2017 Tennessee Tax Legislative Highlights

State & Local Tax Alert: Tennessee Edition

Client Alert

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In addition to Tennessee’s passage of the IMPROVE Act (Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy) also known as the “2017 Tax Cut Act,” 2017 Tenn. Pub. Acts 181, featured in our State and Local Tax Alert: Tennessee Edition of May 23, 2017, the Tennessee General Assembly enacted other significant tax legislation during its 2017 session. Here are some highlights:

Legislature Joins Chancery Court in Prohibiting Department of Revenue from Enforcing Its “Economic Nexus Rule” to Collect Internet Sales Tax, 2017 Tenn. Pub. Acts 452

Each year, the legislature introduces an omnibus bill to approve all of the rules and regulations promulgated during the year by various Tennessee executive agencies. This year, the General Assembly singled out Tenn. Comp. R. & Regs. 1320-05-01.129 (Rule 129) promulgated by the Department of Revenue. Rule 129 was designed to require remote sellers having a substantial economic nexus with the state (deemed to be at least $500,000 in sales to Tennessee customers over a 12-month period) to register with the Department by March 1, 2017, and begin collecting and remitting Tennessee sales or use tax on sales made to Tennessee customers beginning July 1, 2017.

Before the collection obligation under Rule 129 became effective, a lawsuit challenging Rule 129 was filed on March 30, 2017, in American Catalog Mailers Ass’n v. Department of Revenue (Davidson County Chancery Court, Case No. 17-307-IV). The plaintiffs seek a declaration that Rule 129 is unconstitutional because it violates the in-state physical presence requirement for sales or use tax purposes under the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota. The Department promulgated Rule 129 notwithstanding the existing limitations under Quill and invited the legal challenge, as have other states, hoping for a judicial change in Quill’s physical presence standard. After the lawsuit was filed, an agreed order was entered by the court on April 10, 2017, preventing the Department from enforcing Rule 129 pending a final judgment in the case.

In response to the lawsuit, the General Assembly amended the omnibus bill as introduced to prohibit the Department of Revenue “from collecting any internet sales or use taxes authorized under department rule 1320-05-01-.129(2) and permitted under a ruling of any court, until such court’s ruling has been fully reviewed and rule 1320-05-01.129(2) has been approved by the general assembly pursuant to § 4-5-226.”

As a result, the Department’s enforcement of Rule 129 is now prohibited both by legislative act and judicial order.

Tennessee Changes Formula for Calculating Quarterly Estimated Franchise and Excise Tax Payments, 2017 Tenn. Pub. Acts 194

Taxpayers may now begin calculating their quarterly estimated franchise and excise tax payments utilizing an annualized income installment method in the manner provided by Section 6655(e)(2) of the Internal Revenue Code. Additionally, exemptions from the franchise and excise taxes must now be filed on or before the 15th day of the fourth month following the close of the first tax year for which the exemption is claimed. Under prior law, such exemptions had to be filed within 60 days of the beginning of the first tax year for which the exemption was claimed. Finally, the penalty for a failure to timely file an application for exemption from the franchise and excises taxes is reduced from $1,000 per occurrence to $200 per occurrence.

Franchise and Excise Tax Credit Created as Part of the “Tennessee Broadband Accessibility Act,” 2017 Tenn. Pub. Acts 228

As part of the “Tennessee Broadband Accessibility Act,” a franchise and excise tax credit of 6 percent of the purchase price of “qualified broadband internet access equipment” is created. “Qualified broadband internet access equipment” means new equipment placed into service in a tier 3 or tier 4 enhancement county (generally, more rural counties) to provide broadband internet access services at minimum download speeds of 25 Mbps and upload speeds of 3 Mbps. The credit is capped at 50 percent of the taxpayer’s combined franchise and excise tax liability before application of the credit and may be carried forward for up to 15 years. Additionally, the total amount of the credit provided to all taxpayers is capped at $5 million per calendar year.

Department of Revenue to Begin Reporting Franchise and Excise Tax Credits to the Legislature, 2017 Tenn. Pub. Acts 251

Beginning January 1, 2018, and annually thereafter, the Commissioner of Revenue is required to report to the House and Senate Finance, Ways and Means Committees the following information for franchise and excise tax credits claimed during the preceding year: (1) the total number of taxpayers claiming the credit; (2) the total amount of credits claimed; (3) the number of jobs created as reported by the taxpayer, if the credit is awarded based on jobs created; (4) the total amount of credits carried forward from a prior tax year; and (5) the nature of the business of the taxpayers claiming the credit, if the information is available. Disclosure of taxpayers’ returns, specific tax information or tax administration information is not authorized.

Change of Jurisdiction for Claims Seeking Refunds of Retaliatory Insurance Taxes, 2017 Tenn. Pub. Acts 423

Previously, claims for refunds of retaliatory insurance taxes, which are assessed and administered by the Commissioner of Commerce and Insurance, were required to be filed with the Tennessee Claims Commission pursuant to Tenn. Code Ann. § 9-8-307(a)(1)(O). Effective immediately, claims for refunds of retaliatory insurance taxes must be brought in the Chancery Court for Davidson County, Tennessee. With this change, refund claims for retaliatory insurance taxes will now be brought in the same judicial forum as other state tax claims.

Sales Tax Revenue from Admissions to Major League Soccer Events to be Allocated to Municipality Securing a Franchise, 2017 Tenn. Pub. Acts 449

As part of Nashville’s bid for a Major League Soccer (MLS) franchise, this legislation extends to a municipality with a sports authority securing an MLS franchise existing special allocations of sales tax revenue generated by sporting events to municipalities that have secured a major league baseball, football, or basketball franchise or a major or minor league hockey franchise. The MLS allocation would include sales tax revenue generated from the sale of admissions, food and drink, parking, and related services for the MLS sporting event, as well as from the sale of licensed merchandise sold by an MLS team.

Centenarians Exempted from the Hall Income Tax, 2017 Tenn. Pub. Acts 453

Beginning January 1, 2018, any person who is 100 years of age or older is exempt from the Hall income tax. Given that the Hall income tax already is set to be fully phased out beginning January 1, 2021, the utility of this exemption will be short lived.

Tennessee Adopts “Uniform Unclaimed Property Act,” 2017 Tenn. Pub. Acts 457

Tennessee joins a handful of states that have introduced or enacted measures to update their unclaimed property laws to conform generally to the Revised Uniform Unclaimed Property Act drafted by the National Conference of Commissioners on Uniform State Laws, and replaces Tennessee’s former “Uniform Disposition of Unclaimed Property Act.” The new act, entitled “Uniform Unclaimed Property Act,” is replete with definitions and adopts most, but not all, of the provisions from the model act. For example, the Tennessee act continues to exempt gift cards and property obtained in the course of a business-to-business relationship from the definition of “property” subject to the act.

Implementation of Streamlined Sales and Use Tax Provisions Delayed Once Again, 2017 Tenn. Pub. Acts 193

Tennessee’s implementation of the streamlined sales tax provisions, first adopted in 2007, is once again delayed, now through July 1, 2019. These provisions are intended to bring Tennessee sales and use tax laws into compliance with the Streamlined Sales and Use Tax Agreement (SSUTA).