$122 nz at 3* RANDY SENATOR WAvs Ann MEANS COMMITTEE sm SENATORIAL ?>>'iHiB Hf @21111125}.1212 LOUDON AND Monks: courmss MEMBER cs COMMITTEES NASHVILLE GENERAL WELFARE, HEALTH HUMAN 307 WAR MEMORIAL BUILDING RESOURCES RULES (615) 141-6806 1-800-449-8366 ext. 16806 August 1, 2011 The Honorable Robert E. Cooper, Jr. Attorney General and Reporter State of Tennessee 425 Fifth Avenue, North Second Floor Nashville, Tennessee 37243 Re: Opinion Request Nexus created by In-State Distributing Houses or Warehouses Dear General Cooper: As Chairmen of the Finance, Ways Means Committees, we are requesting your assistance in answering questions concerning the establishment of sufficient taxable nexus by certain activities described in existing law. The Retailers' Sales Tax Act, Tenn. Code Ann. 67-6-101, et seq., and other statutes appear to be clear and unambiguous in terms of an out-of-state retailer's responsibility to collect and remit state sales tax if the retailer is engaged in making retail sales sourced to Tennessee residents. Tenn. Code Ann. 67-6-201 broadly imposes a sales and use tax on all persons for the privilege of engaging in the business of selling tangible personal property at retail. The state also has authority to impose sales and use tax to the fullest extent allowed by the Due Process and Commerce Clauses of the U.S. Constitution, as intended by Tenn. Code Ann. 67-6-211. Tenn. Code Ann. 67-6-601 provides that parties engaging in or conducting business as "dealers" in Tennessee must register with the Department of Revenue and collect and remit to the DOR sales and use tax on sales sourced to Tennessee. Tenn. Code Ann. 67-6-102(25) broadly defines a "dealer" to include any person who, in pertinent part, does the following: (C) Sells at retail, or who offers for sale at retail, or who has in such person's possession for sale at retail, or for use, consumption, distribution, or storage to be used or consumed in this state, tangible personal property as defined in this section; (D) Has sold at retail, used, consumed, distributed, or stored for use or consumption in this state, tangible personal property and who cannot prove that the tax levied by this chapter has been paid on the sale at retail, the use, the consumption, the distribution, or the storage of the tangible personal property; (G) Maintains or has within this state, directly or by a subsidiary, an office, distributing house, sales room or house, warehouse, or other place of business; As you know, the U.S. Supreme Court has held that in order for an out-- of--state dealer to be subject to a duty to collect sales tax on sales sourced to the taxing jurisdiction, the out--of-state dealer must first have a taxable nexus. National Bellas Hess, Inc. v. Illinois Dep't of Revenue, 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court has held that a substantial in-state "physical presence" is required to satisfy the Commerce Clause of the U.S. Constitution. The U.S. Supreme Court has further held that the activities of an in- state affiliate or independent contractor can be attributed to an out--of- state dealer for purposes of establishing nexus if the in-state activities are significantly associated with the out-of-state dealer's ability to establish and maintain a market in the state. Tyler Pipe Industries v. Washington Department of Revenue, 483 U.S. 232, 250 (1987). Federal and state courts have upheld tax assessments against out--of-state dealers based on this "attributional nexus" standard. See, Arco Building Systems, Inc. v. Chumley, 209 63, 74 (Tenn. Ct. App. 2006); America Online, Inc. v. Johnson, 2002 Tenn. App. LEXIS 555, at Borders Online, LLC v. State Bd. of Equalization, 29 Cal. Rptr. 3d 176, 189 (Cal. Ct. App. 2005)(stating, "There is no requirement that the out--of--state retailer's in-state representative be engaged in the solicitation of sales or in sales transactions to satisfy the substantial nexus required by the commerce The Quill court recognized that the presence of a "small sales force, plant, or office" may be relevant in making the nexus determination. Quill, 504 U.S. at 316. Accordingly, we seek your guidance on the following questions: 1. Do the activities described in Tenn. Code Ann. 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 U.S. 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 Tenn. Code Ann. 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? We thank you for your advice and assistance and look forward to your response. lf you have any questions or need further information, please feel free to call 6l5-74l--6806 or Megan Moore in the Office of Legal Services at 74l-4858. Very truly yours, Senator Randy McNally Representative Charles Sargent Chairman Chairman Senate Finance, Ways Means House Finance, Ways Means