Tennessee Enacts Significant Income & Franchise Tax Changes

September 2015

On May 20, 2015, Tennessee Gov. Bill Haslam signed the Revenue Modernization Act (RMA) into law. The RMA introduces several significant changes that could create greater income and franchise tax burdens for taxpayers doing business in Tennessee.

Economic/Bright-Line Nexus for Business & Franchise Tax

Effective for tax years beginning on or after January 1, 2016, the definition of nexus is expanded for business, franchise and excise tax purposes to include a bright-line test. Among the enumerated activities creating nexus under the RMA, a taxpayer has substantial nexus in the state if any of the following are true:

  • The taxpayer’s total receipts in this state exceed the lesser of $500,000 or 25 percent of total receipts everywhere during the tax period.
  • The average value of the taxpayer’s real and tangible personal property (either owned or rented) used in the state exceeds the lesser of $50,000 or 25 percent of the average value of all the taxpayer’s total real and tangible personal property.
  • The total amount of in-state compensation paid by the taxpayer exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.

The RMA outlines more specific nexus rules and an exception for foreign corporations.

Market-Based Sourcing

Effective for tax years beginning on or after July 1, 2016, the RMA enacts market-based sourcing of sales other than sales of tangible personal property. The market-based sourcing provision provides that the taxpayer’s market for a sale is in Tennessee to the following extent:

  • In the case of real property, to the extent the property is located in Tennessee
  • In the case of tangible personal property, to the extent the tangible personal property is in Tennessee
  • In the case of a service, to the extent the service is delivered to a location in Tennessee
  • In the case of intangible property, to the extent the intangible property is used in Tennessee

The RMA uses the current greater cost-of-performance sourcing in a hybrid calculation of the sales factor for “qualified members” of a “qualified group” of telecommunications taxpayers.  

Triple-Weighted Sales Factor for Excise & Franchise Tax

Effective for tax years beginning on or after July 1, 2016, the RMA replaces the current double-weighted sales factor formula with a triple-weighted sales factor formula for calculating net worth and earnings for excise and franchise tax purposes.

Alternative Tax for High-Volume Sellers of Goods to Tennessee Distributors

Effective for tax years beginning on or after January 1, 2016, certain high-volume sellers choosing to use distribution centers in Tennessee can use an elective apportionment calculation for franchise and excise tax purposes. A taxpayer may qualify if the taxpayer’s sales of tangible personal property to distributors in Tennessee exceed $1 billion and the Tennessee receipts factor exceeds 10 percent. This election allows the taxpayer to exclude certain “certified distribution sales” from the numerator of the receipts factor in favor of paying an excise tax on those sales using a graduated tax. 

Intangible Expenses Deduction

Tennessee currently allows an excise tax deduction for intangible expenses paid to an affiliate if a taxpayer meets one of three safe harbor exceptions or if the taxpayer submits an application and is approved by the Commissioner of the Department of Revenue. Effective for tax years beginning on or after July 1, 2016, the RMA eliminates the application requirement. To qualify for the related-party intangible expense deduction, a taxpayer must disclose the expense and one of the following:

  • The affiliate to which the expense has been paid, accrued or incurred is registered for and paying the excise tax
  • The expense was paid, accrued or incurred to an affiliate in a foreign nation that is a signatory to a comprehensive income tax treaty with the U.S. or to an affiliate not otherwise required to pay the excise tax or be registered

Taxpayers failing to disclose or add back related-party intangible expenses may be subject to penalties.

To learn more about how this new law could affect your organization, contact your BKD advisor.

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