The following significant changes have been made to the RMA as originally filed:
- (Franchise, Excise) The sales factor of the standard apportionment formula will increase from double-weighted to triple-weighted. This will more than likely lower the apportionment ratio for businesses who are very heavily invested in property and/or payroll in Tennessee, such as manufacturers and distribution centers. Effective for tax years beginning on or after July 1, 2016.
- (Excise Tax) Eliminates the existing review and approval process for affiliated intangible expenses. There will be two requirements for such expenses to be deducted from the tax base: (1) disclosure to the Commissioner and (2) the affiliate to whom the intangible expense is paid must be registered for and paying Tennessee excise tax if required to do so. The new economic nexus standards will apply. Effective for tax years beginning on or after July 1, 2016.
- (Excise Tax) Any taxpayer who fails to disclose its affiliated intangible expenses to the Commissioner as required will also be subject to a negligence penalty equal to the greater of $10,000 or fifty percent (50%) of the required adjustment. Currently, such negligence penalty is only applied if there is a failure to add back such expenses to the tax base as required. Effective for tax years beginning on or after July 1, 2016.
- (Franchise, Excise) There were special rules adopted for the telecommunications industry related to the change to market-based sourcing for franchise-excise tax apportionment purposes. Effective July 1, 2016 for tax years beginning on or after July 1, 2016.
- (Sales Tax) Broadens the existing exemption for computer software fabricated for internal use and consumption to includeremotely accessed software. Effective July 1, 2015.
- (Sales Tax) Broadens the existing exemption for computer software which is developed and fabricated by an affiliated company to include remotely accessed software. Effective July 1, 2015.
- (General) Provides the Commissioner with the discretionary authority to waive penalties in cases where there is a failure to procure a required license. Previously, waiver of penalty in such situations was specifically prohibited. Effective July 1, 2016.
- [Removed] (Excise Tax) Proposed change regarding the intangible expense add-back to clarify that “clear and convincing” evidence is the standard used to determine the deductibility of affiliated intangible expenses.
Summary of other important provisions under the RMA:
- (Franchise, Excise Tax) The sourcing method for sales other than sales of tangible personal property in the receipts factor of the standard apportionment formula changes from a cost of performance analysis to market-based rules. Effective July 1, 2016 for tax years beginning on or after July 1, 2016.
- (Franchise, Excise Tax / Business Tax) A bright-line presence test for out-of-state businesses is created to establish nexus for both franchise, excise tax and business tax. Effective January 1, 2016 for tax years beginning on or after January 1, 2016.
- (Sales Tax) Remotely accessed software becomes subject to sales and use tax. It also confirms that certain software-related services, such as data processing and billing and collection services, remain exempt from the tax. Effective July 1, 2015.
- (Sales Tax) Out-of-state online retailers will be subject to Tennessee sale and use tax if a Tennessee resident is used by the retailer to refer customers to its website for a commission, such as via a link on the resident’s website. This commonly referred to as “click-thru” nexus. Effective July 1, 2016.
The enactment of the Administration’s Revenue Modernization Act will certainly result in both winners and losers among Tennessee businesses. The two major changes to the standard apportionment method for franchise, excise tax purposes, triple-weighting the sales factor and market-based sourcing rules, should benefit many in-state businesses.
The creation of a bright-line presence test for franchise, excise tax and business tax purposes and the sales tax “click-thru” nexus both will help to level the playing field between Tennessee-based companies and their out-of-state counterparts. State and local taxes should not be a competitive distinction for out-of-state companies and the Administration should be applauded for its efforts in this regard.
A late amendment to the bill addressed the review and approval process for and the deductibility of affiliated intangible expenses for excise tax purposes. Although there may be a limited applicability, the deduction process should be simplified although the negligence of $10,000 or more will also apply to cases of non-disclosure as well as failure to add back the expenses.
On the other hand, those Tennessee companies who use remotely accessed software products in their business will feel the impact of a sales tax increase. Many of these businesses have existing contracts with their software vendors and will have no alternative but to absorb the new sales or use tax burden. It has been our experience that many of these vendors are out-of-state companies who are purposely not registered for sales tax in Tennessee and have made a deliberate effort not to have sufficient presence in this state to require a sales tax collection responsibility. As a result, some portion of companies will be left with an obligation to file and/or pay use tax on their purchases of remotely accessed software and related maintenance contracts.
It is important to note the effective dates of these law changes. The sales tax provisions, such as for remotely accessed software and “click-thru” nexus, go into effect as early as July 1, 2015. The remaining changes become effective in 2016 and beyond.
There was also a significant amount of discussion during this legislative session regarding modification of the estimated payments requirements for franchise, excise tax purposes to make such requirements more user-friendly. Elimination of penalty on deficient payments, reduction in the penalty rate and an annualized installment method were some of the proposed changes. There may be a negative fiscal impact for franchise, excise tax collections initially but in the long term, these changes should help to stabilize franchise, excise tax collections and reduce the risk of repeating fiscal year 2014 when actual tax collections were significantly lower than projections. Discussions will continue in the coming year.
Members of LBMC’s State & Local Tax Practice are up-to-date on the provisions of the 2015 Revenue Modernization Act. Please contact us if you have any questions and/or we can assist you in any way.