On May 20, 2015, Tennessee Governor Bill Haslam signed the Revenue Modernization Act (The Act) into law. The Act is designed to raise additional revenues primarily by protecting and growing the state’s tax base. The Act strives to accomplish this through changes to nexus provisions and sourcing rules, which will impact taxes levied on all persons engaged in business in the state–franchise and excise, business, state sales tax, and others.
Nexus Provisions
Franchise, Excise, and Business Tax Changes – Under the current law, nexus is created when a taxpayer does business in Tennessee, i.e., any activity (purposefully engaged in within the state) that has the objective of gain, benefit, or advantage. Effective for tax years beginning January 1, 2016, nexus is created if a taxpayer does business in and has substantial nexus in Tennessee. Substantial nexus exists if any of the following are true:
- The taxpayer is organized or commercially domiciled in Tennessee.
- The taxpayer owns or uses capital in Tennessee.
- The taxpayer has systematic and continuous business activity in Tennessee that has produced gross receipts attributable to customers in Tennessee (i.e., economic nexus).
- The taxpayer has bright-line presence in Tennessee. Generally, bright-line presence in Tennessee is established if an out-of-state taxpayer has more than $500,000 in sales or $50,000 in property or payroll in Tennessee.
Sales Tax Changes – Effective July 1, 2015, the presumption of click-through nexus is established when both of the following occur:
- Out-of-state sellers pay one or more persons located in Tennessee for customer referrals via a website link or other means.
- Sales referred to the seller by all persons receiving commissions were at least $10,000 for the preceding 12 months.
Sourcing Rules
Under the current law, sales of services are subject to franchise and excise tax based on the location where the activity is performed or, if performed in multiple states, based on the greater cost of performance rule (sourced to the state where the majority of costs are incurred). Effective for tax years beginning January 1, 2016, these same sales are deemed to be in Tennessee if the taxpayer’s market for the sale is in Tennessee, regardless of the taxpayer’s location. In other words, if the service is provided to someone in Tennessee, then the revenue is sourced to Tennessee. This shift to a market-based rule as opposed to the cost-of-performance rule will primarily affect service businesses and will predominantly benefit those providing such services to customers outside of Tennessee. Additionally, it will require out-of-state businesses to share the tax burden already faced by businesses located within the state.
While the items mentioned above are the major components to The Act, they are not all-encompassing or all-inclusive. There are always exceptions to the general rule, and it is important to be armed with the proper information required to make the best decision.
If you have any questions regarding the Revenue Modernization Act or would like to discuss it in further detail, contact the expert listed below at PYA, (800) 270-9629.
