During his State of the State address delivered on February 9,
2015, Tennessee Governor Bill Haslam discussed the sharp decline in
tax collections from business that the state experienced in 2014.
Gov. Haslam stated that the drop in revenue collections was partly
due to a disparity between the taxes paid by "companies
outside of Tennessee that do business in Tennessee," and those
"that our in state and homegrown companies" are required
to pay. To remedy this disparity and "level the playing field
in terms of sales tax and business taxes," the governor
introduced the Revenue Modernization Act, and the following day,
two companion bills were introduced in the Tennessee
legislature.
Senate Bill 603 and House Bill 644, filed by Tennessee Senate
Majority Leader Mark Norris and Tennessee House Majority Leader
Gerald McCormick respectively, would bring broad, sweeping changes
by adopting revised nexus standards for Tennessee business tax,
franchise and excise tax, and sales and use tax purposes; revising
Tennessee apportionment for business tax and franchise and excise
tax purposes; and imposing sales tax upon remotely accessed video
games as well as online software access.
Broad Proposed Nexus Standards
With regard to nexus, the Act takes steps to broadly impose taxing nexus over out-of-state businesses to the full extent permissible under the United States Constitution for business tax, franchise and excise tax, and sales and use tax purposes. The Act creates a bright-line nexus test for business tax and franchise and excise tax purposes whereby taxpayers would be deemed to have sufficient physical presence in Tennessee when, during a tax period:
- total receipts exceed $500,000 or 25% of total receipts everywhere, or
- the average value of tangible personal property owned or rented in Tennessee exceeds the lesser of $50,000 or 25% of the average value of real and tangible personal property everywhere, or
- compensation paid in Tennessee exceeds $50,000 or 25% of total compensation paid.
The Act also seeks to impose nexus for franchise and excise tax
purposes on taxpayers licensing intangibles for use within
Tennessee—following a trend already adopted in numerous other
states. Finally, for sales and use tax purposes, the Act proposes
to create a presumption of nexus where a seller enters into an
agreement with one or more Tennessee persons where, in exchange for
some consideration, said person refers potential customers to the
dealer and the dealer's gross sales from such referrals exceed
$10,000 over a twelve-month period. This provision is similar to
what has been dubbed "Amazon legislation" adopted in
several other states, and the presumption of substantial nexus
would only be rebuttable where a taxpayer could show by clear and
convincing proof that no contracted party conducted any activities
in Tennessee that would substantially contribute to the
seller's ability to establish and maintain a market in the
State.
Proposed Business Tax Changes
With regard to business tax, the Act seeks to broaden the tax base by applying the tax to parties:
- selling tangible personal property shipped into
Tennessee,
- selling services delivered to a Tennessee location,
- leasing tangible personal property located in Tennessee,
and
- natural gas marketers selling to in-state customers while holding property (including pipeline capacity) or conducting any other activities within the state via employees, agents, independent contractors, or similar parties.
The Act also limits the exclusion from business taxation for
out-of-state services to include only those delivered to
out-of-state locations, as opposed to the current rule which
excludes services substantially performed in another state.
Proposed Franchise and Excise Tax Changes
With regard to franchise and excise tax, the Act seeks to
replace Tennessee's cost-of-performance methodology for
sourcing sales of other than tangible personal property for
apportionment purposes with a market-sourcing approach. Under the
cost-of-performance test, such sales are sourced to Tennessee only
where the greater proportion of earnings-producing activity that
can be attributed to the sales is performed in Tennessee based upon
costs of performance. The proposed market approach sources sales
based upon the deemed delivery location, or use location, of the
sale or service. To the extent that a sale cannot be
sourced—either precisely or approximately—under this
proposed methodology, the Act adopts a throw-out rule which
excludes the sale from both the numerator and denominator of the
sales factor for apportionment purposes. Replacing the
cost-of-performance method with a market-based sourcing method
coordinates with other recent legislation proposing to
triple-weight the sales factor in Tennessee's apportionment
formula—a move that places greater emphasis upon a
taxpayer's sales market, as opposed to where a taxpayer chooses
to primarily operate, in carving up income among states for
taxation purposes.
The Act also proposes a new franchise and excise tax apportionment
carve-out incentive election for taxpayers operating in Tennessee
and both making sales of tangible personal property in excess of $1
billion and having a receipts factor exceeding 10% for
apportionment purposes. Qualifying taxpayers making this election
would be entitled to exclude "certified distribution
sales" from the numerator of the sales factor for
apportionment purposes. "Certified distribution sales"
are defined to include sales of tangible personal property made in
Tennessee to distributors when such goods are certified as having
been sold for resale and ultimate use outside Tennessee. The Act
provides that electing taxpayers would be subject to an excise tax
on certified distribution sales at a graduated rate starting at
0.5% for up to $2 billion in certified distribution sales, 0.375%
for certified distribution sales between $2 billion and $3 billion,
0.25% for certified distribution sales between $3 billion and $4
billion, and 0.125% for certified distribution sales exceeding $4
billion.
Finally, the Act seeks to increase the requirements for Department
of Revenue approval of taxpayer applications for deductions for
intangible expenses paid to affiliates, requiring that the
Commissioner determine that the transaction giving rise to the
expense have a substantial business purpose and not have as its
principal purpose to avoid tax. Under current law, the Commissioner
may permit such deductions so long as tax avoidance was not the
principal purpose of the transaction(s) creating the
deduction.
Proposed Sales and Use Tax Changes
With regard to sales and use tax, the Act seeks to impose sales
and use tax upon purchases of "video game digital
products," which are defined to include video games, access to
which are provided remotely over the Internet on a per use, per
user, per license, subscription, or other basis. The Act also seeks
to impose Tennessee sales and use tax upon the sale of online
computer software access provided pursuant to application service
provider (ASP) or software as a service (SAAS) platforms to
customers with residential street addresses or primary business
addresses in Tennessee. Where the purchase price of such ASP or
SAAS access relates to users both inside and outside of Tennessee,
the Act provides that the seller may allocate the sales price based
upon the percentage of in-state and out-of-state users. The Act
further provides that services not subject to tax, such as payment
processing services, Internet services, or the mere provision of
online data storage will remain exempt.
For further information visit Waller
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.