Tennessee State and Local Tax Update - Articles

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Posted by: Christy Gibson on Aug 20, 2013

By:  Brett Carter, TBA Tax Chair

What’s Going On (In Tennessee Tax), What’s Going On (In Tennessee Tax)… - Marvin Gaye

That’s right … Everyone in the TBA Tax Section wants to know what’s going on in the Tennessee tax world, so the section has summarized a few hot topics regarding Tennessee taxes that should be on your radar. Enjoy!

Final F&E Returns and Bankruptcy

From the most recent legislative session, Public Chapter 321 was enacted and provides businesses with a process to compute the franchise tax base on the final tax return(s) by defining “final return status” as the status of a taxpayer that is in the process of winding down business operations. The bill also allows businesses to use the “average monthly value” method to compute its final franchise tax base, in addition to allowing businesses to prorate the franchise tax liability when a return covers a tax period of less than 12 months. This is an important development for taxpayers winding down a business operation.

The bill also requires certain businesses being re-organized through a Chapter 11 bankruptcy to reduce their net operating losses by an amount equal to any discharge of debt that has been excluded from federal taxable income, similar to the way such transactions are treated for federal tax purposes. The effective date is  for tax periods ending on or after May 13, 2013, except for Section 8 dealing with net operating loss adjustments, which applies to any tax year in which a discharge of indebtedness occurs on or after October 1, 2013.

Intangible Holding Company - Voluntary Disclosure Process

The Tennessee Department of Revenue issued Notice 13-06 in June notifying taxpayers that its acceptance of voluntary disclosure of intangible expense deductions at a preferred settlement rate will be ending later this year. The Department states in the notice that, beginning September 30, 2013, it will no longer recommend settlements of cases involving intangible expenses paid to affiliates — i.e. “intangible holding companies.”

The Department's settlement initiative began back in late 2011, and since that time, the law has changed, requiring taxpayers for the 2012 tax period and after to file an application to claim deductions for intangible expenses paid to affiliates. The settlement generally requires a taxpayer to pay only 25% of the proposed assessment from the disallowance of such deductions.

The timing of this is not surprising as the department is starting to see the first of the applications under the new law being filed, with many that will be filed in August in accordance with the extended deadline due date for tax returns filed for the 2012 tax period. Taxpayers still on the fence on this issue should seriously consider the voluntary disclosure, especially if they plan to continue to claim the deduction for future periods. The application process will put a taxpayer on the radar with the department; and to the extent that the state denies the application, the State would have the right to pursue prior years on audit if no voluntary disclosure agreement has been executed.

Business Tax Changes

The Tennessee General Assembly passed a revision to the Tennessee Business Tax, the locally imposed gross receipts tax on the sale of goods and services. The 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.

Out-of-State Businesses

The Act clarifies that business tax applies 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:

1.     Performing any service in Tennessee that the extent such service is received by a customer in the state.

2.     Leasing tangible property that is located in the state.

3.     Delivering tangible property to a buyer in this state using the seller’s own vehicles.

4.     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.

Sourcing of Gross Receipts/Contractor Sourcing

The legislation codified former Rule 28 allowing 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.

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.

Tax Tribunal?

The NFIB supported legislation in the General Assembly that would have established a Tax Tribunal. The legislation was ultimately tabled until 2014 and is anticipated to be introduced again during the next legislative session. Stay tuned to developments on that front.

If you have topics that you would like to see covered in future publications, please let us know.