Tennessee Tax Weekly: Business Tax, Collections and Moves in the News

The Tennessee Department of Revenue presented at the TSCPA Liaison meeting on December 18, 2013, focusing its attention on the business tax, improvements to the informal taxpayer conference process and the Department's "Retail Accountability Program." The big news with the business tax was that the Department is going to begin a transition of the staggered filing deadlines under current law to filing deadlines that are tied to taxpayer's fiscal year. In the past, the filing deadline was based on the types of taxable sales a taxpayer made and required taxpayers to prepare proforma financial statements to prepare the business tax returns. Details of the transition can be found on the Department's website. Practitioners should focus on these changes as the Department has begun sending out letters to taxpayers to advise them of the change and how the transition will be administered. In addition to business tax, the Department indicated that it will continue to monitor efforts by the NFIB on an Independent Tax Tribunal. The Department has proposed legislation that would modify the informal conference process, so this will be an item to watch in the upcoming legislative session. The Department provided numbers on its "Retail Accountability Program" which focuses on tobacco and beer wholesalers. The Director of Audit indicated that, under this program, over 2,000 assessments have been made this year totaling $14 million for tobacco and beer retailers who were determined to be underreporting sales of beer and tobacco. This program follows on the heals of legislation that was passed in 2013 to allow the Department to access information from tobacco and beer wholesalers. Taxpayers in these businesses should be aware of the Department's effort and review current sales tax filing positions to make sure that they are in compliance. Details about the Program can be found on the Department's website. Other items in the tax news include tax collections, Larry Hyatt's CPA firm merging with Decosimo, and the hotel/motel tax in Maury County.

Tennessee Tax Weekly: What's Going on In Tennessee Tax?

Amazon scheduled to start collecting sales tax on January 1, 2014, so enjoy your last Christmas shipments without the sales tax being collected by Amazon. Tennnesse Jock Tax continues to be focus of NHL. Putnam County Property Tax Cases set for hearings in January.

Dateline ABC-Nashville: Metro Council Approves New Tax on Sales in Central Business District

This is not the behind-the-scenes work of Lamar Wyatt of the ABC hit Nashville despite the fact that it does have the appearance of a deal that he would love.

That aside, last night at the actual Nashville Metro Council meeting the city council enacted Legislation to tax sales of services and tangible personal property sold at retail within the central business district. Revenue from the new tax (labeled a "fee") will be used to promote the new Music City Center.

The new tax will be .25% of the sales price of the taxable items and will be collected by the Tennessee Department of Revenue in the same manner as state sales tax is collected. Sales of professional services, lodging, concerts, sporting events, newspapers, long-term parking, and liquor are not subject to the new tax.

The boundaries of the district are roughly the Cumberland River to the east,  Lafayette Street to the south, 8th Avenue to the West and Charlotte avenue to the North.

Further background on the the tax/fee can be found in this link to the Tennessean Article.

For tax professionals, the legislation is light on details regarding when a sale is considered to be in the district and the exemptions are similarly vague. What about computer software... Don't get me started.

Because the tax is so low it is hard to imagine much push back when enforcement begins in January 2014, especially when considering it only adds 1cent to a $4 beer according to sponsors. We will see. 

Tennessee Court of Appeals Holds that Dial-up and Broadband Internet Access Services Are Not Taxable Telecommunications Services

The Tennessee Court of Appeals held on September 20, 2013 that dial-up and broadband Internet access services sold to Internet Service Providers that in turn provide these services to end-users were nontaxable “enhanced” services rather than “basic” services and that the true object of the services was not telecommunications.  Level 3 Communications, LLC v. Roberts, No. M2012-01085-COA-R3-CV (Tenn. Ct. App. Sept. 20, 2013).

