Each year, the Administration and the Tennessee Department of Revenue (TDOR) file what they refer to as a Technical Corrections Bill. The Bill normally contains multiple targeted changes to state tax law, some small and some not so small, depending on whether a taxpayer is caught in the cross-hairs of the Bill. The Tennessee Legislature passed TDOR's 2011 Technical Corrections Bill (HB 1994) on May 21, 2011, and it was signed by the House Speaker on May 24, 2011. A separate bill amending certain tax incentives for businesses (HB 1995) passed by the House on May 20, 2011, by the Senate on May 21, 2011, and was signed by the House Speaker on May, 24, 2011. Both have been sent to the Governor for signing. These bills set forth the following changes that will have a potentially significant impact on businesses in Tennessee.

TECHNICAL CORRECTIONS AND INCENTIVES LEGISLATION

Franchise and Excise Tax Provisions

General Provisions

  • Provides that the gain on the deemed sale of goodwill resulting from an Internal Revenue Code ("IRC") Section 338 election and required to be included as Class VII assets pursuant to reporting requirements set forth in IRC Sections 338(b)(5) and 1060, is now excluded from both the numerator and denominator of the receipts factor for both franchise tax and excise tax apportionment purposes. This is favorable for companies based in Tennessee which are sold, as it increases the tax on such companies based outside of Tennessee.
  • Provides that for excise tax purposes taxpayers may subtract from net earnings and losses rent in excess of reasonable rent received or accrued for the rental, leasing, or comparable use of industrial and commercial property rented, leased, or otherwise provided to an affiliate, so long as a corresponding expense is added back to the net earnings or losses of the affiliate lessee in accordance with Tenn. Code Ann. § 67-4- 2006(b)(1)(N). This refines the related party disallowance rules to provide symmetry. If a deduction of unreasonable rent is not taken by one entity, it is not income to the other for Tennessee tax purposes.

Qualified Headquarters Relocation Credit

  • Provides that the Commissioners of Revenue and of Economic and Community Development have discretion, if in the best interest of the state, to lower the number of jobs that must be created in order to qualify for the headquarters relocation credit. The number of jobs may be lowered no more than 50%, and the credit amount will be reduced in direct proportion to the job creation requirement reduction. The Commissioners of Revenue and of Economic and Community Development previously had authority to lower applicable wage requirements for the credit with no corresponding reduction in the credit granted. This provision applies only to written proposals by the Department of Economic and Community Development or TDOR on or after July 1, 2011.

Job Tax Credit

  • Provides that in order to qualify for the job tax credit, taxpayers must make the required capital investment and create at least 25 qualified jobs within 3 years from the effective date of the underlying business plan. The job tax credit now applies in the first tax year when the capital investment and job creation requirements are met.
  • Abolishes unlimited carryover of job tax credits for taxpayers making required capital investments in excess of $1 billion if the applications were received and approved by the Commissioners of Revenue and of Economic and Community Development after January 1, 2011.
  • Abolishes unlimited carryover of qualified net operating losses for taxpayers qualifying for the job tax credit and who make required capital investments in excess of $1 billion if such taxpayers' applications for the job tax credit were received and approved by the Commissioners of Revenue and of Economic and Community Development after January 1, 2011.
  • Abolishes Commissioners of Revenue and of Economic and Community Development's discretion to allow taxpayers who qualify for the job tax credit and make required capital investments in excess of $1 billion to carry net operating losses forward beyond 15 years if such taxpayers' applications for the job tax credit were received and approved on or after January 1, 2011.
  • Clarifies that taxpayers are not entitled to claim additional annual job tax credits both for locating in a tier 2 or tier 3 county and for making higher levels of investments and/or creating new jobs.
  • Allows taxpayers qualifying for the qualified headquarters facility credit in Tenn. Code Ann. §67-6-224, who establish an international, national or regional headquarters in Tennessee, or who establish an international, national or regional warehousing or distribution hub in Tennessee, and meet the requirements to be a qualified or new or expanded warehouse or distribution facility, to offset up to 100% of franchise and excise tax liability by job tax credits.
  • Provides that the Commissioners of Revenue and of Economic and Community Development have the discretion, if in the best interest of the state, to lower the number of jobs that must be created in order to qualify for the job tax credit. The number of jobs may be lowered no more than 50% and the credit amount will be reduced in direct proportion to the job creation requirement reduction. Under prior law, the Commissioners of Revenue and of Economic and Community Development had the discretion to lower the wage and investment criteria for the credit, with no corresponding reduction in the credit amount awarded.

As set forth legislatively, the above noted job tax credit provisions apply only to written proposals by the Department of Economic and Community Development or TDOR on or after July 1, 2011. This effective date language is confusing and presumably means either (i) proposals received by, or, alternatively, (ii) proposals approved by the TDOR on or after July 1, 2011. It is anticipated that interpretative clarification will be made shortly.

Enhanced Industrial Machinery Credit

  • Taxpayers making required capital investments in excess of $1 billion who qualify for the 10% industrial machinery credit set forth in Tenn. Code Ann. § 67-4-2009(4)(I)(i) are now subject to the 15-year limitation applicable to the carry-forward of unused credits unless (1) the taxpayers' applications were received and approved by the Commissioners of Revenue and of Economic and Community Development on or before January 1, 2011, and (2) the Commissioners of Revenue and of Economic and Community Development determined that the allowance of the additional carryforward was in the best interest of the state. This provision applies only to written proposals by the Department of Economic and Community Development or TDOR on or after July 1, 2011.

