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Recent Changes to Tennessee's Tax Law

Jul 9, 2009

The Tennessee General Assembly recently passed legislation that reflects provisions amending several areas of Tennessee’s tax law.  Gov. Bredesen signed this bill into law on Friday, June 25, 2009.  Below are some highlights of the most relevant changes: 

Franchise & Excise Tax

FONCE Exemption Revisions
The Bill substantially revises the franchise/excise tax exemption for a family-owned noncorporate entity (FONCE), where substantially all the activity of the entity is either the production of passive investment income or the combination of the production of passive investment income and farming.  The Bill excludes from the FONCE exemption entities receiving rental income from industrial or commercial property and farm property used for recreational purposes. Entities receiving rental income from residential rental property with no more than four residential units will continue to qualify for the exemption.  The effective date of the change is July 1, 2009.  Entities currently exempt under the FONCE exemption can continue to be exempt by electing unlimited liability for its members or partners and filing proper documentation by October 1, 2009.
     
In a related change, the Bill limits the deduction of rents paid to affiliated parties for industrial and commercial property.  An affiliated lessee will be allowed to deduct monthly rent only to the extent it does not exceed two percent of the appraised property tax value of the property.

F&E Exemption and Annual Filing Requirements Established
The franchise and excise tax exemptions are amended to require taxpayers claiming exemption from franchise and excise tax to file an application for exemption within 60 days of the beginning of the first tax year for which the exemption is effective, as well as an annual renewal application each year, thereafter.  At the discretion of the Commissioner, an untimely application may be accepted, but a penalty of $1,000 per occurrence is imposed for the failure to file a timely application or renewal.

Captive REIT Penalty Provisions Modified
Under present law, when any person negligently fails to disclose any transaction in the manner prescribed by the tax laws and fails to report and pay the total amount of taxes due, there is imposed a penalty in the amount of 50 percent of the underpayment. The penalty provisions are now rewritten so that they are specifically applicable to transactions involving a failure to report intangible holding companies and the reporting of captive real estate investment trust (REIT) dividend received deductions. The applicable penalty will be the greater of $10,000 or 50 percent of any adjustment to the initially filed return.

Electronic Payment of Quarterly Estimated Payments
The Bill clarifies that franchise and excise tax payments must be remitted electronically, if the payment exceeds $2,500.

Sales & Use Tax

Extension of Effective Date for Streamlined Sales Tax
The Bill extends the implementation of changes made under the Streamlined Sales Tax Project from July 1, 2009 to July 1, 2011.
Computer Software Maintenance Contracts Taxable
Sales tax is now applicable for the following software maintenance and warranty charges:

• Computer software maintenance contracts that are sold as a part of computer software subject to sales tax;
• Computer software maintenance contracts with respect to software installed on computers located in Tennessee;
• Computer software maintenance contracts where the computer software location is unknown but the purchaser’s address is in Tennessee.

The Bill also provides that the exemption for computer software developed by a taxpayer for its own use will apply only to software developed by an employee receiving a Form W-2 from the employer for whom the software is being developed.

Exemption for Advertising Services and Preliminary Artwork
The Bill adds statutory language to clarify the application of sales and use taxes to advertising services and advertising materials.  The transfer of preliminary artwork by an advertising agency to its client is exempt from sales and use tax, but the sale of the final artwork and the sale of advertising material are subject to the tax.  The effect of the Bill is to clarify that sales tax does not apply to charges for advertising services.  If final artwork is provided by an advertising agency to its client as part of an agreement for providing advertising services, the sales and use tax applies only to the charges directly attributable to production of the final artwork.  Taxable advertising materials include brochures, catalogs and point of purchase materials, but do not include original sound or video recordings produced by recording and television studios.
 
Electronic Payment Requirements
The threshold for required electronic payment of sales taxes is reduced from $2,500 to $1,000.