Level 3 provides two internet services known as (3)Connect Modem and (3)Crossroads, which provide dial-up and broadband access to the internet, respectively. Level 3’s customers – retail or consumer Internet Service Providers such as Earthlink Communications and America Online – purchase the Level 3 services to enable their end-users to access the Internet. Level 3 would also sell these products to large corporations that used the service for remote access to corporate networks.  As part of the dial-up service, Level 3 provided local numbers so customers could access the local dial network, but Level 3 did not provide a local dial network infrastructure, which was instead provided directly by the local exchange carrier.

In January 2004, Tennessee published Sales and Use Tax Notice #04-03, which indicated that “Internet access is no longer considered a taxable ‘telecommunications service’ under Tennessee law.”  This Notice was issued following the Tennessee Court of Appeals ruling in Prodigy Serv. Corp., Inc. v. Johnson, 125 S.W.3d 415 (Tenn. Ct. App. 2003) and established a refund procedure for taxpayers to seek refunds of Tennessee sales and use tax collected and remitted on Internet access.  Level 3 filed a claim for refund, seeking a refund of Tennessee sales and use tax on its Internet access services.  The State denied the refund, maintaining that the Level 3 services were telecommunications services.

The Trial Court held that, under Prodigy’s analysis, Level 3’s wholesale internet access business was not taxable.  [Cite to Tennessee Court Says Wholesale Internet Access is Not Subject to Sales Tax, April 27, 2012.]

On appeal, the Tennessee Court of Appeals affirmed the Trial Court, concluding that “[r]egardless of whether an end-user used a dial-up modem ((3)Connect Modem) or broadband ((3)Crossroads) to connect with the internet, Level 3 converted the end-user’s information into IP packets and, using its routers and other hardware, enabled the end-user to access the Internet.”  In so holding, the Court of Appeals recognized that the Prodigy decision had identified “Internet access” as an example of an enhanced service that did not qualify as telecommunications. Prodigy, 125 S.W.3d at 419.

The Court of Appeals also concluded that the “true object” or “primary purpose” of the Level 3 services was to provide access to the Internet and not to provide telecommunications.

The State will have 60 days to decide whether to seek discretionary review by the Tennessee Supreme Court.

Tennessee Trial Court Holds that Third-Party Logistics Provider Is Not Exempt from Tennessee Business Tax

A Tennessee trial court has rejected a third-party logistics provider’s challenge to a Tennessee business tax assessment.  In the decision, the court concluded that some of the taxpayer’s logistics services were not covered by the “public utility exemption,” which exemption, by definition, extends to “common carriers.”  Exel, Inc. v. Roberts, Case No. 06‑2869-IV (Davidson County Chancery Court June 28, 2013).

            The taxpayer is a third-party logistics and transportation management company, providing large manufacturers and retail companies with design, logistics, and transportation management services.  These services include transporting raw materials or other products on a fully integrated basis through the customer’s manufacturing process and transporting, distributing and delivering the manufactured products to their ultimate destinations.  The taxpayer also provides warehouse management services.

            With operations throughout the world, the taxpayer had seven customers in Tennessee during the audit period.  The Department determined during audit that some of the transportation-related services provided to customers in Tennessee qualified for the public utility/common carrier exemption from the business tax.  The Department further determined, however, that many of the taxpayer’s other services were not exempt and assessed business tax on those services involving supply chain analysis and design, supply chain management, in-plant services, warehousing and order fulfillment, assembly and packaging, transportation management, service parts logistics and reverse logistics, among others.

            The parties filed cross-motions for summary judgment.  The taxpayer argued principally that because its services generally fell within the category of exempt public utility/common carrier services, it was fully exempt from the Tennessee business tax.  The trial court rejected that argument, concluding instead that “[t]o find an entire class of business exempt from business tax, regardless of the actual services conducted by that business, would operate to extend the enumerated services exemption provision beyond its plain meaning.”  Id., slip op. at 25-26.  The trial court further stated that the “determination of a business’ ‘dominant business activity’ is significant only to the determination of which classification the business would fall under, and even if the dominant business activity is not subject to business tax, those remaining revenues from activities that are subject to business tax are not exempt but rather accrue business tax.”  Id., slip op. at 26 (citing National Gas Distributors, Inc. v. State, 804 S.W.2d 66, 67 (Tenn. 1991)).

