Tennessee is the most recent, and one of the last, state to adopt a new tax collection law to third-party marketplace facilitators. On April 1, 2020, Gov. Bill Lee signed Senate Bill 2182, which takes effect on October 1, 2020.
Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., most states have now moved to extend their local sales tax collection requirements to third-party marketplace facilitators.
SB 2182 defines a “marketplace facilitator” as any business that meets both of the following requirements:
- The business provides, for compensation, a “physical or electronic marketplace” to facilitate the sale of goods or services subject to Tennessee sales tax; and
- The business “directly or indirectly” collects payments from consumers on behalf of sellers who use the marketplace.
This definition excludes firms that only provide payment processing services. So for instance, if a seller receives payment from a customer through PayPal, that does not make PayPal a marketplace facilitator under SB 2182. But if the seller used eBay and PayPal in tandem to conduct the sale and process the customer’s payment, then eBay/PayPal would be responsible for collecting any Tennessee sales tax due.
Even if a business qualifies as a marketplace facilitator, the obligation to collect sales tax does not kick in unless the total sales made or “facilitated” involving Tennessee customers exceeds $500,000 during the previous 12-month period. The marketplace facilitator also does not have to collect sales tax in either of the following scenarios:
- An individual seller with “gross sales” exceeding $1 billion per year signs a separate agreement with the marketplace facilitator in which the seller agrees to collect and remit sales tax; or
- “Substantially” all of the sellers who use the marketplace facilitator’s platform are “registered dealers” required to collect and remit sales tax to Tennessee, which allows the state’s Department of Revenue to issue a waiver to the facilitator.
A marketplace facilitator will also not be held liable for any sales tax due if a seller provides “incorrect or inaccurate information,” so long as the facilitator “made a reasonable effort” to obtain the correct information. SB 2182 also forbids consumers from filing a class action lawsuit against a marketplace facilitator “relating to the over-collection of sale or use taxes.” Furthermore, if a marketplace facilitator fails to collect sales tax for any reason, consumers may still have to pay any applicable use tax on their purchases.
Will SB 2182 Help Make Up the Sales Tax Losses from COVID-19?
Krista Lee Carsner, the executive director of the Tennessee General Assembly’s Fiscal Review Committee, wrote in a revised March 2 fiscal note that requiring marketplace facilitators to start collecting sales tax would increase state revenues by approximately $84.8 million during the current fiscal year, and more than $113.1 million in subsequent years. Carsner said these estimates were based on a 2017 study from the U.S. Government Accountability Office, which found that approximately 38 percent of “collectible revenues” comes from online sales, with 46 percent involving a marketplace facilitator.
It’s worth noting Carsner’s note came just before the onset of the COVID-19 pandemic, which has already forced state and local officials throughout the country to revise their estimates of sales tax revenues, at least in the short term. For example, WBIR-TV in Knoxville, Tennessee, recently reported that city officials prepared their current budget assuming sales tax revenues of $174 million. But as COVID-19 has forced the temporary closure of many businesses, Knoxville officials now believe they could face a sales tax shortfall of as much as $18.2 million.
And while you might think collecting sales taxes from online marketplace facilitators would help make up this shortfall, keep in mind that SB 2182 will not take effect until October–so any new revenues may come too late to help state and local governments during their current fiscal year.
Michigan Court: Use Tax Exemption for “Things of the Soil” Does Not Cover Lawn Care Businesses
Is lawn care a form of “agriculture”? After all, grass is a plant, so growing and caring for a lawn would seem to fit within the literal meaning of agriculture. Yet most of us associate “agriculture” with producing crops or raising livestock on dedicated farmland–now mowing a lawn in a residential suburb.
A Michigan appeals court recently addressed this subject in connection with a use tax dispute. The case, TruGreen Limited Partnership v. Department of Treasury, involved a state law dating back to the 1930s that, in its current form, exempts from taxation any sale of property to a person “engaged in a business enterprise that uses or consumes the property, directly or indirectly, for either the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil.”
The specific question before the Court was whether this language applied to a lawn care company–i.e., is grass a “thing of the soil”?
TruGreen Unsuccessfully Seeks Over $1.1 Million in Tax Refunds
The plaintiff in this case, TruGreen, provides seasonal lawn care and related services for customers. TruGreen does not service agricultural clients, such as farms or nurseries. Rather, its business is limited to “turf and ornamental plant care.”
In 2015, TruGreen requested a $4,745.39 use tax refund from the Michigan Department of Treasury. The requested refund was connected to TruGreen’s purchases of “fertilizer, grass seed, and other products” needed in its lawn care business. TruGreen insisted these purchases were exempt from use tax under Michigan’s “things of the soil” law described above.
The Department of Treasury rejected TruGreen’s interpretation of the law. TruGreen then doubled down, not only requesting a conference with a referee; a lawyer hired to advise the state treasurer on sales tax disputes; but also demanding a refund of more than $1.1 million in use taxes paid over a four-and-a-half year period. Although the referee agreed with TruGreen it was entitled to a refund, the state treasurer ultimately declined to issue one.
TruGreen then went to court. The Michigan Court of Claims, a special trial court that hears civil lawsuits against state agencies, upheld the treasurer’s decision.
TruGreen then filed an appeal with the Michigan Court of Appeals.
In an April 10, 2020, decision, a divided three-judge panel of the Court of Appeals affirmed the Court of Claims. Writing for the two-judge majority, Judge Elizabeth L. Gleicher explained the “[s]tatutory vocabulary” of the state’s use tax exemption “describes a tax subsidy aimed at growing Michigan’s agricultural economy, not ornamental grass and shrubs.”
