The Tennessee General Assembly recently passed a significant revision to the Tennessee Business Tax, a locally imposed gross receipts tax on the sale of goods and services (SB183/HB177). This change follows legislation enacted in 2011 that moved the administration and collection of the business tax from local governments to the Tennessee Department of Revenue. The new legislation, titled the “Uniformity and Small Business Relief Act of 2013,” clarifies the application of the business tax to out-of-state entities and the sourcing of sales involving multiple jurisdictions, and makes other changes to streamline compliance. The effective date of these changes applies to tax periods beginning on or after January 1, 2014.
Current law authorizes counties and municipalities to levy a business tax on certain businesses operating within the county or municipality, and the Commissioner of Revenue is authorized to collect and administer the tax. Credits against the business tax include credits for personal property taxes that have been paid to the local government.
The business tax has traditionally been imposed on taxpayers with “business locations” in Tennessee. The Act extends the business tax to out-of-state companies that do not have established physical business locations in the state but provide services or sell goods in Tennessee. Specifically, the business tax is imposed on businesses engaging in the following activities even if physical locations are not established in the state:
Performing any service in Tennessee that the extent such service is received by a customer in the state.
Observation: Assuming that a taxpayer otherwise has taxing nexus with Tennessee, sales of all taxable services to Tennessee customers will be subject to business tax under this legislation. Under prior law, there was a deduction for services “substantially performed in other states,” but Section 12 of the legislation revised that deduction and now limits the deduction to “sales of services that are received by customers located outside the state.” Thus, performance of services from locations outside of the state will not prevent the state from pursuing the collection of the tax from out-of-state businesses. This has a potential impact on out-of-state service providers that previously took advantage of the deduction for services not performed in Tennessee.
Leasing tangible property that is located in the state.
Observation: Tennessee business tax and sales tax traditionally have been imposed based on leases entered into in the state, regardless of whether the property leased was subsequently removed from the state or was moved from out of state to Tennessee after the property was leased. This new provision appears to be a departure from that treatment for out-of-state lessors whose property is relocated to Tennessee. It appears, however, that for lessors with Tennessee business locations, the existing rule will remain in effect, taxing in-state companies on the full lease price regardless of whether the property is later removed from the state.
Delivering tangible property to a buyer in this state using the seller’s own vehicles.
Observation: This change will likely have limited impact or effect, as out-of-state businesses that sell and deliver goods only via common carrier will not be subject to the business tax.
Purchasing and subsequently selling tangible property in a wholly in-state transaction where the purchase and sale are accomplished by the seller’s employees, agents, or independent contractors.
Observation: This provision appears to be targeted at clarifying the application of the Tennessee Business Tax to out-of-state petroleum providers that use in-state terminals of third parties to sell petroleum to their in-state customers. This issue is currently in litigation in Flash Oil Company of Arkansas v. Commissioner, Davidson County, Tennessee, Chancery Court No. 12 1743-III. In addition to the petroleum transactions like that in Flash Oil, it is possible that this provision may also impose the business tax on businesses selling through drop shipment arrangements. Companies in this situation should carefully review this issue to determine whether any action is needed.
Sourcing of Gross Receipts/Contractor Sourcing
For taxpayers with business locations in the state, the General Assembly has legislatively overturned the holding in Comcast of Nashville II, LP v. Farr, Davidson County, Tennessee, Chancery No. 08-636-II, which invalidated Business Tax Rule 28’s sourcing of a taxpayer’s statewide sales to the jurisdiction in which a taxpayer has a place of business. As a result, former Rule 28 is now codified and allows the business tax to be imposed on all in-state sales, sourcing these sales to the county or municipality in which the taxpayer maintains places of business.
Specific provisions applicable to contractors also have been codified from Rule 28, sourcing gross receipts of contractors to the city or county in which job sites are located with respect to jobs generating more than $50,000 of compensation. If compensation received by a contractor does not exceed $50,000 for a particular job, the receipts are taxed in the jurisdiction in which the contractor maintains its place of business. If no Tennessee business location exists, out-of-state contractors with less than $50,000 of gross receipts from a particular job should report and pay business tax to the state.
The Act grants the Commissioner of Revenue the discretion to alter the applicable tax period to coincide with the taxpayer’s fiscal year and also allows for the submission of a single electronic filing to cover the reporting of business tax due in multiple jurisdictions. These provisions are designed to streamline and simplify compliance with the business tax. The Act provides that a city or county is to renew a business license upon notification by the commissioner that a business has filed its return and paid the tax due. The Act also allows cities and counties to enter into an agreement with the commissioner to issue and renew business licenses.
Exemption for Small Businesses
The Act also broadens the exemption applicable to small businesses. Under prior law, businesses with gross receipts of less than $3,000 in the state were exempt from the business tax. This small-business threshold has been raised to exempt businesses with less than $10,000 of annual receipts in a county or incorporated municipality, a change that is expected to affect about 50,000 small businesses. Exempt businesses with more than $3,000 but less than $10,000 in gross receipts will still have to obtain a minimal activity business license and pay an annual $15 fee to both the county and municipality in which it operates its business.
Satellite Television and Video Programming Services
The Act as originally proposed would have extended the business tax to satellite television providers, which were previously not subject to the locally-imposed tax based on federal law. However, the satellite lobby was able to convince the General Assembly to adopt an amendment maintaining the exemption for the sale of equipment and services by satellite television service providers, based in large part on the argument that this was a new tax on satellite television services. Federal law prohibits cities and counties from taxing satellite television providers but allows states to levy taxes on the satellite industry. The federal preemption would have been eliminated by the legislature’s decision to convert the county-level tax to a state tax with corresponding allocations to the county governments.
Gasoline and Diesel Fuel
The Act reduces the rate applicable to gasoline and diesel fuel wholesalers from 0.1 percent to 0.03125 percent. This reduction is the result of a compromise reached between the Department of Revenue and fuel wholesalers on the proper rate.
The business tax has a variety of tax periods and return deadlines that depend on the classification of the taxpayer, which is based on the types of goods or services sold. Recognizing that passage of this Act would straddle these various periods, the General Assembly imposed a delayed effective date so that taxpayers would be able to plan accordingly. For example, service providers are covered by Classification 3, which has an annual tax period ending on June 30 of each year. Based on this effective date language, the first tax period for Classifications 1 and 5 will begin on January 1, 2014. For Class 2, the first applicable tax period will begin on April 1, 2014; the first applicable tax period for Class 3 taxpayers will begin on July 1, 2014; and the first applicable tax period for Class 4 taxpayers will begin on October 1, 2014
Before registering, businesses with no physical location in Tennessee should consider whether they were potentially subject to the business tax prior to the changes referenced above and whether a voluntary disclosure should be requested as part of the registration process.
The attorneys of Bradley Arant Boult Cummings’ State and Local Tax Practice are available to discuss any questions that taxpayers may have regarding application of the Act.