            The Court also rejected the taxpayer’s arguments that the sales should be treated as wholesale transactions and that the pass-through costs to provide the logistics services should not be included in the tax base.  Finally, the Court held that the business tax, as applied to this taxpayer, did not violate the Commerce Clause of the U.S. Constitution.

            The taxpayer has until July 28, 2013 to appeal to the Tennessee Court of Appeals.

Tennessee Department of Revenue Issues Last Call for Intangible Holding Company Voluntary Disclosure

The Tennessee Department of Revenue issued Notice 13-06 in June notifying taxpayers that its acceptance of voluntary disclosure of intangible expense deductions at a preferred settlement rate will be ending later this year. The Department states in the notice that, beginning September 30, 2013, it will no longer recommend settlements of cases involving intangible expenses paid to affiliates - the infamous "intangible holding company" structure.

The Department's settlment initiative began back in late 2011, and since that time, the law has changed, now requiring taxpayers for the 2012 tax period and after to file an application to claim deductions for intangible expenses paid to affiliates. The settlement generally only requires a taxpayer to pay only 25% of the proposed assessment from the disallowance of such deductions.

The timing of this is not surprising as the Department is starting to see the first of the applications under the new law being filed, with many that will be filed in August, as the pending extended deadline for filing for the 2012 tax period is in October (the application must be filed 60 days before the due date of the return).

Taxpayers still on the fence on this issue should seriously consider the voluntary disclosure, especially if they plan to continue to claim the deduction for future periods. The application process will put a taxpayer on the radar with the Deparment, and to the extent that the state denies the application, they would have a right to pursue the open years through an audit/assessment if no VDA has been submitted.

We knew this day would come, so consider this the last call ...

Tennessee Business Tax: Locally Imposed Tax Revamped

The Tennessee General Assembly recently passed a significant revision to the Tennessee Business Tax, a locally imposed gross receipts tax on the sale of goods and services (SB183/HB177). This change follows legislation enacted in 2011 that moved the administration and collection of the business tax from local governments to the Tennessee Department of Revenue. The new legislation, titled the “Uniformity and Small Business Relief Act of 2013,” clarifies the application of the business tax to out-of-state entities and the sourcing of sales involving multiple jurisdictions, and makes other changes to streamline compliance. The effective date of these changes applies to tax periods beginning on or after January 1, 2014.

Current law authorizes counties and municipalities to levy a business tax on certain businesses operating within the county or municipality, and the Commissioner of Revenue is authorized to collect and administer the tax. Credits against the business tax include credits for personal property taxes that have been paid to the local government.

Out-of-State Businesses

The business tax has traditionally been imposed on taxpayers with “business locations” in Tennessee. The Act extends the business tax to out-of-state companies that do not have established physical business locations in the state but provide services or sell goods in Tennessee. Specifically, the business tax is imposed on businesses engaging in the following activities even if physical locations are not established in the state:

