Fintech lobbyist says Tennessee remittance tax is unconstitutional

• Key insights: The Financial Technology Association is challenging Tennessee's cross-border remittance tax, claiming that it infringes on Congress' power to regulate foreign commerce.
• What's at stake: Payments companies like PayPal and Remitly have said that their money transmissions systems are not equipped to meet the law's "burdensome" obligations to identify, calculate, collect, and remit the tax. 
• Forward look: The filing sets off what could potentially be a prolonged legal battle through the state's court system and could eventually land in front of the U.S. Supreme Court. 

Tennessee's novel cross-border remittance tax is under threat thanks to a new lawsuit filed by the Financial Technology Association that challenges its constitutionality. 

The lawsuit, filed in the Davidson County Chancery Court in Tennessee, is asking the court to declare the law unconstitutional on the grounds that it violates the U.S. Constitution's dormant commerce clause, which prohibits states from enacting laws that discriminate against foreign commerce —  and the import-export clause, which prohibits states from taxing imports and exports without Congress' consent. FTA is also seeking an injunction that prevents the tax from taking effect. 

"When a state singles out international payments for special taxation, that is unconstitutional, plain and simple," Penny Lee, FTA's president and CEO, said in a statement. "The dormant Commerce Clause exists precisely to prevent this kind of unilateral state action. Tennessee consumers sending money to friends and family or business owners paying global vendors or suppliers should not face a higher cost simply because a state decided to tax the way they transact." 

The tax goes into effect Jan. 1, and imposes a $10 fee on transactions under $500, with an additional 2% fee for ones that exceed $500.

While banks have a carve-out from collecting the tax, fintech payments companies are on the hook to identify covered transactions and calculate, collect and remit the tax. 

Some of those companies, such as PayPal and Remitly, do not have money transmission systems that are equipped to comply with the law, according to the filing, and would have to modify their transactions processing systems, compliance software and consumer-facing interfaces.

Historically, courts have upheld the federal government's ability to regulate foreign commerce, Keith Barnett, a partner at Troutman Pepper Locke, told American Banker. 

"The rule [says] anything that affects interstate commerce, either directly or indirectly, is within the exclusive domain of Congress," Barnett said. "Courts have construed the commerce clause very broadly in favor of that being in the federal government's exclusive domain, and that's what this complaint is leaning into." 

The filing sets off what could end up being a prolonged legal battle through the state's court system and could eventually land in front of the U.S. Supreme Court. 

There is precedent for the FTA's challenge to the tax. In 1994, a Massachusetts state tax levied on milk products was struck down by the Supreme Court because it discriminated against non-Massachusetts citizens and businesses, according to the Cornell Law School Legal Information Institute. The results could also have broader implications for other states looking to enact similar laws, said Carlin McCrory, an associate at Troutman Pepper Locke. 

"I assume the FTA wants to take this stance because it also doesn't want other states to start doing the same thing, and then we have this hodgepodge of state legislation, " McCrory told American Banker. 

The FTA's argument against Tennessee's remittance tax is similar to arguments made by critics of the Trump administration's broader tariff regime — namely that only Congress has the power to levy this type of tax. 

Oklahoma is the only other state that has a remittance tax on its books. That law was enacted in 2009, before FTA's founding in 2021. On a federal level, the One Big Beautiful Bill imposes a 1.5% tax on international transactions.