Tennessee – 2014 Legislative Highlights

State & Local Tax Alert: Tennessee Edition

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Method of Tax Assessments and Informal Conference Process Revamped 

Public Chapter No. 854 

Effective January 1, 2015, the method of issuing tax assessments and the informal conference process available to taxpayers will be revamped. 2014 Tenn. Pub. Acts 854. Touted as being more taxpayer-friendly, the two most significant changes are the use of notices of “proposed assessments” to allow for informal review before those assessments become final and the manner in which the informal conference reviews will be conducted.

Notice of Proposed Assessment. The Department of Revenue’s method of issuing tax assessments will be changed to a two-step process. In every case in which an assessment is to be issued, the Commissioner first will issue a “notice of proposed assessment” accompanied by a notice to the taxpayer of the right to request an informal conference within 30 days of the proposed assessment. If an informal conference is requested, the proposed assessment does not become a final assessment until a written decision is issued by the Commissioner or the Commissioner’s designee, setting forth the amount of tax due. If an informal conference is not requested, the proposed assessment will become a final assessment on the 31st day after the notice of the proposed assessment.

Comment: Liens in favor of the State will arise at the time a “notice of proposed assessment” is issued. Accordingly, the Department will be authorized to file a notice of lien before a proposed assessment becomes final under Tenn. Code Ann. § 67-1-1403(b).

When the proposed assessment becomes final—either at the conclusion of the informal conference process or upon the 31st day if no conference is requested—the taxpayer will continue to have the remedial rights provided under the Taxpayer Remedies for Disputed Taxes Act, Tenn. Code Ann. § 67-1-1801 et seq. Notices of proposed assessments will inform taxpayers that upon the assessments becoming final, the taxpayer has the right to file suit to challenge the final assessment within 90 days under Tenn. Code Ann. § 67-1-1801(a)(1)(B).

For purposes of the statute of limitations that applies to the assessment of taxes for which a return is required to be filed (three years from December 31 of the year in which the taxpayer filed a return under Tenn. Code Ann. § 67-1-1501(b)), the limitations time period will be met if the Commissioner issues a “notice of proposed assessment” within that time period.

The new legislation further provides that the taxpayer “shall not be prejudiced” by seeking or deciding not to seek an informal conference, nor is the Commissioner to be prejudiced as a result of an informal conference. If an informal conference is requested, it is not considered to be an administrative remedy or a contested case proceeding that is otherwise subject to the provisions of the Uniform Administrative Procedures Act.

Changes to the Informal Conference Process. As of January 1, 2015, Public Chapter 854 also changes the timing and manner in which informal conferences will be scheduled and conducted. These changes are intended to foster informal and independent reviews of proposed assessments.

The statutory provisions for the informal conference procedure itself will be relocated from the Taxpayer Remedies for Disputed Taxes Act, Tenn. Code Ann. § 67-1-1801(c)(3), to the Tax Enforcement Procedures Act, Tenn. Code Ann. § 67-1-1438. The amended process will require the Commissioner, within 10 days of receiving a taxpayer’s timely request, to schedule the time and place for an informal conference unless the taxpayer makes a written request for a continuation of the conference to allow time to provide additional information or documents.

Other changes to the informal conference process will include the following:

  1. the conference will be conducted by Department personnel who will exercise independent judgment in attempting to resolve disputed proposed assessments without litigation;
  2. the conference will be conducted in an informal manner either by telephone or in person, at the taxpayer’s option;
  3. the taxpayer will be able to participate without representation or may be represented by an officer, employee, partner or member of the taxpayer or by a third party;
  4. decisions regarding individual issues are to be based on the facts and law;
  5. arguments as to the applicability of the tax laws and any new evidence will be taken into consideration, provided that informal conference personnel may request the Department’s audit division to examine new evidence that is substantial and should have been presented during the audit;
  6. the taxpayer will have the right to bring witnesses to an in-person conference;
  7. informal conference personnel will not be allowed to engage in ex parte communications with the Department’s audit division regarding the substantive issues under review;
  8. informal conference decisions will not be considered as precedent; and
  9. informal conference personnel may recommend to the Commissioner that the proposed assessment be compromised.

Publication of Conference Decisions. In a departure from prior practice, the legislation allows the Commissioner to publish or otherwise publicize guidance to taxpayers, practitioners, and Department personnel resulting from informal conference decisions, while maintaining the non-disclosure requirements of confidential taxpayer information. This section of the amendment further provides, however, that conference decisions may not be cited as precedent but may be cited as guidance if published or publicized by the Commissioner.

