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

State & Local Tax Alert: Tennessee Edition

Client Alert


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, 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.