Tennessee gross receipts tax nexus established by economic presence
Bright-line factor standard catching businesses off-guard
INSIGHT ARTICLE |
The Tennessee business tax is a broad-based gross receipts tax imposed on receipts from persons selling taxable goods or services into the state. The tax is far from new, but with the recent adoption of an economic nexus standard, the Tennessee Department of Revenue has increased its compliance enforcement efforts.
An unusual feature of the business tax is that it is primarily imposed on a location-by-location basis and it consists of two separate taxes: state business tax and the city business tax. Each “physical location, outlet, or other place of business” within Tennessee must register separately for the business tax and file its own business tax returns, reporting gross receipts from all sales attributable to that location. In addition to the state business tax, cities are authorized to impose copycat city business taxes on businesses within their borders.
Locations outside Tennessee, however, are consolidated and treated as a single location for business tax purposes, registering and filing returns as a single out-of-state business.
Who is subject to tax?
The Tennessee business tax applies to anyone selling taxable goods or services into the state. Until 2016, the tax had little (or an unclear) impact on out-of-state businesses with no physical presence in the state. However, on Jan. 1, 2016, various economic nexus provisions became effective, revising the “substantial nexus” requirement to include a bright-line factor presence standard. Since that adoption, the department has begun a more consistent enforcement of the tax. Taxpayers should review whether they are currently, or have been, subject to the tax and comply or mitigate liability appropriately.
"Substantial nexus" under the new provisions include, but are not limited to, the following:
- The taxpayer is organized or commercially domiciled in Tennessee;
- The taxpayer owns or uses its capital in Tennessee;
- The taxpayer has a systematic and continuous business activity in this state that has produced gross receipts attributable to customers in Tennessee; or
- The taxpayer has a bright-line presence in the state. A person has a bright-line presence in this state for a tax period if any of the following applies:
- Receipts: > $500,000 or 25 percent of total receipts from sales in Tennessee
- Property: > $50,000 or 25 percent of total property by value in Tennessee
- Payroll: > 50,000 or 25 percent of compensation paid in Tennessee
The business tax imposes multiple tax rates, ranging widely from 0.025 percent to 0.3 percent, depending on a taxpayer's particular classification. Many classifications have a rate of .0375 percent to .1875 percent. Classifications are determined based on the dominant business activity performed in Tennessee, and rates within a particular classification vary between retailer and wholesaler. The dominant business activity is the major and principal source of taxable gross sales of the business. Classifications and tax rates are applied on a location-by-location basis. Every in-state location has its own classification for business tax purposes, and the corresponding tax rate is applied to all receipts from taxable sales made by (or attributed to) that location.
Because out-of-state locations are consolidated for business tax purposes, taxpayers with no locations in Tennessee have only one classification and pay the business tax at the same rate on all receipts from taxable sales.
Business tax is imposed on the gross receipts from taxable goods and services delivered to Tennessee customers. Sales of goods are sourced to Tennessee based on the delivery location. For service providers, determining the delivery location can be challenging. The state has adopted market-based sourcing rules for the Tennessee income tax. Those rules look to where the benefit of the service was received by the customer. However, the state has not provided specific guidance that the market-based rules also apply to the business tax.
Additionally, there are several items that can be deducted from the tax base. Some examples are cash discounts, returned merchandise, contractor payments to subcontractors, and bad debts for which business tax was paid on previously reported receipts.
Finally, the following activities are exempt from tax: services performed in the course of employment; manufacturer of goods, wares, merchandise or other articles of value from a location or outlet subject to ad valorem tax; occasional and isolated sales or transactions by a person not routinely engaged in business; and certain services within the fields of law, accounting, human and veterinary medicine, animal boarding, domestic services, public utilities, banking, insurance, engineering and architecture, building management, farming, nonprofit, education, religion, and charity.
Prior to engaging in business in the state, every person subject to this tax must register with the Tennessee Commissioner of Revenue. The online registration is linked here.
Persons subject to business tax must file an annual return with the department. The returns are due no later than the fifteenth day of the fourth month following the end of the business’ fiscal year. Calendar year tax years will have a due date of April 15th. All business tax returns and payments must be submitted electronically. Businesses subject to both a state and city business tax must file two returns.
What steps should your business take next?
The Tennessee business tax generally applies to all business that sell goods or services in the state. Out-of-state businesses must also pay the tax if the business 1) performs a service in the state that is received by a Tennessee customer, 2) leases items in Tennessee, 3) delivers items to a customer in your own vehicle, or 4) purchases an item in Tennessee and then sell the same item in the state, using someone located in the state acting on your behalf. With the new economic standards in place, out-of-state businesses should review whether they have exposure to the business tax–a once mostly ignored tax, in addition to exposure to the Tennessee income tax.