1. Performing any service in Tennessee that the extent such service is received by a customer in the state.
   Observation: Assuming that a taxpayer otherwise has taxing nexus with Tennessee, sales of all taxable services to Tennessee customers will be subject to business tax under this legislation. Under prior law, there was a deduction for services “substantially performed in other states,” but Section 12 of the legislation revised that deduction and now limits the deduction to “sales of services that are received by customers located outside the state.” Thus, performance of services from locations outside of the state will not prevent the state from pursuing the collection of the tax from out-of-state businesses. This has a potential impact on out-of-state service providers that previously took advantage of the deduction for services not performed in Tennessee.
2. Leasing tangible property that is located in the state.
   Observation: Tennessee business tax and sales tax traditionally have been imposed based on leases entered into in the state, regardless of whether the property leased was subsequently removed from the state or was moved from out of state to Tennessee after the property was leased. This new provision appears to be a departure from that treatment for out-of-state lessors whose property is relocated to Tennessee. It appears, however, that for lessors with Tennessee business locations, the existing rule will remain in effect, taxing in-state companies on the full lease price regardless of whether the property is later removed from the state. 
3. Delivering tangible property to a buyer in this state using the seller’s own vehicles.
   Observation: This change will likely have limited impact or effect, as out-of-state businesses that sell and deliver goods only via common carrier will not be subject to the business tax.
4. Purchasing and subsequently selling tangible property in a wholly in-state transaction where the purchase and sale are accomplished by the seller’s employees, agents, or independent contractors.
   Observation: This provision appears to be targeted at clarifying the application of the Tennessee Business Tax to out-of-state petroleum providers that use in-state terminals of third parties to sell petroleum to their in-state customers. This issue is currently in litigation in Flash Oil Company of Arkansas v. Commissioner, Davidson County, Tennessee, Chancery Court No. 12 1743-III. In addition to the petroleum transactions like that in Flash Oil, it is possible that this provision may also impose the business tax on businesses selling through drop shipment arrangements. Companies in this situation should carefully review this issue to determine whether any action is needed.

Sourcing of Gross Receipts/Contractor Sourcing

For taxpayers with business locations in the state, the General Assembly has legislatively overturned the holding in Comcast of Nashville II, LP v. Farr, Davidson County, Tennessee, Chancery No. 08-636-II, which invalidated Business Tax Rule 28’s sourcing of a taxpayer’s statewide sales to the jurisdiction in which a taxpayer has a place of business. As a result, former Rule 28 is now codified and allows the business tax to be imposed on all in-state sales, sourcing these sales to the county or municipality in which the taxpayer maintains places of business.

Specific provisions applicable to contractors also have been codified from Rule 28, sourcing gross receipts of contractors to the city or county in which job sites are located with respect to jobs generating more than $50,000 of compensation. If compensation received by a contractor does not exceed $50,000 for a particular job, the receipts are taxed in the jurisdiction in which the contractor maintains its place of business. If no Tennessee business location exists, out-of-state contractors with less than $50,000 of gross receipts from a particular job should report and pay business tax to the state.

Compliance

The Act grants the Commissioner of Revenue the discretion to alter the applicable tax period to coincide with the taxpayer’s fiscal year and also allows for the submission of a single electronic filing to cover the reporting of business tax due in multiple jurisdictions. These provisions are designed to streamline and simplify compliance with the business tax. The Act provides that a city or county is to renew a business license upon notification by the commissioner that a business has filed its return and paid the tax due. The Act also allows cities and counties to enter into an agreement with the commissioner to issue and renew business licenses.

Exemption for Small Businesses

The Act also broadens the exemption applicable to small businesses. Under prior law, businesses with gross receipts of less than $3,000 in the state were exempt from the business tax. This small-business threshold has been raised to exempt businesses with less than $10,000 of annual receipts in a county or incorporated municipality, a change that is expected to affect about 50,000 small businesses. Exempt businesses with more than $3,000 but less than $10,000 in gross receipts will still have to obtain a minimal activity business license and pay an annual $15 fee to both the county and municipality in which it operates its business.

Satellite Television and Video Programming Services

The Act as originally proposed would have extended the business tax to satellite television providers, which were previously not subject to the locally-imposed tax based on federal law. However, the satellite lobby was able to convince the General Assembly to adopt an amendment maintaining the exemption for the sale of equipment and services by satellite television service providers, based in large part on the argument that this was a new tax on satellite television services. Federal law prohibits cities and counties from taxing satellite television providers but allows states to levy taxes on the satellite industry. The federal preemption would have been eliminated by the legislature’s decision to convert the county-level tax to a state tax with corresponding allocations to the county governments.

