Authored by: Ron Tambasco, Tracey Sellers, Patrick Philpott and Kristina Wurth
On May 20, 2015, Tennessee enacted the Revenue Modernization Act (the “Act”). The Act brings sweeping changes to several aspects in which Tennessee taxes business activity, including expanding the definition of nexus, sourcing sales for apportionment, changing the requirements for intangible expense deductions, and broadening the sales tax base.
Franchise and Excise Tax
Effective January 1, 2016, the Act expands Tennessee’s nexus standards used in determining the state’s ability to subject a business to its tax collection responsibility. Under the new nexus provisions, a business will create substantial nexus and be subject to Tennessee franchise and excise tax through any direct or indirect connection to Tennessee such that the taxpayer could be required to pay tax up to the highest level available under the United States Constitution. The Act includes a non-exclusive list of business activities that satisfy this standard:
The Act also institutes a “bright-line” nexus test where a business will be found to have substantial nexus with Tennessee to the extent:
Nexus standards for Tennessee’s business tax were changed to a standard substantially similar to the excise and franchise tax. However, the licensing of intangible property to a party in Tennessee that derives income from the intangible property in Tennessee is omitted from the business tax examples. In addition, only for business tax purposes, the
Act provides that “engaged in Tennessee” will include out-of-state sellers whose only connection to the state is delivering goods to customers within Tennessee, regardless of method of delivery. These changes are effective January 1, 2016.
The Act creates a rebuttable presumption that an out-ofstate seller is subject to the Tennessee sales tax if the taxpayer utilizes a person in Tennessee to refer potential customers, whether through an internet link or otherwise. For the presumption to apply, the out-of-state seller must make in excess of $10,000 of sales into Tennessee from referrals of this type. The seller may only rebut the presumption where it can be demonstrated that it did not conduct any activities that would “substantially contribute to the dealer’s ability to establish and maintain a market” in Tennessee through clear and convincing evidence.
Tennessee imposes sales tax on the ‘use of computer software’ within Tennessee. With the enactment of the Act, the ‘use of computer software’ will be considered to include software accessed over the internet that will remain in the possession of the seller, often referred to as Software as a Service or “SaaS.” The use of computer software will be subject to Tennessee sales tax as the sale or licensing of electronically delivered software where the customer accesses the software from a location within Tennessee. Where the sale relates to customers accessing software from both within and outside Tennessee, the seller would be required to allocate to Tennessee the portion of sales related to users accessing software from within the Tennessee.