Tennessee Tax Refunds Must Be Filed by December 31

State & Local Tax Alert: Tennessee Edition



Is Your Company Missing Anything?

In Tennessee, December 31 is an important deadline for Tennessee taxpayers because it marks the last day that a taxpayer can file a claim for refund with the Tennessee Department of Revenue for state taxes paid at any time during 2009. While some taxpayers may already have identified potential claims for refund that need to be filed, now is a good time to review several of the tax cases that are pending in the trial courts to target additional refund opportunities as those cases work their way through the Tennessee Courts. This bulletin describes some of the current issues in litigation that you may want to consider as potential refund opportunities.

Franchise and Excise Tax

Cost of Performance
There are several franchise and excise tax cases that are pending in Tennessee’s trial courts that address the proper application of Tennessee’s apportionment factor for taxpayers making sales of services or intangibles. For example, Vodafone v. Farr is a case involving the application of Tennessee’s cost-of-performance rules to the sale of wireless telecommunications service and it’s scheduled for a pretrial conference in early December. Taxpayers that sell services or intangibles should review their calculation of Tennessee’s receipts factors to make sure that they are taking full advantage of the cost-of-performance regulations, which could significantly reduce their Tennessee apportionment.

Affiliated Debt
A recurring issue for some Tennessee taxpayers is whether affiliated company debt should be included as part of the Tennessee franchise tax base. It is the Department of Revenue’s position that affiliated debt in excess of a 4:1 ratio should be added back (9:1 ratio for financial institutions). There are a few cases pending in the Tennessee trial courts on this issue that could reject the Department’s 4:1 test. Accordingly, Tennessee taxpayers should consider whether a protective refund claim is warranted on this issue.

Public Law 86-272
There are also several pending cases challenging the application of Tennessee’s excise tax under Public Law 86-272, asserting that the activities of a Tennessee sales force fits within the federal preemption of Tennessee’s excise tax on out-of-state companies. Most of the cases involve pharmaceutical sales companies whose activities appear to fall within the safe harbor established by Public Law 86-272. If this issue presents a close case for a given taxpayer, the taxpayer would be well-advised to file a protective refund claim to preserve the refund claim in the event that these cases are decided in favor of the taxpayers.

Sales and Use Tax

Computer Software and Related Services
There are a few trial court cases pending that involve the application of Tennessee’s sales tax to computer software consulting, development, training, and help-desk services. These issues are fact-intensive and depend on the specific terms of the contracts with software consultants and vendors; however, they might provide some useful guidance for taxpayers that have taken conservative positions on what should be included in the tax base. A claim for a tax refund may be warranted based on the sales taxes paid in 2009 on software-related projects.

Internet Access/Network Services
The Department of Revenue issued sales tax assessments to a variety of taxpayers providing wholesale Internet access, private line services, port modem management services, and wide area network services. The taxpayers are challenging these assessments relying on the Tennessee Court of Appeals ruling in Prodigy, which concluded that Internet access is not subject to Tennessee sales and use tax as a telecommunications service. For taxpayers in this sector, a network service provider may have refund opportunities depending on the outcome of these cases. In an unrelated case, a taxpayer has filed a claim for refund on wireless Internet access services. It is anticipated that the taxpayer will be awarded a refund. Taxpayers remitting sales tax on wireless Internet services will want to review this issue and consider filing refund claims.

Bad Debt Credits
There are several bad debt credit cases pending in Tennessee that involve affiliated financing companies that serve as factoring companies for large retailers. The retailers are pursuing refunds based on credit sales that were factored and ultimately proved to be uncollectible. The facts in these cases vary depending on the structure utilized by the taxpayer, so it is possible that one or more of these cases will be successful and present a potential refund opportunity.