Inheritance Tax

Automatic 12 Month Extension for Filing and Paying Tennessee Inheritance Tax
The Bill provides for an automatic extension of twelve months to file and pay the Tennessee inheritance tax if a request for extension is made in writing by the personal representative, or by providing a copy of the personal representative's request for an automatic extension of time to file the federal estate tax return.

Business Development Incentives

Increase in Jobs Tax Credit
The amount of job tax credit is increased from $2,000 to $4,500.  Prior law allowed a job credit of $4,500 only for jobs in economically distressed counties.  To qualify for the job tax credit, the required capital investment and job creation must take place within 12 months of the effective date of the business plan and create at least 25 jobs. The jobs tax credit may offset no more than 50 percent of the combined franchise and excise tax.  Prior law provided a limit ranging from 33 1/3 percent to 50 percent.

Extension of Green Energy Tax Credit to Suppliers, Customers and Campus Affiliates
The green energy tax credit is extended to integrated suppliers, integrated customers and campus affiliates of certified green energy supply chain manufacturers that are integrated into the green energy manufacturer’s operations at its project site.

Modification and Expansion of Credits for Industrial Machinery, Headquarters Relocation, Qualified Data Centers and Emerging Industries

• Industrial Machinery Credit:  For taxpayers making an investment of at least $1 billion in the state, the carryover period for industrial machinery credits is to be extended indefinitely until the credits are completely utilized. The Bill also extends the investment period for taxpayers making expenditures of at least $1 billion in the state from a maximum of five years to a maximum of seven years. The amounts expended on owned or leased computer software are included in determining the required capital investment to qualify for the industrial machinery credit.
  
• Headquarters Relocation Credit:  The Bill increases the headquarters relocation credit from $50,000 to $100,000 per job for taxpayers that invest at least $1 billion in the state. The minimum number of jobs that must be created is reduced from 1,000 to 500.  A prorated credit recapture is required for facilities not used as a headquarters facility for the required 10 year period.
• Qualified Data Center Investment Period:  The investment period for “qualified data centers” to meet the required capital investment is extended from a maximum of five years to a maximum of seven years.
  
• Emerging Industry Credit:  The Bill amends the definition of qualified “emerging industry” facilities eligible for sales and use tax credits by removing the specific exclusion of manufacturing and increasing the investment period from six to eight years.

Business Tax

Administration Shifted From Counties to State
The Bill transfers the administration of Tennessee’s local business tax from county clerks to the State.  Taxpayers will continue to file separate returns for each place of business, but returns will now be sent to the Tennessee Department of Revenue instead of the local county clerk.

Revisions to Business Tax Code
Other changes in the business tax code include:

• 50 percent cap on the credit for tangible personal property taxes;
• Businesses are to be classified as retailers or wholesalers based on their dominant business activity;
• A requirement that contractors obtain the business license of subcontractors in order to qualify for the deduction for amounts paid to subcontractors;
• An electronic filing requirement for taxpayers required to file sales and use taxelectronically.

Other Provisions 

Privilege Tax Imposed on NBA and NFL Players
The Bill imposes an annual professional privilege tax on players who are employed by and on the roster of any franchise of the National Basketball Association or National Hockey League for any NBA or NHL regular season game held within the boundaries of Tennessee.  The amount of the tax is $2,500 per game with a three game annual cap of $7,500.

Participation in Multistate Tax Commission Joint Audit Program
The Commissioner of the Tennessee Department of Revenue is authorized to enter into a contract to participate in the Multistate Tax Commission Joint Audit Program and to disclose tax return and other tax information for the exclusive purpose of participating in that program.

Attorney Fees in Fraud Cases
In this legislation, the state is deemed the prevailing party for purposes of awarding reasonable attorneys’ fees and expenses of litigation in any case in which the taxpayer has been found by the court to have committed fraud.

 
As always, please contact Crosslin & Associates if you have any questions.  We appreciate your business and look forward to helping make these tax provisions work for you.
 
Under requirements imposed by the IRS, we inform you that, if any advice concerning one or more U.S. federal tax issues is contained in this communication (including any attachments), such advice was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein.