Protective Refund Claim For 2004 Before Dec. 31, 2007 Is In Order!
While Tennessee does not have a general income tax, the state does have the Hall Income Tax, a six percent (6%) tax on certain dividends and interest income received by individuals, estates, trusts, partnerships and limited liability companies. Interest income derived from bonds of the state of Tennessee or political subdivisions of Tennessee is exempt from the Hall Income Tax, however, tax is imposed the tax on interest income derived from bonds issued by other states or their political subdivisions.
The imposition of the Hall Income Tax on obligations issued by other states and their political subdivisions may be subject to constitutional challenge. In January 2006, the Kentucky Court of Appeals ruled that Kentucky's tax on income derived from bonds issued by states other than Kentucky violates the Commerce Clause of the United States Constitution. It held that the taxation of bonds in Kentucky was unconstitutional because in-state bonds are treated more favorably than out-of-state bonds. On Aug. 17, 2006, the Kentucky Supreme Court upheld the ruling of the Court of Appeals. The Kentucky Department of Revenue consequently petitioned the United States Supreme Court for permission to appeal, which was granted in January 2007. The Supreme Court heard the case, Department of Revenue of Kentucky v. Davis, on Nov. 5, 2007, and its decision is expected next year.
Tennessee's Hall Income tax operates similar to the Kentucky income tax statutes found to be unconstitutional by the Kentucky Supreme Court. The Hall Income Tax specifically exempts interest earned on obligations or bonds issued by the State of Tennessee or political subdivisions of Tennessee from taxation. However, the Hall Income Tax is imposed on bonds issued by other states or their political subdivisions.
This presents a potential refund opportunity for Tennessee taxpayers. In order for calendar year taxpayers to preserve their ability to obtain a refund of tax paid in 2004 on interest income earned in 2003 from bonds issued by other states, a claim for refund must be filed with the Department of Revenue no later than Dec. 31, 2007 or those claims will be barred.
Refund claims for later years can await the Supreme Court's decision. The tax attorneys at Waller Lansden will continue to monitor the Davis case. They are currently preparing 2004 refund claims for those taxpayers having such bond interest and who wish to preserve the opportunity for a refund if the U.S. Supreme Court concurs with the Kentucky Supreme Court.
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