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The Tennessee Department of Revenue has rescinded Notice 12-19, which indicated that the Department was going to impose sales tax on compressor fuel that propels natural gas through pipelines in the state.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.

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