While grass and trees are technically “things of the soil,” as used in the tax law Gleicher said “that phrase is surrounded by words describing activities that take place on farms,” such as “tilling” and “harvesting.” So while TruGreen “plants grass and cares for it,” Gleicher said the company ‘s work “is unrelated to crop cultivation or agriculture in general.”
Is It OK to Use a Dictionary to Interpret Sales and Use Tax Laws?
The other two judges on the panel issued separate decisions in which they sparred over the proper use of the dictionary in interpreting the use tax exemption. Judge Brock A. Swartzle wrote the dissenting opinion. He said that “things of the soil” had a broader meaning than “agricultural products.”
More precisely, Swartzle said the 1933 edition of the Oxford English Dictionary provided the “most relevant definition” of the word “thing,” which was “ [a]n entity of any kind” and “[a]pplied (usually with qualifying word) to a living being or creature; occasionally to a plant.” Based on this, Swartzle said a “plain reading” of the use tax law clearly applied to grass, trees, and shrubs, as they were “plants” and thus “things of the soil.”
The third member of the appeals panel, Presiding Judge Douglas B. Shapiro, wrote a concurring opinion. He agreed with Judge Gleicher’s conclusion that the phrase “things of the soil” was a “term of art” was clearly intended to cover “crops grown for harvest and sale.”
Shaprio took exception to Judge Swartzle’s reliance on the dictionary to justify his contrary view. Shapiro noted the “use of dictionaries as sources of law is a very recent phenomenon” in the law, and relying on them to interpret the law “dispenses with the constitutional fact that the judiciary is an independent co-equal branch of government and ultimately responsible for the interpretation of statutes and their fair application in individual cases.”
Only a few sales/use tax rate changes to report effective May 1, 2020.
- Bibb County Use tax
- Cullman County Sales tax
- McMinn County Sales tax
- The city of Athens in McMinn County
- Maury County Sales Tax
- Wilson County Sales Tax
Wouldn’t this be a good time to have your sales and use tax filing outsourced? With all the changes happening in the world of sales tax, your existing team or provider may not have the capacity to handle it. Luckily, TaxConnex does.
Contact our friend at TaxConnex here.
Missouri Supreme Court: Furniture Sold to Hotels Is Not “Resold” to Guests
In the United States, sales tax is generally assessed only on the final “sale” of a good to a consumer or end-user. A “sale for resale” is therefore normally exempt from paying tax. But what qualifies as a “resale”? For example, if a hotel purchases furniture for its rooms, does it then “resell” that furniture every time it rents that room to a guest? Or must sales tax be collected on the initial sale of the furniture to that hotel?
The Missouri Supreme Court addressed these specific questions in a March 17, 2020, opinion, DI Supply I, LLC v. Director of Revenue. DI Supply I, LLC, sold more than $11 million in room furnishings–beds, chairs, desks, wall art, etc. to the Drury Hotels chain between 2012 and 2015. DI Supply did not collect or remit sales tax on any of these sales. The State of Missouri’s Director of Revenue subsequently conducted an audit, determined DI Supply was liable for sales tax, and made a total assessment of tax (plus interest) of $613,159.38.
DI Supply unsuccessfully challenged the Director’s decision at an administrative hearing. The company then appealed directly to Missouri’s Supreme Court, which has exclusive jurisdiction under that state’s constitution to interpret tax laws. In a 5-1 decision, the Court sided with the Director and held DI Supply was liable for the sales tax.
Judges Choose to Interpret Sales and Use Tax Laws Differently
DI Supply’s legal challenge centered on a specific clause in Missouri’s resale exemption statute that excludes “items of a non-reusable nature which are furnished to the guests in the guests’ rooms” from the state’s sales tax. As written, this exemption covers items like “soap, shampoo, tissue and other toiletries and food or confectionery items offered to the guests without charge.” DI Supply maintained this should also extend to the furniture in the room, as those items were also included in the “nightly rate for a hotel room.” In other words, DI Supply said that Drury Hotels was actually “reselling” the furniture each time it rented out the room.
While this argument might sound ludicrous – and indeed, was rejected by the Court – there was some legal basis for DI Supply’s position. There are several past rulings from the Missouri courts, some dating back 25 years, that define a “resale” to include the transfer of the “right to use” tangible personal property, such as furniture. The problem, the Court said, was that these decisions interpreted Missouri’s use tax laws, not its sales tax laws.
Transfer of title from DI Supply to Drury
As far as the Court was concerned in 2020, a “sale at retail”– i.e., a sale subject to sales tax – requires a “transfer of title or ownership for the purchaser’s use or consumption.” A transaction that only transfers the “right to use,” such as a guest renting a hotel room for the night, does not count. When DI Supply sold its furniture, there was a transfer of title to Drury Hotels. Conversely, when Drury later rented its rooms with that furniture, there was no transfer of title to the individual guests. DI Supply therefore had to pay the sales tax bill.
One Dissenting Judge Claims Precedent
As noted above, the Supreme Court’s decision was not unanimous. One judge, Zel M. Fischer, authored a dissenting opinion. He argued that the Court’s prior rulings with respect to the use tax should apply to the sales tax as well. After all, Fischer observed, the sales and use tax statutes were meant to “complement each other,” so it only made sense that “their respective language must be harmonized to allow for identical application.”
Fischer argued that his colleagues were effectively overturning 25 years of precedent. This not only violated stare decisis–the doctrine that judges should stick to their previous rulings; it also made little sense to interpret the sales and use tax statues differently. Ultimately, Missouri’s General Assembly establishes tax policy. Fischer said if the legislature wanted to set different rules for sales and use taxes, it could do so.