After a two-year delay, Tennessee is preparing to modify sales tax requirements including destination sourcing. The state is making the changes as part of its participation in the Streamlined Sales and Use Tax Project, a national program to simplify and standardize sales and use tax requirements.

Tennessee’s updates are scheduled to take effect on July 1, 2017. Businesses across the state should evaluate their POS systems and sales tax compliance procedures now to determine what modifications may need to be made to meet the state’s new sales tax policies.

Simplifying Sales Tax

Sales and use tax rates and regulations vary by jurisdiction, even within state lines. Keeping track of requirements and the transactions subject to sales tax has made compliance difficult for businesses. It also made it difficult for states to collect on the full amount of commerce conducted within the state; the Supreme Court ruled in Bellas vs. Illinois and Quill Corp v. North Dakota that states’ sales tax systems were too complicated to enforce on businesses that did not have a physical presence within the state. With the rapid increase in online and state-border-crossing transactions, states are increasingly evaluating how their sales tax requirements could be improved.

The Streamlined Sales Tax Governing Board seeks to address sales tax complications by creating a set of standards, definitions and policies, collectively the Streamlined Sales and Use Tax Agreement (SSUTA), to make sales tax compliance easier to manage. States that elect to participate in the Streamlined Sales Tax Governing Board must adopt the SSUTA before becoming Full Members of the Board. Currently, there are 23 full member states, excluding Tennessee.

Tennessee and the Streamlined Sales Tax

Tennessee elected to join the Streamlined Sales Tax Governing Board in 2005. It adopted some of the SSUTA updates in 2008 and 2009 and became an Associate Member of the board.

Due to the complexity involved, the state voted to delay other SSUTA provisions, including the destination sourcing requirement, local rate and boundary updates, general sourcing definition, uniform tax return allowances and the bundled transaction definition, until July 1, 2015. It then pushed the effective date back further until July 1, 2017.

The largest piece of the puzzle for Tennessee involved a software system that would allow retailers to account for sales tax rates based on the buyer’s location. Tennessee currently uses origin sourcing to determine sales tax. Under origin sourcing rules, retailers calculate the buyer’s sales tax obligation based on the rate of the seller’s brick-and-mortar location.

Full Members of the Streamlined Sales Tax Governing Board are required to use destination sourcing, the rate of the buyer’s brick-and-mortar location. Tennessee’s existing software does not account for the sales tax in the buyer’s location, and the state has put off approval for software that would accommodate destination sourcing.

Although it was expected to be delayed again, Tennessee recently approved the destination sourcing software, which makes the July 1, 2017, effective date of the destination sourcing provision more probable.

What This Means for Businesses

Businesses should begin to prepare for the changeover to destination sourcing . POS systems will require significant modifications to ensure they are compliant with the destination sourcing requirement.

It is likely that Tennessee will grant a compliance leniency period because of the scale of the changes that will be involved, but the state has not yet released further details about the transition to the July 1, 2017 SSUTA provisions.

We will keep you up-to-date as more details emerge. For information on how your businesses can prepare for the sales tax changes, please contact Sonya Daniels. Sonya can be reached at sdaniels@cbiz.com or 901.842.2830.

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