Gasoline and Diesel Fuel

The Act reduces the rate applicable to gasoline and diesel fuel wholesalers from 0.1 percent to 0.03125 percent. This reduction is the result of a compromise reached between the Department of Revenue and fuel wholesalers on the proper rate.

Effective Date

The business tax has a variety of tax periods and return deadlines that depend on the classification of the taxpayer, which is based on the types of goods or services sold. Recognizing that passage of this Act would straddle these various periods, the General Assembly imposed a delayed effective date so that taxpayers would be able to plan accordingly. For example, service providers are covered by Classification 3, which has an annual tax period ending on June 30 of each year. Based on this effective date language, the first tax period for Classifications 1 and 5 will begin on January 1, 2014. For Class 2, the first applicable tax period will begin on April 1, 2014; the first applicable tax period for Class 3 taxpayers will begin on July 1, 2014; and the first applicable tax period for Class 4 taxpayers will begin on October 1, 2014

Before registering, businesses with no physical location in Tennessee should consider whether they were potentially subject to the business tax prior to the changes referenced above and whether a voluntary disclosure should be requested as part of the registration process.

Time to Appeal Tennessee Property Tax Assessments

Now is the time to request an appointment to appeal real or personal property assessments if you disagree with your local property assessor’s appraised value or classification of your property.

Deadline to Appeal

County boards of equalization will begin hearing regular property tax appeals on June 1.  They have the authority to increase, decrease or leave unchanged the appraised value of the property or change the classification of the property.  You must make an appointment to appear before the county board by contacting your local property assessor’s office.  The deadline for review varies by county.  If you fail to appear before the county board, the property tax assessment is deemed conclusive and you lose any further rights of appeal, except in very limited circumstances.  Tenn. Code Ann. § 67-5-1401.  You should contact the local assessor’s office to request your appointment to appeal your property tax assessment by June 1.

Steps to Appeal

There are multiple levels of appeals that taxpayers must follow in order to preserve their rights and the appeal path can become a trap for the unwary if deadlines are missed.

1.   Informal Review – The first level of review, which is informal but should not be overlooked, is to talk with the local property assessor’s office.  This is an easy and inexpensive means to review your assessment and determine if there has been a mistake or if the property assessor is willing to make an adjustment based on information you can provide about the use or value of the property.  To request an informal review, call your local property assessor’s office.

2.   County Boards of Equalization – If you are not satisfied with the informal review or if you decide to skip that step, you must request review by the county board of equalization to preserve your appeal rights.  Tenn. Code Ann. § 67-5-1401.  County boards begin their sessions each year on June 1 and you should contact your local property assessor’s office to request an appointment.  You must appear “in person” before the county board of equalization prior to its final adjournment.  You may appear before the board or hearing officer by yourself or you may be represented by a qualified property tax representative or an attorney.  Again, if you fail to appear, the assessment will be deemed conclusive against you.  Tenn. Code Ann. § 67-5-1401. 

3.   State Board of Equalization – If you are not satisfied with the decision by the county board of equalization, your next step in the appeal process is to the State Board of Equalization.  Tenn. Code Ann. § 67‑5‑1412.  There are several levels of appeal within the State Board and the process becomes more formal.  Appeals to the State Board must be submitted in writing, sworn to, and filed with the Executive Secretary of the State Board.  The State Board has forms available for your use or you may also file your appeal online at www.tn.gov/comptroller/sb/.  There is a filing fee required for all appeals and the amounts are noted on the State Board’s website.

Taxpayers have until August 1 or 45 days after the date the notice of the decision of the county board of equalization was sent to file a further appeal with the State Board, whichever date is later.  Tenn. Code Ann. § 67-5-1412(e). 

