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S.A.L.T. Select Developments: Tennessee

Baker Donelson's S.A.L.T. Select Developments will identify important state and local tax developments from Tennessee.

State and local taxes impact almost every taxpayer. S.A.L.T developments in any one jurisdiction can be frequent and sometimes confusing. Where multiple jurisdictions are involved, staying current with state and local tax developments can be overwhelming for any taxpayer.

To assist you with staying current on a periodic basis, Baker Donelson's S.A.L.T. Select Developments will identify one or more recent state and local tax developments from Tennessee.

August 2021

Packaging of Multiple Products/Services for Sales Tax Purposes: The Tennessee Department of Revenue (Department) issued Letter Ruling No. 21-04 dated April 28, 2021, which was posted August 9, 2021 on the Department's website. The taxpayer in this ruling is a technology company that develops and sells consumer electronics, computer software, online services and related support to its customers. These products and services include devices, subscription music, subscription TV, online magazines and newspapers, online games, cloud storage, warranty contracts and insurance. The taxpayer sells each of the foregoing individually, but also proposed to offer consumers a new way to purchase those offerings through packages for a set monthly subscription price that includes both products and/or services. In responding to questions addressing the new package offerings, the Department stated that when a transaction involves items or services that are all independently subject to sales tax, the entire transaction is subject to tax; and, similarly, if all the items or services are independently either not subject to sales tax or are exempt, the entire transaction is not subject to tax. However, where the offering proposal includes two or more items sold for a single price and at least one of the items is subject to the sales tax, the entire sales price is subject to the tax. Based upon the foregoing, the Department then addresses the application of the sales tax to packages offered by the taxpayer without a device, as well as packages including a device. The ruling also addresses the applicable state and local tax rates to apply to these differing packages, as well as the appropriate method for sourcing the differing package transactions under differing factual circumstances. For instance, the Department stated that if the taxpayer's packages are purchased from a business location in Tennessee, then the sale is sourced to that location and the local sales tax rate that applies is the local rate for that business location; however, if the sale is made from out-of-state, then the taxes are sourced under different principles depending upon whether tangible personal property is included within the package. More information can be found here.

Shipment to In-State Transload Facility Did Not Create Sales Tax Liability: On July 14, 2021, the Department issued Letter Ruling No. 21-07 addressing the application of the Tennessee sales tax to out-of-state sales shipped to a transload facility in Tennessee. In this situation, the taxpayer is a manufacturer headquartered outside Tennessee, shipping products to wholesale customers that in turn resell the products to other resellers that sell the products to consumers. The taxpayer ships the products from outside Tennessee by either truck or railcar under contractual terms that provide that the risk of loss passes from the taxpayer to its customer upon placement of the product into the hands of the common carrier at the taxpayer's business locations outside Tennessee. The products are then shipped to a third-party transload facility in Tennessee, where the transload facility employees offload the product and reload such products onto other railcars or trucks for shipments by the taxpayer's customers to other locations both inside and outside Tennessee. The taxpayer is registered for Tennessee sales tax as a remote seller, but the taxpayer's customers using the transload facility are not registered in Tennessee. Under these facts, the Department determines that the taxpayer's sales to customers are not subject to Tennessee sales tax when title passes outside of Tennessee and there is no indication that there is a transfer of possession to customers in Tennessee. The Department further noted that since the title passes at taxpayer's out-of-state business locations, the sale for purposes of taxation occurs outside Tennessee and the taxpayer should comply with the laws of the state where the sale is made. Further, the Department noted that merely traveling through a transload facility in Tennessee is not a taxable event; however, when the taxpayer's customer transfers title and possession to a purchaser located in Tennessee, the customer's sale of the product will be subject to either sales or use tax unless the sale qualifies as a sale for resale or is otherwise exempt under Tennessee law. More information can be found here.

July 2021

Interest Rate Changes: In early July, the Tennessee Department of Revenue (Department) announced that the interest rate to be applied to assessments and refunds relative to the period from July 1, 2021 through June 30, 2022, continues to be 7.25 percent, which is the same interest rate that applied to the prior year period. The interest rate for installment payment agreements, however, has been increased to 9.25 percent for the period July 1, 2021 through June 30, 2022, up from 8.25 percent for the prior year period. More information can be found here.

Proposed Repeal of Sales Tax Rule: In early July, the Department filed a Notice of Rulemaking Hearing with the Tennessee Secretary of State announcing a hearing to be held on August 17, 2021 in the Andrew Jackson Building, Nashville, Tennessee, to address matters pertaining to the proposed repeal of Sales and Use Tax Rule 1320-05-01-.96 (Rule 96). That Rule 96, which originally was certified in 1974, provides in essence that, except where the Department agrees otherwise, sales of tangible personal property or taxable services made by a dealer to an out-of-state vendor who directs that the dealer act as the out-of-state vendor's agent to deliver or ship tangible personal property or taxable services to that out-of-state vendor's customer, who is a user or consumer, are subject to the sales and use tax. Rule 96 goes on to state that the dealer so acting as an agent for the out-of-state vendor must collect the tax involved on the transaction unless the transaction comes within the conditions indicated in Rule 96. By seeking repeal of Rule 96, the Department is apparently acknowledging that, with the enactment of recent legislation, out-of-state dealers now have sales tax collection and remittance responsibilities under either the new filing threshold (see Notice #20-14, dated July 2020, here) or as a marketplace facilitator (see Notice #20-15, dated July 2020, here), and therefore Rule 96 would no longer be required. More information regarding the hearing for this proposed repeal can be found here.

