Tennessee Clarifies the Application of Marketplace Facilitator Legislation to Franchise & Excise Tax

Thoughtware Alert Published: Dec 15, 2020
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In an era of rapidly changing nexus laws post-Wayfair, taxpayers may find themselves asking which new nexus provisions apply to what tax type. Although most states have adopted distinct economic nexus provisions for income tax and sales and use tax, the same standard, in substance, could apply for both tax types. For example, Hawaii passed S.B. 495 just last year. S.B. 495 creates an economic nexus standard for taxing out-of-state persons on their income earned in Hawaii. A person who lacks physical presence in Hawaii is presumed to be systematically and regularly engaging in business in Hawaii and subject to income tax if, during the current or preceding calendar year, (1) the person engages in 200 or more business transactions with persons within Hawaii, or (2) the sum of the value of the person’s gross income attributable to sources within Hawaii equals or exceeds $100,000. The 200 or more transactions or $100,000 of sales is strikingly similar to the economic nexus provisions enacted for sales and use tax purposes in several states (including the South Dakota statutes at issue in Wayfair). 

The question then becomes whether states will enact other novel provisions from the sales and use tax realm for income tax purposes or whether states will simply begin applying these provisions to their income tax regime. One novel provision that has caught fire with the states pertains to marketplace facilitators. Earlier this year, Tennessee enacted a provision imposing a sales and use tax collection obligation on a marketplace facilitator that facilitates sales of tangible personal property or taxable services to customers in Tennessee. The collection obligation does not apply to a marketplace facilitator that has $100,000 or less in total sales to customers in Tennessee during the previous 12-month period. A “marketplace facilitator” is defined as a person, including any affiliate of the person, that for consideration contracts or otherwise, agrees with a marketplace seller to facilitate the sale of the marketplace seller’s tangible personal property or things or services taxable through a physical or electronic marketplace operated, owned, or otherwise controlled by the person or the person’s affiliate. A marketplace facilitator (or its affiliate) also must directly or indirectly, through contracts, agreements, or other arrangements with third parties, collect the payment from the purchaser and transmit payment to the marketplace seller. The definition of a “marketplace facilitator” excludes persons exclusively providing advertising services, persons providing payment processing services only, derivatives clearing organizations, and delivery network companies.

The Tennessee Department of Revenue recently published guidance on its website clarifying the marketplace facilitator provision will not apply to the franchise and excise tax provisions. In short, if a taxpayer falls into the marketplace facilitator legislation, the taxpayer does not automatically trigger nexus for franchise and excise tax purposes. Nevertheless, taxpayers should continue to monitor legislative and administrative changes for potential “crossovers” between nexus provisions. 

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