Tennessee Tax Year in Review
State & Local Tax Alert: Tennessee Edition
Bradley Arant Boult Cummings LLP’s State and Local Tax Team would like to share our year-end review—revisiting some interesting Tennessee tax developments for 2014 and announcing our annual “Tennessee Tax Issue of the Year.”
While there were fewer developments than usual that captured the Tennessee state and local tax spotlight, here are our top picks for 2014:
- Tennessee Supreme Court Grants Review of the Commissioner of Revenue’s Alternative Apportionment Variance. The Tennessee Supreme Court has granted review of Vodafone Americas Holdings’s ongoing dispute with the Department of Revenue over the Commissioner’s exercise of his discretion to impose alternative apportionment against the taxpayer’s foreign general partner for franchise and excise tax purposes. Vodafone Americas Holdings v. Farr, Comm’r of Revenue, 2014 WL 2895900 (Tenn. Ct. App. June 23, 2014), perm. app. granted, (Tenn. Nov. 20, 2014).
The taxpayer is a telecommunications provider. It asserted that a cost-of-performance sourcing methodology should be used for franchise and excise tax purposes instead of sourcing its receipts to the billing addresses of its customers. In a 2-1 decision, the Tennessee Court of Appeals found that the Commissioner properly issued a variance under Tennessee’s version of UDITPA and MTC regulations to source the taxpayer’s receipts to the billing addresses of its customers based on the Commissioner’s position that the statutory cost-of-performance method did not fairly represent the extent of the taxpayer’s business activity in Tennessee.
The Tennessee Supreme Court granted the taxpayer’s request for discretionary review, and briefing will be completed in early 2015, after which oral argument will be scheduled.
This case is noteworthy, not only because the Tennessee Supreme Court tends to sparingly grant discretionary review in state tax cases, but also because it involves an income apportionment issue that is among the more important issues being litigated across the country. Within Tennessee, there are several other pending cases that raise similar cost-of-performance issues. Vodafone, as well as the trial court cases, are on our watch list for 2015.
- New Procedure for Proposed Tax Assessments and Changes to the Informal Conference Process. The method of issuing tax assessments and the informal conference process available to taxpayers was revamped in 2014. 2014 Tenn. Pub. Acts 854.
The Department of Revenue designed this legislation, in part, to counter efforts in prior legislative sessions to create an independent tax tribunal in Tennessee. Cf. “The New Alabama Tax Tribunal is Open for Business,” BABC State and Local Alert (Oct. 1, 2014). Beginning January 1, 2015, in every case in which a tax assessment is to be issued, the Commissioner will first issue a “notice of proposed assessment” with a right to request an informal conference within 30 days. If the taxpayer requests an informal conference, the “proposed assessment” does not become a “final assessment” until a written decision is issued setting forth the amount due. If, however, an informal conference is not requested, the “proposed assessment” becomes a “final assessment” on the 31st day after the notice was issued. Thereafter, a taxpayer will continue to have all rights and remedies available under the Taxpayer Remedies for Disputed Taxes Act, Tenn. Code Ann. § 67-1-1801, et seq. Changes are also made to the timing and manner of conducting informal conferences, all of which are intended to foster informal and independent reviews of the proposed assessments.
- Shortfalls in Franchise and Excise Tax Collections. A storyline that received a great deal of attention in 2014 was the shortfall in Tennessee’s franchise and excise tax collections and the inability of the administration to identify the cause. At least a portion of the shortages was later attributed to corporate relocations from Tennessee to Mississippi. The shortfalls, which totaled over $200M during the 2013-2014 fiscal year, are being closely monitored for the current fiscal year and may result in legislative proposals that could impact Tennessee’s business community. We have added this issue to our watch list for 2015 when the Tennessee General Assembly reconvenes.
- “Jock Tax” Repealed. The much-maligned “jock tax” was repealed for both National Hockey League and National Basketball Association players in 2014. 2014 Tenn. Pub. Acts 760. The tax was removed for NHL players after April 24, 2014, and the phaseout of the tax for NBA players takes effect on June 1, 2016.
- Taxation of Diesel Fuel Used by Rail Carriers. The Tennessee General Assembly passed legislation in response to the ongoing litigation brought by rail carriers challenging as discriminatory the state’s sales tax on diesel fuel used by rail carriers when commercial motor carriers are exempt from the tax. The legislature’s solution was to amend the sales tax exemption for all commercial carriers that use motor fuel that is subject to the diesel fuel tax. Transportation Fuel Equity Act, 2014 Tenn. Pub. Acts 908.
Effective July 1, 2014, diesel fuel used by motor vehicles, trains, and aircraft (but excluding boats, barges, and other vessels operated on waterways) is subject to Tennessee’s diesel fuel tax but is exempt from Tennessee’s sales tax. However, this legislation has spawned new lawsuits brought by rail carriers challenging as discriminatory the exclusion of boats, barges, and other vessels from the diesel fuel tax.
The discriminatory tax issue raised by rail carriers in Tennessee is the same issue that currently is pending before the United States Supreme Court in Alabama Dep’t of Revenue v. CSX Transp., Inc., 720 F.3d 863 (11th Cir. 2013), cert. granted, No. 13-553 (U.S. Jul. 1, 2014). The case was argued on December 9, 2014, and we will continue to monitor this issue in 2015.
Our selection for the 2014 Tennessee Tax Issue of the Year is
Tennessee Constitutional Amendment No. 3
Constitutional Amendment No. 3 was on the November 4, 2014, general election ballot and asked Tennessee voters to answer the following question:
Shall Article II, Section 28 of the Constitution of Tennessee be amended by adding the following sentence at the end of the final substantive paragraph within the section:
Notwithstanding the authority to tax privileges or any other authority set forth in this Constitution, the Legislature shall not levy, authorize or permit any state or local tax upon payroll or earned personal income or any state or local tax measured by payroll or earned personal income. . . .
Although Tennessee does not impose a tax on payroll or earned personal income and the Tennessee Supreme Court previously has held that such a state income tax on earned income would be unconstitutional under the existing Constitution, the legislature referred Constitutional Amendment No. 3 to Tennessee voters in 2014. The amendment passed by a margin of 66% to 34%. We note that Amendment No. 3 did not impact the Hall Income Tax on personal investment income.
Amendment No. 3 should remove any lingering doubts that the Tennessee Constitution does not permit personal income tax on earned income. This likely will be an important selling point to the Tennessee Department of Economic & Community Development as it continues its efforts to recruit and retain major businesses and their employees in Tennessee.
Best wishes for a Happy New Year from the
Bradley Arant Boult Cummings
Tennessee State and Local Tax Team!
Joe Gibbs, Pat Moskal, Brett Carter, and Brian Shelton