Impact of IRC Sections 754 And 743(b) For Franchise And Excise Tax Purposes: On July 14, 2021, the Department posted Letter Ruling No. 21-06, dated June 10, 2021. This Ruling addresses the effect for Tennessee franchise tax purposes of an election under Internal Revenue Code Section 754 and the subsequent decision to push down the adjustment in partnership property to the "Taxpayer"; as well whether, for Tennessee excise tax purposes, the Taxpayer's net earnings or net loss will be determined with or without making any addition or subtraction relating to a Section 743(b) basis adjustment pursuant to that Section 754 election. The facts in this Ruling indicate that the Taxpayer is a single-member limited liability company that is owned through a tiered ownership structure consisting of other single-member limited liability companies ultimately owned by a multi-member limited liability company classified for federal tax purposes as a partnership ("Partnership"). Members in the Partnership sold controlling interest in the Partnership to "Purchasers", and thereafter the Partnership made an election under Section 754 such that the Purchasers' adjusted basis in the Partnership's property was stepped up to fair market value under Section 743(b). The Partnership intends to use "pushdown accounting" on its books and records and on its consolidated financial statements prepared under generally accepted accounting principles (GAAP).

Under these facts, the Department determined in this Ruling that the pushdown accounting allows for the Purchasers' higher purchase price to be used in the preparation of the Taxpayer's separate financial statements as well as the consolidated financial statements; and, therefore, if the Taxpayer elects to apply pushdown accounting, the Taxpayer must compute its net worth for franchise tax purposes consistent with its GAAP balance sheet. With respect to the excise tax, the Department noted in this Ruling that an election under Section 754, followed by a basis adjustment with respect to a transferee partner, is applicable with respect to that transferee partner only pursuant to Treasury Regulations under Section 743. Based upon the foregoing, and based on references to Treasury Regulations under Section 743 to the effect that adjustments to the basis of partnership property under Section 743(b) have no effect on the common basis of partnership property, the Department determined that for Tennessee excise tax purposes the Taxpayer's net earnings or net loss will be determined without making any addition or subtraction relating to the Section 743(b) basis adjustment pursuant to a Section 754 election. More information can be found here.

June 2021

Various Tax Legislation Enacted: In addition to those new laws referenced in our May edition, Governor Lee has signed into law additional tax and related legislation passed by the Tennessee Legislature during the 2021 Session. Some of those additional tax related legislative enactments include 2021 Public Chapter 217 which, effective April 22, 2021, tolls the statute of limitation for collection of taxes upon the imposition of a bankruptcy stay or other similar events, and permits such statute to commence running 30 days after the stay is lifted or the proceeding prohibiting the collection ends (more information can be found here); Public Chapter 522 which, effective May 25, 2021, authorizes a county trustee to proceed against a taxpayer who is delinquent in the payment of tangible personal property taxes by retaining an agent to collect such taxes, subject to the conditions set forth in this new law, the effectiveness of which is repealed on July 1, 2024 (more information can be found here); and Public Chapter 559 which, effective for tax years beginning on or after January 1, 2021, adds one month to the current six-month extension of time in which taxpayers can file a franchise and excise tax return (more information can be found here).

Marketplace Facilitator Ruling: Additionally, the Tennessee Department of Revenue (Department) issued Letter Ruling #21-05, dated April 28, 2021 and posted June 1, 2021, finding that the activities of a certain "Taxpayer" did not create "marketplace facilitator" responsibilities since the necessary requirements to be such a facilitator were not satisfied. The Taxpayer in this Ruling is affiliated with other companies that manufacture and distribute certain products to a network of independent dealers located across the country. The Taxpayer created an online platform which enabled the participating dealers to create an inventory listing and make business-to-business sales to certain customers of products purchased from these other companies affiliated with Taxpayer. The Taxpayer required the participating dealers to enter into a contract with the Taxpayer and potentially remit an initial fee for use of the platform. However, the Taxpayer did not collect payments from customers of the participating dealers; nor did the platform perform any functions facilitating payment for the orders, although the platform did provide inventory listings and confirmation of preliminary order approvals or rejections. The Department concluded that the Taxpayer's platform is a "marketplace" since it is an internet website where taxable tangible personal property is offered for sale; however the Taxpayer is not a "marketplace facilitator" since the Taxpayer is not involved in collecting or remitting payments even though the Taxpayer is involved in confirming preliminary order approvals or rejections. As a result, the Department determined that the Taxpayer under these facts is not a marketplace facilitator; and, thus, is not required to collect and remit Tennessee sales and use tax on sales made to Tennessee consumers who use this online platform. More information can be found here.

Sales Tax Holiday Notice: Further, the Department has issued several Notices regarding various tax and related matters, one of which being Notice #21-10 addressing the sales tax holiday for food, food ingredients and prepared food, with such holiday beginning on Friday, July 30, 2021 and ending on Thursday, August 5, 2021. More information can be found here.

May 2021

Various Tax Legislation Enacted: The Tennessee Legislature adjourned the 2021 Session in early May, but not before passing various tax and related legislation which have now been signed by Governor Lee. Just some of those tax related legislative enactments include 2021 Public Chapter 154 which allows businesses to subtract COVID related relief received from the State in computing net earnings and losses for excise tax purposes, effective April 14, 2021 (more information may be found here); Public Chapter 480 which allows sales or use taxes collected from a customer to be refunded to the customer, rather than to the dealer, under certain circumstances, effective October 1, 2021 (more information may be found here); Public Chapter 285 which deletes certain streamlined sales tax definitions and other provisions first enacted in 2007, the implementation of which have been delayed through subsequent legislation, effective April 30, 2021 (more information may be found here); Public Chapter 214 which establishes protections for taxpayers relying on guidance issued by the Tennessee Department of Revenue, effective July 1, 2021 (more information may be found here); Public Chapter 86 which for sales tax purposes excludes from the definition of tangible personal property certain mains, pipes, pipeline and tanks, as well as certain railroads, railroad structures and related items, and deems the foregoing as realty upon installation for purposes of the sales tax laws, effective July 1, 2021 (more information may be found here); Public Chapter 456 which enacts a sales tax holiday on food and food ingredients and on prepared food sold between July 30, 2021 and August 5, 2021, effective July 1, 2021 (more information may be found here); and Public Chapter 420 which makes numerous changes to Tennessee's laws involving trusts and rights and responsibility related thereto, generally effective July 1, 2021 with certain amendments effective January 1, 2022 (more information may be found here).

