Predators Edition: All CAPS All the Time for Tennessee's Franchise & Excise Tax Obligated Member Exemption?

Nashville has become a hockey town, so when someone says something about the Caps in Nashville now, the Predators fans start drooling over Lord Stanley’s Cup. But in Tennessee’s franchise and excise tax world, there is a lesser-known CAPS provision that can pack a similar pop for unsuspecting obligated member entities who think they are exempt from the F&E tax.

By way of background, Tennessee taxes limited liability companies (LLCs), limited partnerships (LPs) and limited liability partnerships (LLPs) under the same tax laws that apply to tax corporations. Unlike corporations, however, Tennessee F&E law allows LLCs, LPs and LLPs to waive the limited liability protections that those entities generally provide. Such a waiver qualifies an entity waiving limited liability for an F&E exemption known as the obligated member entity exemption.

To make this election, LLCs, LPs and LLPs must include in their publicly-filed organizing document/articles of organization a provision that specifically states that the entity has waived limited liability. Here’s where it gets a little tricky…

The statutory provisions for LPs and LLPs specifically state that the phrase included in the organizing document that waives limited liability must be typed in …. wait for it … ALL CAPS. The statute specifically provides that it must be in all capital letters or the entity does not meet the statutory requirements of the exemption. You want to talk about a trap for the unwary…

Interestingly, however, the ALL CAPS requirement is not included in the waiver provisions for LLCs, so a LLC may waive limited liability by including a specific waiver provision in the articles of organization, and it need not be in all caps.

This recently came up in an exemption denial that the Department issued to a taxpayer, and the denial specifically stated that the exemption did not apply because the waiver language was not in all CAPS. Fortunately for the taxpayer, they had chosen an LLC rather than an LP or LLP as the organization form, so the statute did not require that the waiver be listed in all caps, so the LLC had properly qualified for the obligated member entity exemption, and a determination was issued granting the exemption.

This is a reminder of this trap and the fact that even the Department gets it wrong at least some of the time. Obligated member entities should be on the lookout for this TRAP, and LPs/LLPs might consider reviewing their organizational documents to confirm that the appropriate capitalizations were included in the organizing LP/LLP agreement. If not, it would be worth an amended and restated LP/LLP agreement to get that cleaned up before the Department decides to look at it.

Yes, the Preds have to be worried about the Caps on their quest for the Cup this year, but with this reminder, hopefully obligated member LLCs, LPs and LLPs don’t have to be worried about their own CAPS.

Wonder if Kavanaugh Loves Whiskey Too? New Guidance on Tennessee's Liquor Tax and Free Samples at Distilleries

Tennessee’s sales tax law is replete with guidance on how vendors are treated when they “give away” goods as promotional items or as part of a marketing campaign. Under that law, when a vendor buys something that it intends to give away, the vendor must pay sales tax on the purchase. In that instance, Tennessee sales tax law views the vendor as the end-user of that purchase, and those goods cannot be purchased on a resale basis.

In many cases, a vendor buys certain goods on a resale basis, because they are primarily in the business of selling those items in the normal course of their business - food, drink and clothing. When the vendor later chooses to give away a free drink or a free food or other free samples, it creates a void in the sales tax continuum and is why many businesses must self-assess use tax. It is not surprising then that auditors will routinely inquire about how giveaways or promotional items are treated whey they are auditing sellers of tangible personal property.

This law is not unique to the sales tax, but also applies to the liquor by the drink tax. Thus, licensed alcohol sellers that give away a drink must pay not only the sales/use tax but also the liquor by the drink tax.

Whether this law applies to distilleries was an issue that came up during the recent legislative session. Parties interested in this issue include distilleries such as the one found in Lynchburg, Tennessee, where Jack Daniels offers some free samples of Old No. 7 and other variations of Jack Daniels’ finest as part of some, but not all, of its tours. (No need to dwell on how I know the specifics of such a tour …)

To clarify the application of the liquor tax to distilleries, the General Assembly during the 2018 legislative session passed Public Law 1027. Based on this new law, the liquor tax does not apply to free samples at a distillery. The Department of Revenue confirmed this result in its recent notice – Notice 18-13, which confirmed that the 15 percent liquor by the drink tax does not apply to beverages served on a distilleries premises whether it is served for free.

A good result for distilleries, and a good reminder for bars and restaurants serving liquor. With all the talk about Beer during the Kavanaugh confirmation hearings, we cannot forget about Whiskey. While many people love their beer, many also love their Whiskey - even if we don’t always agree about how it is taxed.