Sales Tax Provisions

General Provisions

  • Provides that credit for sales or use tax paid in other states now applies to computer software or computer maintenance contracts used or consumed in Tennessee.
  • Expands the definition of "industrial machinery" to include a tangible personal property installed in a warehouse or distribution facility in Tennessee which is purchased and either renovated or expanded through an investment in excess of $10 million by the taxpayer and/or lessor to the taxpayer, including purchases of new equipment for such building, over a period not exceeding 3 years. This provision applies only to written proposals by the Department of Economic and Community Development or TDOR on or after July 1, 2011.

Qualified Headquarters Credit

  • Removes the provision previously allowing taxpayers to qualify for qualified headquarters facility credit by making a $50,000,000 minimum capital investment with no additional job creation and, instead, now requires that taxpayers make a $10,000,000 minimum capital investment and create at least 100 new full-time employee jobs, which pay at least 150% of the state's average occupational wage, in conjunction with the construction, expansion, or remodeling of a qualified headquarters facility.
  • Provides that the Commissioners of Revenue and of Economic and Community Development now have the discretion, if in the best interest of the state, to lower the number of jobs that must be created in order to qualify for the qualified headquarters credit. The number of jobs may be lowered no more than 50% and the credit amount will also be reduced in direct proportion to the job creation requirement reduction.
  • Limits the current definition of "qualified tangible personal property," upon which the qualified headquarters credit is based, to such property directly related to the creation of new full-time employee jobs.

As set forth legislatively, the above noted qualified headquarters credit provisions apply only to written proposals by the Department of Economic and Community Development or TDOR on or after July 1, 2011.

Flood Provisions

  • Persons receiving disaster assistance through the Federal Emergency Management Agency (FEMA) as a result of a disaster in Tennessee occurring between March 23, 2011, and May 12, 2011, are permitted, until February 29, 2012, to apply for a sales tax refund of up to $2,500 for the sales tax paid on purchases of major appliances, residential furniture, or residential building supplies between March 23, 2011, and December 31, 2011. Appliances and residential furnishings must be purchased for use in the claimant's primary residence to replace items that were damaged or destroyed in the disaster occurring between March 23, 2011, and May 12, 2011, and the sales price per item may not exceed $3,200. Residential building supplies, including cleaning supplies, must be used in the claimant's primary residence for purposes of restoration, repair, replacement, or rebuilding due to the disaster, and the sales price per item may not exceed $500. Persons applying for a refund under this provision will be required to submit proof establishing that they received Federal disaster assistance, made eligible purchases, and paid Tennessee sales tax on such purchases.

Business Tax Provisions

  • The Commissioner of Revenue may now require taxpayers owing $1,000 or more in business tax with any return, report, or other document to be filed with the TDOR, to pay such tax liability no later than the applicable due date in funds that are immediately available to the state on the date of payment. Payment in immediately available funds may be made by wire transfers through the federal reserve system or by other means approved by the Commissioner of Revenue and state treasurer.
  • Provides that in addition to prior existing electronic filing requirements, taxpayers required to remit business tax payments in immediately available funds must file all returns associated with such payments electronically. If a taxpayer is required to file returns and remit payments electronically for any single location, the Commissioner may further require such taxpayer to file returns and remit payments electronically for all business locations.
  • Provides that, in addition to prior existing penalties, taxpayers subject to electronic filing requirements are subject to a $500 penalty for each instance when a return is filed by any other means.

Tax Administration Provisions

  • The Commissioner of Revenue now has the authority to delegate final authority to approve or disapprove penalty waiver applications to subordinate TDOR officials other than the Commissioner's deputy commissioner or the Commissioner's assistant commissioner for tax administration.

OTHER 2011 TAX LEGISLATION

Hall Income Tax

Effective January 1, 2012, the income level at which taxpayers are exempt from Hall Income tax increases from $16,200 to $26,200 for single filers and from $27,000 to $37,000 for persons filing jointly.

Senate Bill 261

Excise Tax

Abolishes the personal property tax previously levied on stocks for loan, investment and cemetery companies found by Tenn. Code Ann. § 67-5-1101, et seq. It implements a complex revenue-sharing formula under Title 67, Chapter 4, Part 20 to compensate the cities and counties for the loss of revenue because of the repeal. House Bill 137.

Privilege Tax

Adds language at the beginning of Tenn. Code Ann. § 67-4-409(b)(12) reiterating that every holder of an indebtedness, including individuals, businesses of any type and governmental entities, must collect and remit tax from debtors. This code section currently only provides for a penalty ($250 or double the unpaid tax, whichever is greater) if the holder of an indebtedness fails to pay or underpays the tax imposed by section (b). House Bill 1924

Provides that persons having not-for-profit status owning and operating water companies are exempt from paying a privilege tax for the furnishing or distributing of gas, water or electricity pursuant to Tenn. Code Ann. § 67-4-405(b). This exemption previously only applied to: (1) cities or political subdivisions of the state owning or operating gas or water companies or power plants, (2) persons meeting the criteria of exempt wholesale generators or FERC certified wholesale power marketers under the Federal Power Act of 1992, and (3) U.S. governmental agencies.

Senate Bill 542

Property Tax

Provides that in order for broadcaster of public radio and public television to be eligible for the exemption for property used to provide public radio or public television services, as set forth in Tenn. Code Ann. § 67-5-212(l) and (m), such broadcaster must constitute an entity "organized as a nonprofit charitable or educational institution." Previously, a broadcaster of public radio and public television only needed to hold a license.

Sales and Use Tax

Adds an exemption from sales tax for purchases made between July 1, 2011, and December 31, 2011, of items related to the construction of a storm or tornado shelter. The exemption applies to purchases of building supplies used to construct or improve a shelter and with the maximum price per item of $3,200. In order to receive the exemption, claimants must submit a single application to the TDOR on or before February 1, 2012. The department is required to post on its website guidelines for such refund requests. Senate Bill 267.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.