April 2021

Extension to May 17: On March 19, 2021, the Tennessee Department of Revenue (Department) published Notice #21-02 stating that, consistent with the IRS's decision to extend the filing deadline for individuals, the Department has extended the due date for filing and paying the 2020 Hall income tax from April 15, 2021 to May 17, 2021. The Hall tax has a zero tax rate for tax years beginning on or after January 1, 2021. The Department also extended the franchise and excise tax due date from April 15, 2021 to May 17, 2021 for individuals who file a Tennessee franchise and excise tax return using Schedule J2 – Computation of Net Earnings for a Single Member LLC Filing as an Individual. These extensions are automatic, and no further action is required per said Notice. The Department did state that interest and late filing penalties will not be applied for those returns filed and payments made on or before this extended due date. Estimated payments due on April 15, 2021 are not included in this extension. More information can be found here.

New Exemption/Revised Credit for Film Industry: Further, and on March 29, 2021, Governor Lee signed legislation, 2021 Public Chapter 70, enacting a new sales/use tax exemption and a revised franchise and excise tax credit for "qualified production" activities – meaning in essence the production of certain films, the creation of certain computer-generated imagery, and stand-alone audio or visual post-production scoring and editing in Tennessee. With respect to the sales tax exemption, the new legislation provides that the sale or use of tangible personal property, computer software, or services that are necessary to and primarily used for qualified production are exempt from the sales/use tax. The applicant for the exemption must apply to the Tennessee Film, Entertainment and Music Commission (Commission) to seek a determination that the applicant is engaged in a qualified production; and, if so determined, the Commissioner of the Department and the Commissioner of the Department of Economic and Community Development (ECD) thereafter must each determine that approving the exemption application is in the best interests of the state. With respect to the restated franchise and excise tax credit, an applicant engaged in qualified production can be awarded a credit for qualified payroll expenses which may be taken on any franchise and excise tax return but not exceeding 50 percent of a combined tax liability shown on that return before the credit is taken. Qualified payroll expenses means compensation paid in Tennessee for a "qualified position" during the applicable tax period, and a qualified position means services performed by an employee or independent contractor determined by the Commission to be necessary to and primarily for a qualified production. Unused credit can be carried forward for not more than 15 years. The applicant must apply to the Commission for purposes of determining whether the applicant is engaging in qualified production; and, if so approved, the Commissioner of each of the Department and ECD must determine that approving the credit application is in the best interests of the state. This legislation is effective July 1, 2021 for the sale/use tax exemption, and effective July 1, 2021 for the franchise and excise tax credit, applying to tax years beginning on or after that date. More information can be found here.

March 2021

Updates Reported – On February 9, 2021, the Tennessee Department of Revenue posted Letter Ruling #21-02, which addresses the application of the sales and use tax to fees and dues charged for membership in a professional membership organization. Basically, the organization described in this Ruling is a not-for-profit professional membership association, which is exempt from federal income tax under Internal Revenue Code Section 501(c)(6). The organization provides its members with certifications, resources, tools, academic research, publications, professional development courses, and networking opportunities. These individual members pay a one-time application fee to become a member in the organization. As part of such membership, individual members have connection through the organization to the global community of similar professionals, discounts on certification exam fees, and professional development opportunities, among others. The individual members can interact with the organization through an online dashboard, which allows a member to access and update profile information, view a list of upcoming events and webinars, among other opportunities. However, members are not required to utilize any of the organization's products and services; and, according to the organization, many members do not utilize the dashboard or online materials. The organization also offers a free membership that permits a user access to the organization's global community, as well as access to a store to purchase various books, guides, exam preparation materials, among others. In concluding that the membership fees paid to join the organization are not subject to the Tennessee sales and use tax, the Department noted that the tax applies to the sale of tangible personal property and specifically enumerated services unless an exemption applies, but that professional memberships are not listed as taxable on a stand-alone basis as a taxable service or as an amusement. Further, the benefits of the membership, according to the Department, do not necessarily result in the membership fee becoming taxable. The Department noted that under the facts presented, members receive access to a variety of benefits, most of which are not taxable; and, as a result, the added benefits are not essential to the membership sales, but rather are better classified as incidental to the sale of the individual memberships. As such, the sale of the memberships was determined not to be taxable. More information can be found here.

Additionally, the Department on March 12, 2021 issued Tobacco Tax Notice #21-01 dealing with the delivery sales of electronic nicotine delivery systems. According to this Notice, federal law in December 2020 was amended so as to include such delivery systems in the definition of "cigarette." The amended federal law imposes various conditions upon such systems including the filing of monthly reports with the tobacco tax administrator of each state no later than the 10th day of each month. The Department is the tobacco tax administrator for shipments into Tennessee. The Notice states that, beginning May 10, 2021, and the 10th of every month thereafter, any entity shipping electronic nicotine delivery systems into Tennessee from another state is required to report all such shipments to the Department. More information can be found here.

