On May 20, Tennessee Gov. Bill Haslam signed the Revenue Modernization Act, which provides for broad changes affecting the state franchise, excise, and state sales taxes. Generally, the changes are aimed at generating greater tax revenues by increasing the tax burden on companies that have a limited physical presence within the state. Taxpayers with sales activities in Tennessee should consider the following changes.
Bright-Line Nexus Provision for Franchise, Excise, and Business Taxes
For tax years beginning on or after Jan. 1, 2016, a business is subject to franchise, excise, or gross receipts-based business taxes if any of the following apply during any tax year:
- Gross receipts in Tennessee exceed the lesser of $500,000 or 25 percent of total receipts everywhere.
- Average value of real and tangible property owned or rented and used in Tennessee during the tax period exceeds the lesser of $50,000 or 25 percent of total real and tangible property.
- Total compensation paid in Tennessee exceeds the lesser of $50,000 or 25 percent of total compensation paid.
A business that exceeds any of these thresholds still will be entitled to the protections of Public Law 86-272 for the Tennessee excise tax based on income. However, because Public Law 86-272 applies only to income taxes, protection is not available for the Tennessee franchise tax or for other business taxes (based on gross receipts) filed with local jurisdictions. A statute similar to the new bright-line nexus rule was challenged successfully by taxpayers in J.C. Penney Nat'l Bank v. Johnson. It remains to be seen if the new law will be challenged successfully.
Market-Based Sourcing Adopted for Franchise and Excise Tax Apportionment
For tax years beginning on or after Jan. 1, 2016, receipts from sales of services and intangible property will be sourced to Tennessee if the taxpayer’s market for the sale is in Tennessee. This represents a change from the state’s previous cost-of-performance rule for sourcing sales of services and intangibles. This change primarily will affect service businesses. The new rule favors Tennessee businesses that provide services or sell intangible property outside of the state and increases the burden on out-of-state businesses that sell to customers located in Tennessee. The act also provides for a special election for certain sales to distributors. If a business ships goods to a distribution center in Tennessee and the distributor certifies the goods were shipped out of Tennessee, then those amounts will not be considered Tennessee sales.
Click-Through Nexus for Sales Taxes
Effective July 1, 2015, the legislation also enacts a click-through nexus standard for online sellers. The click-through nexus standard creates a presumption of nexus and requires an out-of-state seller to collect Tennessee sales tax if the out-of-state seller enters into an agreement, directly or indirectly, with one or more residents under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by link on a website or by other means, to the out-of-state seller, if the cumulative gross receipts from sales by the out-of-state seller to purchasers in Tennessee who are referred by residents of the state via an agreement with the out-of-state seller are greater than $10,000 during the prior 12 months. The presumption may be rebutted only by clear and convincing evidence that the person with whom the out-of-state seller has an agreement or contract did not conduct any activities in the state that would contribute substantially to the out-of-state seller’s ability to establish and maintain a market in this state during the preceding 12 months.
Sales Tax on Remote Software Accessed in Tennessee
Effective July 1, 2015, receipts from software that is accessed from a location within Tennessee are deemed sourced to Tennessee for sales tax purposes. Previously, software was taxable in Tennessee only if it was downloaded to a computer or server located within the state. For software accessed via the Internet, the access location is in Tennessee if the residential street address or primary business address of the customer is in Tennessee.