Flight of the Conchords - welcome to Tennessee and the Tennessee business tax. For years a tax that applied only to in-state businesses with physical places of business in the state, the Tennessee business tax has taken flight in recent years with various modifications that have expanded the scope of the tax significantly - now reaching out of state businesses. The changes can be traced back to Tennessee's decision to take over the administration of the tax in 2010, leaving the locals to only administer the issuance of business licenses.
From then to now, the Tennessee Department of Revenue has continued to refine the tax, initially convincing the legislature to expand the tax to out-of-state vendors who delivered tangible personal property in their own trucks to now tax all remote sellers selling tangible personal property and services to customers in Tennessee. This latest change became effective for tax years beginning on or after January 1, 2016 and was achieved by passing economic nexus in the Tennessee legislature.
While Tennessee is in the news for economic nexus for sales and use tax (see previous posts), it is the economic nexus for business tax that may be the more pressing issue for a wider subset of taxpayers that have previously relied on J.C.Penney as the basis for not paying Tennessee business tax.. This is even more significant considering recent news out of Ohio in Corrigan v. Testa and how economic nexus applies to gross receipts taxes.
The good thing about economic nexus for the Tennessee business tax is that the effective date of the law change in 2015 Pub. Ch. 514, sections 3, 5, & 31 may cut off some prior liabilities. Under the Revenue Modernization Act, economic nexus is only applicable to returns that have just become due, depending on a taxpayer's tax year.
For taxpayers that are just focusing on the Tennessee business tax because of economic nexus, you may also be realizing that you may have had real, physical presence nexus long before the 2015 law change, so in coming into compliance, you should consider a voluntary disclosure agreement to limit the state's look-back period. Just coming on line without having dealt with previous years could be a trap, so give that some thought.
Another issue to consider for out-of-state business is how the personal property tax credit may apply in determining the amount of the tax, and for future years, there are mechanisms to pass the tax on to customers if your business model will allow for that.
Businesses that should be thinking about this are all online retailers or businesses that have previously relied on physical presence as the basis for not paying the business tax in Tennessee.
Another point to think about is all those providers of digital goods and software. May be worth thinking about whether you are taxable at all based on little-known trial court decision that addresses the taxability of intangibles under the business tax.
Lot's of business tax issues in Tennessee to consider. That's why ... ah yeah ... its business ... it's business time ...