February 2021

Updates Reported – On February 4, 2021, the Tennessee Department of Revenue posted Letter Ruling # 21-01, which addresses the application of the Tennessee sales and use tax to certain data analytics services. As referenced in the Ruling, the taxpayer provided web-based data analytics services to its customers located across the country, including in Tennessee. These services are described in the Ruling as geared towards the taxpayer's customers achieving efficiency and effectiveness in their strategic planning initiatives. The taxpayer aggregated the customer's data with other data obtained from third parties, and then used such information to create comprehensive data sets stored on servers that the taxpayer leased and further processed in a variety of ways to provide a range of analytics services to its customers. Those services include digital reporting that provided an overall measure of the customer's performance and an evaluation of the health and growth of the customer's competition; a web-based data analytics dashboard which allowed the customer to search the taxpayer's data and allowed for the generation of reports to the customer; as well as consulting services that were available on-demand so as to allow the taxpayer's customers to supplement their internal analytics efforts with assistance from the taxpayer's employees, as well as more involved consulting services. Pricing for these analytics services could either be by a single, all-inclusive charge, or paid on an itemized basis for each particular analytics service provided by the taxpayer. In determining that these services were not subject to the Tennessee sales and use tax, the Department initially noted that the access and use of computer software in Tennessee is subject to the tax. Further, the Department referenced that the sales and use tax applies to remotely accessed software – unless the true object of the transaction is not independently subject to sales tax and that the items that would be subject to the sales tax are merely incidental to the true object of the transaction. Under the facts in this Ruling, and while the taxpayer did use software to deliver results for its customers, the Department determined that this software method of delivering the results of the taxpayer's services is merely incidental to the data analytics services that the customers are seeking. Accordingly, the Department determined that the true object of these transactions was to deliver non-taxable data analytics services – which, as the Department noted, is described in the statutory exemption as "information or data processing services, including the capability of the customer to analyze such information or data provided by the dealer." The Department did caution, however, that to the extent the taxpayer licenses software to customers who use the software's functionality with no additional services provided by the taxpayer, the sale is a taxable sale of remotely accessed software. More information can be found here.

January 2021

Updates Reported – On January 11, 2021, the Tennessee Department of Revenue posted on its website Revenue Ruling # 20-09, which addresses a question involving the sourcing of receipts from sale of tangible personal property for Tennessee franchise and excise tax purposes within the facts set forth in that Ruling. The taxpayer in that Ruling manufactured custom-built tangible personal property at its facilities located outside Tennessee but stored the finished tangible personal property at a facility in Tennessee. This property is of a type that is required to be registered, and customers register the property typically in the state where the property will be stored. Registration is at the same time the property is being manufactured and before the customer takes title to or possession of the property. Additionally, the customer takes possession of the property at the taxpayer's facility in Tennessee, and also receives training at that facility prior to removing the property to its location of registration. In response to the question of whether the taxpayer could exclude from the numerator of its franchise and excise tax apportionment formula the receipts from sales to customers of such property destined for a location outside Tennessee, the Department stated that the place of registration may be indicative of the purchaser's location but is not controlling in determining the sourcing of receipts for franchise and excise tax purposes. Instead, and after reviewing wording within these tax statutes pertinent to determining sourcing, the Department ruled that the taxpayer should exclude from the numerator of its apportionment formula the receipts from sales of its custom-built tangible personal property that is delivered to a purchaser in Tennessee when the purchaser has no location in Tennessee, but must include the receipts in the numerator of such apportionment formula if the purchaser has a location in Tennessee. More information can be found here.

December 2020

Updates Reported – The Tennessee Department of Revenue has recently issued two publications addressing different components of Tennessee tax law. Revenue Ruling # 20-12, dated November 18, 2020, addresses the interpretation of the minimum measure of Tennessee's franchise tax; and Notice # 20-21, posted December 9, 2020, addresses the taxability of hemp and nicotine products for purposes of the tobacco tax.

With respect to the minimum measure of the franchise tax, Revenue Ruling # 20-12 considered a fact situation involving a homebuilder operating in Tennessee and recording on its books the value of its home development projects based on the various stages of development. The Ruling addressed the question of whether the minimum measure of the franchise tax includes costs of labor, interest, permits, services, and other non-tangible items that are capitalized and presented on the taxpayer's balance sheets as components of its inventory and/or work in process. The Department, relying in part upon on a Tennessee Supreme Court decision from 1976, concluded that capitalized costs are a part of the value of the taxpayer's real and tangible personal property and, therefore, are included in the franchise tax minimum measure. The Ruling acknowledges that pursuant to Tennessee Code Annotated Section 67-4-2108(a)(2) [cited erroneously in the Ruling as (a)(3)], property that is under construction and not being utilized in whole or in part is excluded from the minimum measure. However, the Ruling concluded that since the taxpayer is in the business of building and selling real property, all of the construction in process is treated as being utilized for purposes of the minimum measure, and therefore is not excluded under Section 67-4-2108(a)(2). The Ruling also references the requirement under Section 67-4-2108(a)(3) that property be valued in accordance with generally accepted accounting principles (GAAP), at costs less accumulated depreciation. The Ruling noted that GAAP contemplates the capitalization of soft costs to inventory, and therefore the soft costs (costs of labor, interest, permits, etc.) enhance the value of the real property and thus should be included in the cost of the home for purposes of the minimum measure. More information can be found here.

As to Notice # 20-21, and by way of background, Tennessee imposes a tobacco tax on the privilege of selling cigarettes and other tobacco products (OTP). The definition of "cigarette" for Tennessee tobacco tax purposes necessarily includes tobacco as a required ingredient. The definition of OTP also includes tobacco or substitutes for tobacco as a required ingredient. Notice #20-21 recognizes that a wide variety of new products that do not contain tobacco are being introduced into this State, some of which contain nicotine and some of which do not. The Department states in the Notice that the tobacco tax will not be applied to these non-tobacco products without statutory authorization on what is considered as a tobacco substitute. For example, the Department states that hemp cigarettes and herbal cigarettes generally do not contain tobacco, and therefore are not subject to the tobacco tax unless tobacco becomes an ingredient of those products. E-cigarettes and vapor devices also do not contain tobacco according to the Notice, and therefore are not subject to the tobacco tax. Similarly, certain other nicotine products, including smokeless nicotine pouches and nicotine gum, do not contain tobacco, and are therefore not subject to the tax. More information can be found here.

