By Mark Loftis, Director of State and Local Tax, Crosslin
Most taxpayers doing business in Tennessee are very familiar with the state’s sales/use tax and franchise/excise taxes. The state’s lesser known “business tax”, which has grown over the years from being purely a “local tax” to a now broadly defined state “gross receipts” tax, is many times overlooked by taxpayers until faced with an audit by the state which produces an assessment.
Over the past few years, the state has made it clear that expansion of the business tax is a priority along with compliance to its requirements. This is evidenced by increased audit of the business tax by the Department of Revenue.
The business tax can now apply to taxpayers with no “physical presence” in Tennessee
As of Jan. 1, 2016, as part of the Revenue Modernization Act (RMA) that was passed and signed into law, the state adopted an “Economic Nexus” or “Substantial Nexus” standard in regard to the application of the business tax. The RMA also adopted an “Economic Nexus” standard in regard to the corporate income and franchise taxes as well.
Prior to Jan. 1, 2016 the law was unclear on exactly what the nexus standard should be regarding the application of the business tax, although it was generally applied that a company must have a “physical presence” within the state in order for the tax to apply. So the prior general rule of thumb was that the nexus standard for Tennessee to impose the business tax required actual “physical presence” in Tennessee. As of Jan. 1, 2016, the RMA clarified that and imposed “Economic Nexus” standards in order for the tax to apply. Economic Nexus standards go well beyond having physical presence and sets the standard that mere economic activity (over certain limits) allows Tennessee to impose the business tax on otherwise “out of state” taxpayers.
As is indicated on the Tennessee Department of Revenue’s business tax website, the state views the application of the business tax very broadly and states “with few exceptions, all businesses that sell goods or services (within the state) must pay the state business tax”.
Economic Nexus Standard Effective Jan. 1, 2016 provides that if any of the following applies to a taxpayer then the taxpayer has nexus and is subject to the business tax:
- Taxpayer commercially domiciled in the state.
- Taxpayer owns or uses capital in the state.
- Taxpayer has systematic and continuous business activity in the state (that produces gross receipts).
- Taxpayer has a bright line presence – Tennessee annual:
- Receipts greater than $500,000 (or 25 percent of total receipts)
- Property greater than $50,000 (or 25 percent of total property)
- Payroll greater than $50,000 (or 25 percent of total payroll)
Overview of the Tennessee business tax
The state declares a taxable privilege on gross receipts and defines it as “any vocation, occupation, business, or business activity listed in Tenn. Code Ann. 67-4-708 (1) – (5) is a taxable privilege subject to the state business tax. There are 5 classifications of business defined in the code.
The business tax is administered by the State Department of Revenue. The county and municipalities administered the business tax locally up until several years ago when that was shifted to the state to administer. There are two components to the business tax, a state (county) business tax and a municipal business tax requiring two returns for each location generally. For the new “out of state” taxpayers the department has developed an “out of state” return.
Rates of tax: The rates of tax vary by business classification and ranges from .001 to .003 for retailers and .00025 to .000375 for wholesalers.
Due date of the returns: The business tax is reported and remitted on annual returns generally due April 15 of the following tax year.
Exempt entities/exemptions: There are various entities and business activities exempt from the Business Tax (but not limited to):
- Sales of less than $10,000 within a county/municipality.
- Sales in qualified enterprise zones.
- Religious, charitable, legal, educational, domestic, accounting services, architecture, engineering, surveying, and veterinary entities.
- Nonprofit entities.
- Medical and health services.
- Farm exemptions.
Deductions available: There are various deductions available including (but not limited to):
- Sales of services in other states.
- Returned merchandise/cash discounts/repossessions.
- Sales in interstate commerce.
- Trade in allowances.
- Bad debts written off.
As this expanding Tennessee gross receipts tax is more strongly enforced by the state, taxpayers need to be aware of these new reporting requirements and be prepared for the audit which will likely come.
Read more about state and local tax here.