If You Build It, They Will (Stay or) Come: Tennessee Adopts Single Sales Factor for "Tennessee" Manufacturers

Kevin Costner’s character in Field of Dreams, Ray Kinsella, heard voices from a field in Iowa that convinced him to mount a tractor and convert a corn field into a baseball diamond fit for baseball’s late and great stars. They came, and tourists still flock to Dyersville, Iowa where the Field of Dreams stands to this day. Tennessee channeled its Inner-Field of Dreams this legislative session with the passage of single sales factor for manufacturers, succumbing to years of lobbying from the Tennessee Chamber and other trade associations. And now … Tennessee is expecting Tennessee manufacturers to stay and for more to come.

              The characters in Tennessee’s Field of Dreams?

Ray Kinsella – Governor Haslam. He kind of looks like Costner

Terence Mann – It’s probably House Ways and Means Committee Chair, Charles Sargent. He has a pretty memorable voice like James Earl Jones, and like Terry Mann, Rep. Sargent finally came around after years of holding back on his full support for single sales factor.

Shoeless Joe Jackson – Ray Liota’s character, the benefactor of the Field? -Insert tax director from any major Tennessee manufacturer here:_____________ & a tax director from an out-of-state company, relocating to Tennessee here: _____________!

The Voice from the Corn? – No doubt it is Bradley Jackson who championed the change for years and continued to remind legislators throughout the 2017 session that this was something that manufacturers really wanted. “If you build it, They Will Come!” (In Bradley’s best whispering voice.)

And the Law...

One of the cornerstone’s to the Governor’s IMPROVE Act, Tennessee’s single sales factor apportionment law is elective and is effective for tax years beginning on or after January 1, 2017. The key determination that taxpayers will need to consider is whether the principal business in Tennessee is that of a manufacturer, which is defined as a taxpayer with revenue from its Tennessee activities of 50% or more from fabricating or processing tangible personal property for resale and consumption off the premises.

Practice Point: The definition of manufacturing is a familiar one for Tennessee manufacturers as it is used for the sales tax, industrial machinery exemption but with the key difference being that the determination of whether a taxpayer is a manufacturer for purposes of F&E apportionment is based on a statewide calculation and not on a location-by-location basis, which is the case with the sales tax. The location-specific determination under the sales tax code oftentimes leaves certain facilities in Tennessee out, and they do not qualify as manufacturing facilities for purposes of the sales tax exemption.  Based on this distinction, manufacturers should carefully evaluate whether they meet the 50% test under this change.

A late addition to the new law was the exclusion of “passive income” from the calculation of the 50% test. So, passive income from dividends, interest, sales of securities, and income from licensing or sale of intellectual property is excluded from the taxpayer’s revenue for purposes of calculating the 50% threshold.

Single sales factor apportionment is elective, but once a taxpayer elects in, it is bound by the election for five years. Another point to focus on for taxpayers is the proper application of single sales factor to combined franchise tax filers, as the election only applies to group members that qualify as manufacturers. Out-of-state manufacturers who might want to use single sales factor will likely be left out in the cold unless they want to mount a constitutional challenge to the limitation of single sales factor to just Tennessee manufacturers...

Will it Work?

Massachusetts is another state that adopted single sales factor for manufacturers with the hope that it would maintain or boost manufacturing jobs in the state. The reality, however, has been different than anticipated with Massachusetts now having 40% fewer manufacturing jobs than when single sales factor was enacted.

Based on those results, it remains to be seen whether Tennessee manufacturers will stay or come, but in the interim, Taxpayers should pay close attention to this provision to see whether they qualify for the benefits of the single sales factor.