November 2020

Updates Reported – The Tennessee Department of Revenue recently issued three Rulings regarding various issues. On October 9, 2020, the Department issued Revenue Ruling # 20-08, in which the Department determined that a foreign corporation storing inventory in Tennessee was doing business in this State but was nevertheless not subject to the franchise tax because of a statutory exception under Tennessee Code Annotated Section 67-4-2004(49)(B). That exception applies to a taxpayer that is treated as a foreign corporation under the Internal Revenue Code and has no income effectively connected with a U.S. trade or business. The Department determined that the taxpayer in this Ruling falls within this exception as it is a foreign corporation for federal income tax purposes and has affirmed that it has no income that is effectively connected with a U.S. trade or business. This taxpayer was determined not to be subject to the franchise tax. The taxpayer did not request a ruling with respect to the excise tax, but in a footnote the Department stated that the taxpayer would not be subject to the Tennessee excise tax because it lacks substantial nexus with Tennessee under the above-referenced exception. More information can be found here. Letter Ruling # 20-10, issued November 2, 2020, addresses the question of whether a funeral home taxpayer was required to collect the sales tax on a price increase for guaranteed merchandise previously sold to a customer under a pre-need contract that becomes an at-need contract. The taxpayer collected and remitted the tax at the time of the sale of the pre-need contract. The Department determined that the taxpayer should not collect additional sales tax from the customer or the customer's next of kin if there is a price increase at the time the pre-need contract becomes an at-need contract because the sales tax was already collected on the sales price of the guaranteed merchandise at the time the parties entered into the pre-need contract. More information can be found here. Revenue Ruling # 20-11, dated November 2, 2020, addresses the application of the sales tax to the installation for various household appliances, such as washing machines, dishwashers, built-in refrigerators, among many other such appliances. The Department referenced that the issue is whether the item of tangible personal property becomes part of realty after the installation. The Ruling addresses many of the principles used in the determination of whether the installation of such property does become realty. The Ruling goes on to apply those principles with respect to the installation of each of the specified appliances. More information can be found here.

October 2020

Updates Reported – On October 8, 2020, the Tennessee Department of Revenue issued Letter Ruling #20-07 addressing whether a Fund, organized as a limited partnership outside Tennessee, is doing business in this State and thus subject to the Tennessee franchise and excise taxes. The Fund's only business activity has been owning mortgages and receiving payments on those mortgages; and its only connections with Tennessee were that, from time-to-time, some of the real or personal property securing some of the mortgages owned by the Fund would be located in Tennessee and some of the borrowers could possibly also be located in Tennessee. The Fund relied on an investment manager, unrelated to the Fund, to assist the Fund in acquiring the mortgages. That investment manager provided similar services to other customers in addition to the Fund. Further, independent mortgage brokers worked with the investment manager, with each having different responsibilities so as to perform various steps involved in brokering the mortgage loans and finalizing the loan documents. The investment manager ultimately determined which of its customers, including the Fund, should receive the mortgage. If the investment manager chooses the Fund, the Fund or a single-purpose entity would be identified as the lender in the notes, mortgages and other loan documents that the investment manager acquired on behalf of the Fund.

The Department determined in the Ruling that the Fund under these circumstances was not doing business in Tennessee and therefore not subject to the franchise and excise taxes. The Department concluded that while the statutory definition of "doing business in Tennessee" is broad and encompasses any activity purposely engaged in Tennessee with the object of gain or benefit, there are certain statutory provisions that apply to financial institutions regarding the determination of doing business in Tennessee. In particular, Tenn. Code Ann. Section 67-4-2004(14)(C)(iii) provides in part that a financial institution is not considered to be conducting the business of a financial institution in Tennessee if the only activity of the financial institution in this State is the ownership of an interest in a loan or other asset attributed to Tennessee in which the payment obligations were solicited and entered into by a person that is independent of and not acting on behalf of the owner. The Department concluded that the investment manager has numerous other customers all of which are prospective lenders, to whom the manager regularly assigns an interest in mortgages; and typically the investment manager decides which of his customers should receive the mortgage based upon a standardized allocation system. The Department concluded the investment manager to be an independent person not acting on behalf of the Fund, and therefore the statutory safe harbor provided under Section 67-4-2004(14)(C) has been satisfied. Accordingly, the Fund was determined not to be subject to the franchise and excise taxes. More information can be found here.

September 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Updates Reported (September 30): The Tennessee Department of Revenue recently issued Letter Ruling # 20-06, dated September 17, 2020, addressing whether a Tennessee net operating loss carryforward survives a certain merger transaction for purposes of this State's excise taxes. The excise tax is imposed at the rate of 6.5 percent on a taxpayer's net earnings; and Tennessee permits a taxpayer to deduct a net operating loss from its net earnings in the computation of the excise tax liability, with qualified net operating losses being available to be carried forward and deducted for up to 15 years. With certain exceptions, Tennessee requires each taxpayer to be considered as a separate entity; and, as a result, a loss carryforward may be taken only by the taxpayer that generated the loss carryforward - with one specific exception. That exception provides that if a taxpayer merges out of existence and into a successor taxpayer that has no income, expenses, assets, liabilities, equity or net worth, then the qualified Tennessee loss carryover of the predecessor taxpayer that merged out of existence shall be available for carryforward and deduction from the net earnings of the surviving successor. Under this recent Ruling, the Department was asked to address in essence whether two separate but related corporations, each having net operating loss carryforwards, could merge into a newly created corporate taxpayer under the foregoing exception. The Department ruled that this exception was not available to the entirety of such a transaction, but rather the first existing corporate entity to merge into the new corporate successor would result in the successor being allowed to utilize those loss carryforwards; but that the second merger of a previously existing corporate taxpayer into the newly created corporation would not satisfy the exception since at the time of the second merger the new corporation would have income, assets, expenses, liabilities, etc. as a result of the first merger. More information can be found here.