Other Points to Remember 

You should also make note of the following important points:

1.  Appeals for Successive Years – Unless there is a change in your property assessment from last year, you will not receive a separate notice of assessment each year.  Nevertheless, if you have appealed an earlier year, your appeal is limited to that tax year and does not preserve your appeal rights for the successive years in which the assessment remains unchanged.  You must appeal the assessment for each tax year even if the assessment remains the same and you do not receive a new notice. 

2.   Payment of Undisputed Taxes – While on appeal, a taxpayer still must pay the undisputed portion of the property tax assessment in order to pursue the appeal and avoid the assessment of penalties after the taxes become delinquent on March 1.  The unpaid portion will accrue interest if you are ultimately required to pay the assessment.

3.   Mark Your Calendars – Remember that even if you do not receive any of the notices that are required to be sent to you, you are not relieved, usually, of your obligation to meet all filing deadlines.  If a deadline is approaching and you have not received a notice, call the local assessor or State Board office.  Do not let any of the deadlines pass.

IMPORTANT DEADLINES FOR TENNESSEE PROPERTY TAX APPEALS
January 1	Assessments of all real property and personal property are made annually as of January 1
May 20	Deadline for property assessor to make assessment
June 1	County Boards of Equalization begin their annual sessions.  Taxpayers should call to schedule an appointment to appeal before June 1
August 1	Deadline to file appeal to State Board of Equalization, or 45 days after notice of the action of the County Board is sent, whichever is later
October 1	Date on which property tax payments first become due (not delinquent until March 1 of the following year)
February 28	Last date to pay prior year’s property taxes before they become delinquent and subject to penalty and interest
March 1	Unpaid taxes for prior year become delinquent

Tennessee Department of Revenue Rescinds Notice Regarding Compressor Fuel For Pipelines

The Tennessee Department of Revenue has rescinded Notice 12-19, which indicated that the Department was going to impose sales tax on compressor fuel that propels natural gas through pipelines in the state. Notice 13-03 issued on April 18, 2013 indicated that the State has reconsidered its position that tax should collect sales tax on compressor fuel "consumed" in the state. No details are provided regarding the Department's decision; however, Tennessee Supreme Court precedent plainly holds that such fuel is not taxable.

As part of the Notice, the Department has requested that interested parties submit comments and that meetings will be held with those interested parties to determine the future applicability of the sales tax to these transactions. Accordingly, interested parties should reach out to the Depatment to provide comments and participate in the discussion process.

Tennesse Tax Tribunal Bill Deferred to 2014

      Legislation (HB961/SB734) to establish an independent tax tribunal to resolve disputes between Tennessee taxpayers and the Tennessee Department of Revenue has been deferred to the 2014 legislative session by the House Government Operations Committee.

      The legislation, sponsored by Sen. Bo Watson and Rep. Jon Lundberg, was based in large part on the ABA Modal Tax Tribunal Act and would have established an independent tax resolution system similar to tax tribunals recently approved in Georgia, Illinois, and Maine. Alabama looks poised to enact a tax tribunal in its current legislative session.

       Under current law, tax disputes involving the Tennessee Department of Revenue, including assessments based on audits, can be reviewed by the Informal Hearing Office of the Department if the taxpayer appeals the assessment.

       Taxpayers that disagree with the Informal Hearing Office may proceed to Chancery Court, and taxpayers seeking a refund must similarly pursue denied refund claims in Chancery Court. 

       As originally introduced, the Tax Tribunal Act would have replaced the Chancery Court proceeding with a full-time Tax Tribunal, and appeals would have proceeded from the Tax Tribunal directly to Tennessee’s appellate courts.  The bill likely will be amended to offer the taxpayer the option to appear before the Tax Tribunal while preserving the avenue to file suit in Chancery Court.

       The Tax Tribunal is being championed by the National Federation of Independent Business. “The goal is to offer Tennessee taxpayers, small and large, an independent, less costly forum for appeals,” said Jim Brown, Tennessee State Director of the NFIB, noting as many as 35 states have similar appeals functions. “It’s important to our members and supporters to know they have received a fair, impartial hearing.”