“Taxpayer Bill of Rights.” Public Chapter 854 also amends the “Tennessee Taxpayer Bill of Rights,” recognizing that the changes described above are designed to provide taxpayers with the right to dispute any proposed assessment by filing a timely request and to a “speedy, informal and inexpensive review of a proposed assessment in an informal conference with an impartial representative of the department and to be represented by an attorney, certified public accountant, or other representative.”

Commissioner’s Power to Compromise Tax Liabilities. As of January 1, 2015, Public Chapter 854 also amends the powers of the Commissioner to allow him or her to compromise tax liabilities upon such terms as the Commissioner finds to be in the best interests of the state, without the necessity of first obtaining the written approval of the comptroller of the treasury and the attorney general as required under current law. Either the comptroller or the attorney general may still require, however, that such compromises or any class of compromises be subject to their prior review and written approval.

Electronic Filing for Personal Property Tax Coming?

Public Chapter No. 938 

Local property tax assessors are authorized, as of May 19, 2014, to require electronic filing of tangible personal property schedules, with the approval of the Director of Property Assessments. 2014 Tenn. Pub. Acts 938. For any year in which electronic filing is required in a county, the filing deadline is extended to April 15, and tangible personal property assessments may be appealed directly to the state board of equalization until 45 days after the assessment change notice is sent.

Comment: As with all property tax deadlines, taxpayers should pay particular attention to these new deadlines when filing electronically. The failure to comply with property tax deadlines generally precludes an appeal unless reasonable cause can be shown for the noncompliance. Amended personal property tax schedules, however, can still be filed under certain circumstances. See Tenn. Code Ann. § 67-5-903(e).

Transportation Fuel Equity Act 

Public Chapter No. 908 

The General Assembly passed legislation this year in response to ongoing litigation brought by rail carriers challenging the application of Tennessee's sales tax to diesel fuel used by the rail carriers. 2014 Tenn. Pub. Acts 908. In the litigation, Illinois Central Railroad sued the State seeking a declaration that the sales tax exemption allowed on diesel fuel used by commercial motor carriers—but not rail carriers—was discriminatory under the Railroad Revitalization and Regulatory Reform Act (4R Act). See Illinois Cent. R.R. Co. v. Dep’t of Revenue, 969 F. Supp. 2d 892 (M.D. Tenn. 2013). Following a trial, the federal district court held that the Department’s differential tax treatment subjecting rail carriers to sales tax on diesel fuel, but not motor carriers, was discriminatory. The State has appealed that decision, and it is currently pending. Illinois Cent. R.R. Co. v. Dep’t of Revenue, Docket No. 13-6348 (6th Cir.).

The General Assembly addressed this tax issue by amending Tennessee’s sales tax exemption to include all commercial carriers that use motor fuel subject to the diesel tax. Thus, beginning July 1, 2014, diesel fuel used to transport passengers or goods for a fee used by “motor vehicles, trains, and aircraft” (but excluding marine vessels, boats, barges, and other craft operated on waterways) is subject to Tennessee’s diesel tax under Tenn. Code Ann. § 67-3-202, but is now exempt from Tennessee’s sales tax under Tenn. Code Ann. § 67-6-329(a)(2).

Natural Gas Marketers Reclassified Under the Business Tax 

Public Chapter No. 942 

The General Assembly also responded to litigation involving natural gas marketing companies, enacting legislation that will tax those companies under classification 5 of the business tax beginning with tax periods on or after July 1, 2014. 2014 Tenn. Pub. Acts 942. Previously, the Department of Revenue taxed these companies under classification 2 of the business tax. See Atmos Energy Marketing, LLC v. Farr, Docket No. 10-10-I (Davidson County, Tenn., Chancery Court Aug. 22, 2013).

In Atmos Energy, the taxpayer challenged the business tax on several grounds, including the argument that the Department had incorrectly classified its business under classification 2 of the business tax as the sale of natural gas rather than the sale of services. While the taxpayer was unsuccessful on these issues before the trial court, it appears to have obtained tax relief through the legislative process.

The amendment provides that natural gas marketers will now come within a new category under classification 5 of the business tax and creates a separate tax rate applicable to them that will result in a reduction of the business tax for future periods and the removal of the requirement to obtain a license.

“Jock Tax” Repealed for NHL Players and Phased Out for NBA Players 

Public Chapter No. 760 

The General Assembly repealed a much-maligned professional privilege tax imposed on professional hockey and basketball players. 2014 Tenn. Pub. Acts 760. The tax, referred to as the "jock tax," required National Hockey League and National Basketball Association players to remit annually a professional privilege tax based on the number of games played in Tennessee on which they were on the roster up to a maximum tax of $7,500. The players' associations for both leagues had threatened to file lawsuits challenging the constitutionality of the tax, but opted instead to agree to the phaseout of the tax. NHL players are no longer subject to the tax for periods after April 24, 2014. The phaseout for NBA players takes effect on June 1, 2016.