August 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Updates Reported (August 20): On August 14, 2020, the Tennessee Department of Revenue issued Notice #20-16 dealing with interest expense carryforward for purposes of this State's franchise and excise taxes. That Notice recognized that the federal Tax Cuts and Jobs Acts (Act) amended Internal Revenue Code Section 163(j) to limit the business interest expense deduction. Pursuant to legislation enacted by Tennessee, and for tax years beginning after December 31, 2017 and before January 1, 2020, Tennessee recognizes this federal limitation. However, pursuant to that same Tennessee legislation, and for tax years beginning on or after January 1, 2020, Tennessee decoupled from the Act's amendment of Section 163(j) and the business interest expense deduction is no longer limited. Pursuant to the Act, Section 163(j) allows taxpayers to carryforward the business interest expense deduction limited by the amendment. According to this Notice, and for tax years beginning on or after January 1, 2020, a taxpayer may deduct the 2018 and 2019 carryforwards to the extent they are deducted for federal income tax purposes. The Notice references that the carryforward is limited in the same manner it is for federal income tax purposes under Section 163(j) as amended by the Act. Further, the Notice recognizes that the 2018 and 2019 carryforward amounts deducted for federal income tax purposes will be included on Schedule J, Line 27a, of the Franchise and Excise Tax Return along with the current year's business interest expense. The Notice further directs that taxpayers should maintain records sufficient to verify the 2018 and/or 2019 carryforward amounts that are taxed. Further, the Notice states that Tennessee taxpayers that are members of a federal consolidated group should allocate the federal consolidated group's carryforward of business interest expense for its 2018 and 2019 years in the same manner as the allocation of the group's interest expense deduction for those tax years, referencing Important Notice #19-18 for relevant information as to how this allocation is calculated. More information can be found here.

July 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Updates Reported (July 27): As reported in Supplement #7, the Tennessee General Assembly in its re-convened 2020 Session passed legislation both: (i) amending the filing threshold for out-of-state dealers and (ii) amending the sales threshold for determining sales tax collection responsibilities of a marketplace facilitator. Governor Lee signed this legislation into law as 2020 Public Chapter 759. With respect to the threshold for out-of-state dealers, Public Chapter 759 establishes a $100,000 filing threshold if the dealer engages in the regular or systematic solicitation of consumers in Tennessee through any means and made sales that exceeded that amount during the previous 12-month period. On July 16, 2020 the Tennessee Department of Revenue issued Notice #20-23 addressing this new threshold which becomes effective October 1, 2020 and which requires out-of-state dealers to begin collecting and remitting the tax by the first day of the third calendar month following the month in which this threshold was met. Until October 1, 2020, the current remote seller sales threshold is $500,000 as established in Sales and Use Tax Rule 1320-05-01-.129(2). Notice #20-23 states that for purposes of computing the sales threshold, dealers should include all retail sales, including exempt retail sales, but should exclude sales for resale. With respect to the marketplace facilitators amendment, Public Chapter 759 establishes a $100,000 sales threshold in determining the responsibilities of a facilitator. Also on July 16, the Department issued Notice #20-24 addressing a wide range of issues pertaining to this recent amendment. Further, the Department has issued an extensive list of frequently asked questions both addressing the new amendment to the marketplace facilitators law as well as addressing the interaction of the sales threshold for out-of-state dealers with the marketplace facilitators law. More information can be found here.

June 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Updates Reported (June 25): The Tennessee Legislature adjourned its re-convened 2020 Session in the early hours of June 19, 2020. During that re-convened session, the legislature made several revisions to Tennessee's sales tax laws including revising the marketplace facilitator sales tax law that was enacted April 1, 2020 to be effective October 1, 2020. One of the amendments to that marketplace facilitator sales tax law requires dealers with no physical presence in Tennessee to collect and remit the sales and use tax if the dealer makes sales that exceed $100,000 to consumers in Tennessee during the previous 12-month period. That particular amendment also provides that such dealers with no physical presence, but who exceed the $100,000 sales threshold, shall begin to collect and remit the tax by the first day of the third calendar month following the month in which this threshold was met; provided that this new amendment does not require a dealer to collect the tax for sales made before October 1, 2020. Further, this amendment states that this $100,000 sales threshold for out-of-state dealers does not change the substantial nexus criteria for determining tax nexus with Tennessee for purposes of the business, excise or franchise taxes. Separately, the amendment also reduces the safe harbor for a marketplace facilitator from $500,000 to $100,000 of sales made or facilitated to consumers in Tennessee during the previous 12-month period. These amendments, which became part of the budgetary bill process, are expected to be signed into law in the coming weeks by Governor Lee. More information can be found here.

Coronavirus Tax Payment and Return Filing Responsibilities - Earlier Update Reconfirmed (June 2): On May 20, 2020, the Tennessee Department of Revenue issued a news release reconfirming that the Department has extended the due date for filing and paying of the professional privilege tax from June 1 to July 1, 2020. This news release referenced Executive Order No. 24, as issued by Governor Bill Lee, which provided this extension. Further, interest and late filing penalties will not be applied to returns filed and payments made on or before the extended due date. More information can be found here.

May 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Information Reported (May 8): The Tennessee Department of Revenue has provided information on its website that the Department is available to assist business owners who may find themselves unable to pay their taxes in full at the time of filing. The website states that taxpayers may request a penalty waiver or a payment plan that allows for monthly payments over time. Information regarding a potential penalty waiver or payment plan can be found here.