        “We will continue to work closely with the taxpaying community and other interested parties to incorporate suggested improvements and address remaining concerns before presenting a revised proposal to the legislature in 2014.”

         No fiscal note was issued on the legislation.

Tennessee ALJ Grants Motion to Reconsider Non-Standard Valuation of Property

      A Tennessee Administrative Law Judge held on April 4, 2013 that Georgia Pacific's ("GaPac")

nonstandard valuation should be considered on appeal. In re Georgia Pacific Corrugated II, LLC (Shelby County, Apr. 4, 2013). In so ruling ALJ Brook Thompson, recognized that Tenn. Code Ann. 67-5-903(e) did not become effective until after GaPac filed its original 2011 property tax schedule. Thus, the amended law, which prevents taxpayers from filing amended schedules that introduce non-standard valuations for the first time as part of the amended return, was not applicable to GaPac for the 2011 year. Accordingly, GaPac should be allowed to present its nonstandard valuation as part of the administrative appeal.

     In this case, GaPac filed its original return in March 2011. In April 2011, the Tennessee General Assembly amended the Tennessee property tax law, stating that nonstandard valuations may not be raised for the first time as part of an amended return. Subsequent to this change in the law, GaPac amended its original March 2011 filing, asking for a nonstandard valuation. On appeal, the ALJ concluded that the amended law applied and prohibited the nonstandard valuation, dismissing the case.

     On a motion to reconsider, Judge Thompson reversed the order dismissing the case, concluding that Tenn. Code Ann. 67-5-903(e) (as amended) did not become effective until after the original schedule was filed. "In a case with similar facts, ALJ Loesch ruled that the timing of the amendment to the statute did not preclude the subsequent claim of non-standard valuation." See Armstrong Hardwood Flooring Company (Davidson County, Sept. 27, 2011).

     Practice Point: While this ruling could have limited significance for most taxpayers, based on the delay in hearings in Tennessee on property tax matters, taxpayers who failed to present a nonstandard valuation for the 2011 tax year, may still be able to support a nonstandard valuation even though a non-standard valuation was not filed with the original filing. Thank you Armstrong Hardwood and Georgia Pacific!

Tennessee Trial Court Dismisses Phone Company's Refund Claim

    

     A Tennessee trial court has dismissed a phone company's franchise and excise tax refund lawsuit, concluding that the revenue commissioner properly exercised his discretion under UDITPA and the MTC regulations by imposing a variance to source sales of wireless service to the billing address of Tennessee customers. In so holding, the trial court did not address the taxpayer’s apportionment calculation, which was based on a cost-of-performance methodology. Vodafone Americas Holdings, Inc. v. Roberts, Civil No. 07-1860-IV (Mar. 19, 2013).

     For the tax years at issue , Vodafone filed Tennessee franchise and excise tax returns, using the billing addresses of the customers of Verizon Wireless to source its receipts from sales of certain telecommunications services. A refund claim was later filed asserting that Tennessee franchise and excise tax was not due because Vodafone lacked statutory and constitutionally-required business activity in Tennessee.

The refund claim was denied, and Vodafone initiated the subject lawsuit. Vodafone also asserted that the proper apportionment of the majority of wireless services at issue should be calculated using a cost-of-performance methodology.

     The revenue commissioner subsequently exercised his variance power and required Vodafone to calculate its Tennessee apportionment sales factor for the refund period and for all subsequent years using a "primary-place-of-use" methodology (i.e., according to the locations of the cell phone customers).

     In an earlier ruling on cross-motions for summary judgment, the trial court concluded that the Vodafone general partnership interest was sufficient to establish taxing nexus with Tennessee because of the activities of the general partnership in Tennessee. The trial court had also denied both parties’ motions for summary judgment and held that a trial was necessary to resolve factual issues bearing on the "propriety of the Commissioner's imposition of the variance at issue in this case under Tennessee law."

