we note the Commissioner of Revenue must necessarily possess considerable discretion in determining the appropriate measures to take to administer and enforce Tennessee's tax laws. See Fisher v. Secretary of United States Department of Health, Education and Welfare, 522 F.2d 493, 504 (7th Cir. 1975); see also Tusant v. City of Memphis, 56 S.W.3d 10, 18-19 (Tenn. Ct. App. 2001). The Commissioner's exercise of discretion is particularly appropriate when the enforcement of a tax may be debatable and must be balanced and coordinated with the Commissioner's other duties and priorities in administering all of the taxes entrusted to him. The Commissioner may also take into account the likelihood and expense of litigation his actions are likely to provoke, particularly given that Tennessee law allows potentially significant awards of attorneys fees and expenses against the non-prevailing party in tax litigation, see Tenn. Code Ann. § 67-1-1803(d), as well as the broader precedential ramifications of a decision being rendered that is adverse to the State.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Randy McNally
State Senator
307 War Memorial Building
Nashville, Tennessee 37243-0205