April 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Further Updates Reported (April 16): On April 6, 2020, the Tennessee Department of Revenue issued Notice #20-11 advising that the filing and payment deadline for the professional privilege tax is being extended from June 1 to July 1, 2020. Beginning in 2020, the only Tennessee licensed professions subject to this privilege tax are:

  • Agents, broker-dealers, and investments advisors registered under Title 48 of the Tennessee Code;
  • Attorneys;
  • Lobbyists; and
  • Physicians and osteopathic physicians.

The Department stated that interest and late filing penalties will not be applied to returns filed and payments made on or before the July 1 extended due date. Find more information here.

Coronavirus Tax Payment and Return Filing Responsibilities - Further Due Date Changes Reported (April 3): On March 31, the Tennessee Department of Revenue issued Notice #20-07 advising that the Department has extended the due date for filing and paying the Business Tax from April 15 to June 15. As referenced in that Notice, the Business Tax is a tax on gross receipts that applies to most businesses selling goods or services. The Notice further states that interest and late filing penalties will not be applied to returns filed and payments made on or before this June 15 extended due date. This Notice only applies to the State and local business tax to returns and payments due on April 15. Find more information here.

March 2020

Coronavirus Tax Payment and Return Filing Responsibilities - Further Due Date Changes Reported (March 30): On March 25, 2020, the Tennessee Department of Revenue issued Notice # 20-06 advising that the Department has extended the due date for filing and paying the Hall income tax from April 15 to July 15, 2020. The Department states in that Notice that taxpayers will have until July 15 to file returns and make payments originally due on April 15; and that interest and late filing penalties will not be applied to returns filed and payments made on or before that extended due date. Further, the Notice references that the October 15, 2020 six-month extension date for the 2019 calendar year remains unchanged. Find more information here.

Coronavirus Tax Payment and Return Filing Responsibilities - Due Date Changes Reported (March 25): On March 24, 2020, the Governor of the State of Tennessee announced that the deadline for filing franchise and excise tax returns in this state would be moved from April 15 to July 15, 2020. The announcement indicates that taxpayers will have until July 15 to file returns and make any payments (including quarterly estimated payments) originally due on April 15. Guidance from the Tennessee Department of Revenue has just been issued and can be found here.

Coronavirus Tax Payment and Return Filing Responsibilities - No Broad Changes Reported (March 19): The Department of Revenue has issued an update as of March 17 that certain offices are not receiving walk-in customers. More information is available here.

No other responses yet, but we are continuing to monitor. However, Tennessee Code Annotated, Section 67-1-114(b), allows the Tennessee Department of Revenue to extend some tax return filing due dates if the Internal Revenue Services generally extends for all tax periods the due date of a federal return or extends the due date of such return for a specific group of taxpayers such as those affected by a federally declared disaster. There has been no word from the Department of Revenue regarding the use of this Section at this time.

Registration of Wine Brands: The Tennessee Department of Revenue recently published Notice #20‑02, dated March 2020, entitled "Alcohol Tax Notice". This Notice announces that beginning June 1, 2020, the Department will register both domestic and imported wine brands using the product's brand name as listed in Box 6 on the product's Certificate of Label Approval (COLA). The Department is responsible for registering all brands of domestic and imported wine in Tennessee, and under Regulation 1320-4-6-.05(2) the Department has been registering imported wines using the importer's name rather than the product's brand name. This current method of registering imported wines has, according to the Department, allowed two or more importers to introduce the same wine product into Tennessee as separate brands contrary to current law. According to the Notice, and beginning June 1, 2020, the Department will register both domestic and imported wine brands using the product's brand name as listed in the COLA. Certain additional registration alternatives are set forth in the Notice if the wine is sold without a brand name. The Department states in the Notice that due to this change in the brand registration process, the importer or wholesaler who first registered the brand will retain the existing registration, and subsequent importers/wholesalers will lose distribution rights to any such brand effective May 31, 2020. According to the Notice, the Department (i) intends to contact all affected importers/wholesalers by letter regarding the Department's intent not to renew their right to a brand, (ii) will provide a right to an administrative hearing to contest the non-renewal, and (iii) will require the sale by May 31, 2020 of any affected inventory to which the importer/wholesaler no longer has distribution rights.

Refer to this Notice for more details.

February 2020

Business Tax: On February 6, 2020, the Tennessee Department of Revenue published on its website Letter Ruling #20-01, dated January 13, 2020. This Letter Ruling addresses application of the Tennessee business tax to administrative fees received by a human resource management service company which coordinated staff-augmentation needs of its customers. The Tennessee business tax applies to all sales of a retailer or wholesaler according to its dominant business activity at rates specified in the business tax statutes, and taxable sales include the transfer of title or possession to tangible personal property as well as the furnishing of any taxable services. The tax applies to the actual consideration passed, without any deduction on account of the cost of the property sold or any other expense whatsoever. In this current Ruling, the taxpayer resource management service company received payments from its customers which included not only the taxpayer's fee for providing the staff-augmentation needs, but also included amounts charged by third-party suppliers of contract workers as well as the amounts owed to those contract workers. The Department, relying upon a 1996 unreported Tennessee Court of Appeals decision, noted that the taxpayer was contractually obligated to pass along amounts owed to the third-party contract suppliers as well as the contract workers themselves. As a result, those amounts were not subject to the business tax owed by the taxpayer; that taxpayer is obligated to the business tax on the administrative fees that the taxpayer retained as its compensation. 

Refer to this Ruling for more details.

