Here are the highlights to the administration's bill:
- Create "economic nexus" for franchise and excise tax purposes. This change will require out-of-state businesses that exceed $500,000 in Tennessee receipts to file a franchise and excise tax return. Currently, Tennessee requires an out-of-state business to have a physical presence inside Tennessee before a filing requirement exists.
- Create "click-thru" nexus for out-of-state sellers in Tennessee for sales tax collection. There will be a rebuttable presumption that an out-of-state online retailer has sales tax nexus in Tennessee if the seller enters into an agreement or contract with a Tennessee resident to refer customers to the online retailer's website for a commission, such as via a link on the resident's website.
- Add a requirement for any transaction to have a "substantial business purpose" for intangible expenses paid to an affiliate to be deductible for excise tax purposes. This change is designed to keep businesses from shifting income outside of Tennessee by paying intangible expenses to an affiliate.
- Change the method for sourcing sales of service revenue for the franchise and excise tax apportionment formula to a market-based approach. Currently, Tennessee sources service revenue based on where a greater proportion of the service providers' costs are incurred, which benefits out-of-state service providers. This change will require out-of-state service providers to apportion their service revenue to Tennessee if they have customers located in Tennessee. This change will also benefit in state service companies by allowing them to apportion their service receipts outside of Tennessee.
- Make computer software which is remotely accessed and used by customers but remains in the possession of the seller or its agent subject to sales tax. Currently any software which remains on the seller's computer and is only accessed by the customer through the Internet without being downloaded to the customer is exempt from sales tax in Tennessee. If there are users of the software both in and outside Tennessee, the sales price may be allocated based on the percentage of users in Tennessee.
This change affects both Tennessee and out-of-state companies. Tennessee businesses using providers of such software will feel an increased sales tax burden while many technology companies may find themselves with a new sales tax collection responsibility.
As featured in The Nashville Business Journal.