     A trial on stipulated facts and stipulated exhibits was held on March 5, 2013. On March 19, 2013, the court issued its memorandum and order, holding that the variance was properly issued by the revenue commissioner. In reaching this conclusion, the court primarily relied on Bellsouth Adver. & Publ’g Corp. v. Chumley, 308 S. W.3d 350 (Tenn. Ct. App. 2009), finding that "it was reasonable for the Commissioner to conclude that the cost of performance methodology did not fairly reflect the extent of Vodafone’s business activity in Tennessee. " The change in taxable earnings "amounted to roughly an 89% reduction" in apportioned receipts.

     The Court also concluded that the revenue commissioner’s properly found that Vodafone’s case presented an "unusual factual situation" that warranted the imposition of a variance based on the applicable regulations.

     The Court’s ruling is a final order for appeal purposes. Accordingly, Vodafone will have 30 days to file a notice of appeal if it intends to pursue this matter further.

Brett R. Carter, Bradley Arant Boult Cummings, LLP, Nashville

Amended Tennessee Business Tax Bill Released For Further Comment

The Tennessee Department of Revenue has released a new version of its Tennessee Business Tax Bill, which is titled the Uniformity and Small Business Relief Act. The original version, which was released in mid-February was addressed in an earlier article, Tennessee Requests Comments on Legislation to Amend the Locally-Imposed Gross Receipts Tax. This new version of the bill makes changes to the provisions applicable to cable and satelite providers as well as changes to the exemption for small businesses. The exemption is clarified in that the exemption level is raised to sales of $10,000 per jurisdiction. Taxpayers exempt under this provision must obtain an annual "Minimal Activity License" at a charge of $15 per year. The revision also clarifies the fact that services are imposed based on where a customer is located and receives the taxable services. It is likely that additional changes will be released, and we will update those revisions as they are made. A copy of the Amended Uniformity and Small  Business Relief Act is linked for your review.

Tennessee Tax Tribunal Bill?

Senator Bo Watson of the Tennessee General Assembly has introduced legislation in Tennessee that would modify Tennessee's tax dispute resolution system and incorporate a tax tribunal. The bill, which can be found by clicking on the following link, http://www.capitol.tn.gov/Bills/108/Bill/SB0734.pdf, was referred to the Senate Government Relations Comittee on February 6 and is being considered by that committee.

It is unclear whether there is an opportunity for this bill to gain any traction as the current system, while it may have some shortcomings, is not viewed is being broken. As this legislation proceeds, we will publish additional updates and analysis.

For updates, please follow @TNTaxLawyer on Twitter.

Tennessee To Propose Expansion of Business Tax on Gross Receipts



TN Governor, Bill Haslam



The Tennessee Business Tax has historically been imposed by local jurisdictions on activities conducted at places of business within the local jurisdiction. Thus, a place of business was required in the state, indeed in the local jurisdiction, to be subject to the tax. The Tennessee Department of Revenue is proposing changes to this tax to expand the base to include certain out-of-state businesses and to allow local governments to tax gross receipts earned outside of the local taxing jurisdcition. The attached link includes the proposed legislation, and the Department is seeking comments from interested taxpayers.

Entities that lease tangible property in Tennessee, deliver goods in the state in company-owned vehicles, provide services in Tennessee or sell goods in purely intrastate transactions but do not have business locations in the state will now be required under this legislation to report and pay a "state-level" business tax. The applicable sections of the bill to focus on is Section 15. Attention should also be focused on Section 13, which provides for the accompanying personal property tax credit that applies. The state has not expanded the credit to take into consideration potential property taxes paid.

The Commissioner of Revenue is seeking comments on the proposed legislation that also focuses on "television service providers" but provides no definition of such.

Constitutional issues with the existing tax, nor shortcomings in the applicable definitions are not addressed by this proposal.

http://bit.ly/1193ttH