November 2019

Sales/Use Taxes: On November 6, 2019, the Tennessee Department of Revenue posted Revenue Ruling #19-07, dated October 14, 2019, which addresses the tax exemption under Tennessee Code Annotated Section 67-6-207 for certain tangible personal property sold to a qualified farmer or nurseryman – assuming the conditions of that Section are satisfied. This Ruling discusses several of those conditions and determines that the equipment in question does satisfy the exemption requirements. However, in addition to this exempt equipment for sale to qualified farmers and nurserymen, the Ruling also addresses the question of whether warranties accompanying the equipment, as well as separately sold warranties or service contracts, would also be accorded exempt status. The Ruling refers to Section 67 6-208(a) which provides in essence that the sale, use or subscription to a warranty or service contract is subject to the Tennessee sales and use tax; and then concludes that since the tax exemption under Section 67-6-207 does not specifically extend to the sales of warranty or service contracts, the sales of warranty and service contracts covering the exempt equipment are subject to the Tennessee sales and use tax. The Department does acknowledge, however, that because such warranties or service contracts are taxable on the front-end, any repairs made under the warranty or service contracts would not be subject to additional tax. Refer to Revenue Ruling #19-07 for more details.

October 2019

Franchise and Excise Taxes: On October 2, 2019, the Tennessee Department of Revenue posted Letter Ruling #19-05, dated August 29, 2015, which addresses various questions regarding the application of the community investment tax credits available to certain financial institutions pursuant to Tennessee Code Annotated Section 67-4-2109(h). Under that Section, a financial institution may take a credit against its total liability for franchise and excise taxes when it makes qualified loans, qualified long-term investments, grants or contributions to eligible housing entities for any eligible activity. The community investment tax credits under Section 67-4-2109(h)(1)(A) equal five percent of a qualified loan or qualified long-term investment, and the credits under Section 67-4-2109(h)(2)(A) equal ten percent of a qualified low-rate loan, grant, or contribution; and those credits can be applied one time with any unused credit carried forward for 15 years. The community investment tax credits under Section 67-4-2109(h)(1)(B) equal three percent annually of the unpaid principal balance of a qualified loan for the life of the loan or 15 years, whichever is earlier, and the credit under Section 67-4-2109(h)(2)(B) equals five percent annually of the unpaid principal balance of a qualified low-rate loan for the life of the loan or 15 years, whichever is earlier. The Ruling addresses those situations in which a qualified loan is made by more than one financial institution pursuant to a syndicated loan or, separately, pursuant to a loan participation. In essence, and as applicable, the Ruling states that all originating lenders in a syndicated loan may claim the one-time credit as well as the annual credits under these Sections. However, with respect to loan participations, only the financial institution that originated the loan may claim the one-time credit; however, both the originating lender and all participating lenders are entitled, as applicable, to claim the annual credits based upon the unpaid principal balance of the loan. While Letter Rulings are applicable only to the taxpayer being addressed, refer to Letter Ruling #19-05 for more details.

September 2019

Business Excise Tax: In August, Tennessee Department of Revenue posted Notice # 19-18 addressing the impact of amended Section 163(j) of the Internal Revenue Code with respect to the computation of Tennessee's excise tax (that is, this State's business income tax) for purposes of the deduction for business interest expense. That amended Section 163(j), enacted as part of the Federal Tax Cuts and Jobs Act, limits the amount of business interest expense that can be deducted in a tax year for federal income tax purposes. That federal Act impacts the computation of the Tennessee excise tax. However, and as a result of Tennessee legislation enacted in 2018, this State decouples from that particular amended Section 163(j) for excise tax computation as to tax years beginning on or after January 1, 2020. Nevertheless, the federal interest limitation is still in effect for excise tax computations with respect to tax years beginning after December 31, 2017 and before January 1, 2020. This Notice addresses various interest limitation issues applicable to those tax years beginning after December 31, 2017 and before January 1, 2020. Refer to Notice # 19-18 for more details.

August 2019

Sales Tax: On August 7, 2019, Tennessee Department of Revenue posted Notice #19-17 addressing a new statutory exemption from the Tennessee sales/use taxes with respect to a fiber-optic cable that is attached to a utility pole, building or other structure, or that has been installed underground. As stated in the Notice, and while the purchase of such cable before it is installed remains subject to the tax, the installation of the cable is exempt from the sales/use tax under this new legislation. Further, the lease of a fiber-optic cable is exempt if certain criteria are satisfied as referenced in that Notice. This new statutory exemption is effective July 1, 2019. Refer to Notice #19-17 for more details: 19-17: Fiber-Optic Cable.

July 2019

Business Income Tax: On July 8, 2019, Tennessee Department of Revenue issued two Notices pertaining to a newly enacted 2019 law which addresses adjustments for certain foreign source income in the computation of this State's excise (business income) tax. Notice #19-13 addresses the global intangible low-taxed income (GILTI) and Notice #19-14 addresses untaxed foreign earnings deemed to be repatriated to the United States (Repatriated Earnings). Consistent with that new Tennessee law which predominately decouples from GILTI and Repatriated Earnings provisions of the federal Tax Cuts and Jobs Act, these Notices state in essence that taxpayers with such foreign source income must make two adjustments to net earnings subject to the excise tax effective for tax periods on or after January 1, 2018, with one such adjustment reversing out the GILTI and Repatriated Earnings included in federal taxable income and the second adding back an amount equal to five percent of the GILTI and the Repatriated Earnings.

Refer to these two Notices for more details:

June 2019

Sales Tax: On June 5, 2019, two Notices and a listing of Frequently Asked Questions were issued by the Tennessee Department of Revenue addressing numerous interpretive, administrative and enforcement issues pertaining to Sales and Use Tax Rule 129(2). Remote sellers meeting the Rule's $500,000 sales threshold as of July 1, 2019 are directed to register and begin collecting sales and use taxes by October 1, 2019, with further directives for those remote sellers meeting that threshold after July 1, 2019.

Links to the two Notices and the FAQ are as follows:

For more information about state and local tax developments in Tennessee, please contact:

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