Tennessee Goes Beyond Physical Presence to Subject Out-of-State Businesses to Its Business Tax

As businesses prepare their 2016 state and local tax returns, they should review their potential liability for the Tennessee business tax (TBT). While the TBT has existed for many years, Tennessee’s adoption of the Revenue Modernization Act creates new economic nexus standards and market-based sourcing, meaning many out-of-state companies will become subject to the TBT for the first time.

Creating Economic Nexus

Beginning with tax years on or after January 1, 2016, the new factor-based economic presence standard establishes thresholds of $500,000 for receipts, and $50,000 each for property and payroll. Because the TBT is based on gross receipts rather than net income, the protections of Public Law 86-272 don’t apply. This means a business that sells tangible property to Tennessee customers in excess of the sales factor threshold can have substantial nexus for TBT.

Additionally, under the new provisions, a business may be subject to the TBT if it:

  • Performs services in Tennessee for in-state customers
  • Leases tangible property in Tennessee
  • Delivers tangible product via company vehicles into Tennessee
  • Purchases product in Tennessee for sale to Tennessee customers via an in-state employee, agent, or independent contractor (drop-ship sale)
  • Has systematic and continuous business activity in Tennessee

Market Sourcing Implementation

A second major change is the adoption of market-based sourcing. The TBT is based on gross receipts from sales made and services delivered to Tennessee customers. The Revenue Modernization Act changes the sourcing of service revenue from cost of performance to market-based beginning with tax years on or after July 1, 2016.

When calculating Tennessee gross sales for business tax purposes, sales will be sourced to Tennessee when the customer receiving the product or the benefit of the service is located in Tennessee.

Now That a Business Has Nexus

The mechanics of registering for and reporting the TBT can be confusing.

Tennessee Location

A business with a Tennessee location is subject to a county levy. If the business has a location in a city that has enacted a municipal levy, the business will also be subject to that tax. The business must file a county return and, if applicable, a municipal return for each location. A business with multiple locations in one city may request permission from the Tennessee Department of Revenue to file a single municipal and county return.

Without a Tennessee Location

A business without a physical location in Tennessee, otherwise known as an out-of-state business, will file an out-of-state business return. Since the business has no physical presence, it won’t specify a county and will report all Tennessee receipts on the return.

Businesses may register for the appropriate licenses and taxes on the Tennessee Department of Revenue Web site.

Calculating Business Tax

A business’s tax rate depends on its classification as defined under Tenn. Code Ann. Section 67-4-708. The business also must report as either a retailer or a wholesaler. The classification and status as retailer or wholesaler is determined separately for each location. Tax rates for out-of-state businesses can range from 0.025 percent for certain wholesalers to 0.1875 percent for certain retailers.

Additionally, Tennessee provides several exemptions and deductions that can significantly reduce a business’s receipts subject to the TBT. Current statutes and rules should be reviewed to determine which exemptions and deductions apply.

Time to File

All forms can be found on the Tennessee Department of Revenue Web site. Business returns and payments are due on the 15th day of the fourth month following the close of a business’s fiscal year, which is April 15 for calendar-year businesses. Tax must be paid with the return. The law doesn’t provide for estimated payments. A written request for extension for up to 30 days can be granted by the commissioner of revenue.

We're Here to Help

For more information about Tennessee’s business tax, the Revenue Modernization Act, or help determining what the implications are for your business, please email statetax@mossadams.com or visit www.mossadams.com/statetax.