Intangible Expenses, Amazon & Solar Highlight Bills in Tennessee Legislature

State and Local Tax Alert - Tennessee Edition



Tennessee’s legislative session is in full swing, and based on the current pace of the session, legislators should finish their work during the first week of May, at the latest, and return to their districts for the November elections. Consistent with the 2011 session, the Tennessee Department of Revenue has abandoned the practice of introducing an omnibus “technical corrections” tax bill near the end of the session. Instead, there are several key tax bills that business taxpayers should be tracking as the session proceeds.

Franchise and Excise Tax
will amend Tennessee franchise and excise tax law regarding the deduction for intangible expenses paid to affiliates. Under current law, taxpayers need only disclose intangible expenses paid to affiliates. Subject to certain exceptions, the proposed amendment would require taxpayers to file an application with the Department of Revenue, seeking advanced approval to claim the deduction. The bill is part of the Administration’s package, and according to the fiscal note, will raise $12 million. Amendments made to the bill include exceptions for foreign affiliates, pass-through entities, and intangible holding companies subject to Tennessee or another state’s tax, but the pre-approval process presents problems for companies that have not previously filed in Tennessee.  For additional information on this legislation, see previous State and Local Tax Alert: Tennessee Edition.

This bill also includes an amendment to Tennessee’s consolidated net worth filing that allows taxpayers to request the exclusion of entities from the consolidated net worth affiliated group if the affiliate’s operations are remote from the taxpayer and exclusion of the affiliate would result in a fair representation of the group’s consolidated net worth. The exclusion may be granted at the Commissioner’s discretion, and the amendment allows the Commissioner to entertain late requests if the Commissioner determines that there is good and reasonable cause.

The bill is still being considered by the Senate Finance Subcommittee. The House Tax Subcommittee passed the amended bill on March 14, 2012, with recommendation for passage.

Sales and Use Tax
SB2232/HB2370 (the “Amazon” nexus bill) codifies a temporary nexus waiver agreement between Tennessee and Amazon under which Amazon’s in-state, affiliated distribution centers would not be considered in determining whether Amazon has a physical presence in Tennessee sufficient to establish nexus for sale and use tax purposes. The provision will expire on January 1, 2014, after which, Amazon will be required to collect and remit Tennessee sales and use tax. The bill requires Amazon to notify its customers through a confirmation email after a purchase that they may owe use tax and to include in the email a link to the Department of Revenue’s website that allows the purchaser to pay the tax. Further, Amazon will have to provide each of its customers with an annual statement containing the total purchase price of all sales made to the purchaser during the preceding calendar year, again notifying customers that use tax may be owed. These reporting requirements are limited to Amazon and do not apply to other online retailers making sales to Tennessee customers. The bill was signed by Governor Haslam on March 26.

Solar Energy Property Tax Bill
SB3296/HB3520 amends the statutory assessment rate for solar energy property. In recent weeks, this proposal has been scrutinized by those in the solar energy industry as a tax increase on solar operators. The Comptroller contends that this amendment is required because the current law is unconstitutional and will not apply to businesses or individuals that own solar equipment. Rather, the amendment will only apply to solar operators that sell energy back to the grid. The bill passed out of the Senate State and Local Government Committee and has been referred to the Senate Finance Committee.  The House Finance subcommittee has deferred the bill until April 4.

SB2207/HB2345 would amend the public records disclosure law in Tennessee to make “due diligence materials” confidential. The information that would be confidential under this statute would be information provided during the business recruitment process, including information on business processes, organizational structures, financial statements, budgets, cash flow reports or similar information used to determine eligibility for tax incentives of FastTrack grants.

This proposal is part of the Governor’s package and, according to the Governor, would put Tennessee on par with other states that are competing with Tennessee for new businesses and business relocations. There has been concern in the legislature regarding the transparency in the tax incentive process. Accordingly, amendments to the bill have required disclosure of certain information, including company name, amount of FastTrack funds received, number of jobs created, and location of the projects.

The bill is pending in the Senate Commerce Labor and Agriculture Committee, and it is unclear whether this committee will reconvene during this session.

Electronic Filing Legislation
SB2233/HB2371 includes various proposals by the Department of Revenue to expand the Commissioner’s authority to require electronic filing and payments. In addition, the bill also includes provisions allowing the Commissioner to require electronic information reports from beer and tobacco wholesalers to track wholesale sales to retailers in Tennessee. This provision is intended to enhance the authority of the Commissioner when conducting audits of convenience stores.

This bill also amends the business tax statutes to allow the Commissioner to change the tax year and due date of business tax returns to coincide with a taxpayer’s fiscal year instead of the arbitrary annual filing periods currently provided for in the business tax statutes. This is a favorable change that will prevent taxpayers from having to prepare partial-year, pro forma returns as part of the business tax compliance process.

The bill has passed both the House and the Senate and is awaiting Governor Haslam’s signature.

SB2175/HB2231, the “Uniformity in Tax Increment Financing Act of 2012,” is legislation advanced by the Comptroller to amend the tax increment financing laws in Tennessee to streamline the incentive process for property tax, while providing for accountability and transparency. The bill was signed by the Governor on March 21, 2012.

SB2206/HB2344 would expand the Tennessee FastTrack grant program. Under current law, expenditures for infrastructure development and job training are allowed. The amendment allows expenditures for retrofitting, relocation expenses, site development, equipment purchases, and temporary office space and equipment. If enacted, this will expand the authority of the Department of Economic and Community Development (ECD) to make direct grants to businesses being recruited to the state. This bill has passed the House and has been transmitted to the Senate for consideration.

SB2405/HB2000 proposes expansion of the franchise and excise tax credit for jobs for small, high wage employers that create jobs in high technology areas. The amendment would authorize the state to waive the typical requirement that 25 jobs be created for the credit to apply. This bill is being considered by the Senate Tax Subcommittee.

SB2213/HB2351 enacted revisions to the franchise and excise tax job tax credit, providing additional credits for jobs created for persons with disabilities. This bill was signed into law by the Governor on March 13, 2012, and may now be cited as Chapter 576 of the Public Acts of 2012.

As the session proceeds, attorneys for Bradley Arant Boult Cummings will continue to monitor and provide updates regarding these and other Tennessee tax initiatives. If you have questions about any of the bills covered in this bulletin, please contact the authors for further details.