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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.

Overview

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.

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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