Each year, the Administration and the Tennessee Department of Revenue (TDOR) file what they refer to as a Technical Corrections Bill. The Bill normally contains multiple targeted changes to state tax law, some small and some not so small, depending on whether you are in the cross-hairs of the Bill. The Tennessee Legislature recently passed TDOR's 2010 Technical Corrections Bill, which contains the following changes which will have significant potential impact on businesses in Tennessee.
Franchise and Excise Tax Provisions
- REIT affiliated groups are required to file combined franchise and excise tax returns and pay tax on apportioned combined net earnings/combined operations. A captive REIT affiliated group is defined as a captive REIT and any entity in which such captive REIT, directly or indirectly, has more than a 50% ownership interest, provided that such term excludes groups in which the captive REIT is owned, directly or indirectly, by a bank, bank holding company, or public REIT. A captive REIT is now defined to include an entity with an election in effect under I.R.C. §856(c)(1) in which any other entity or individual, directly or indirectly, has at least 80% ownership interest by value.
- Expands the definition of "affiliate" to include individuals (including indirect ownership by their families) and entities that are both owned more than 50% by an individual. This will impact the potential add-back of "excess rent" for leases to affiliates under T.C.A. §67-4-2006(b)(1)(N) and whether investments are from "affiliates" for purposes of the venture capital fund exemption in T.C.A. §67-4-2008(a)(5). It should be noted that diversified investing funds were already subject to the same definition.
- Eliminates any add-back for rent paid, accrued or incurred for the rental, leasing or comparable use of commercial and industrial tangible personal property under T.C.A. §67-4-2006(b)(1)(N).
- Otherwise nontaxable persons or entities owing, but failing to pay, excise tax resulting under Tenn. Code Ann. §67-4-2007(f) due to the disposition of an asset within 12 months are subject to a penalty equal to 50% of the underpayment if such underpayment is due to negligence.
- Financial institutions may now claim a credit equal to 10% of such institution's contribution to the Tennessee Small Business Opportunity Fund.
- The job tax credit additional annual credit set forth in Tenn. Code Ann. § 67-4-2109(b)(2)(B)(iii) is extended to integrated customers.
Sales Tax Provisions
- Industrial machinery exemption is expanded to include an expansion to an existing warehouse or distribution facility in Tennessee through an aggregate investment in excess of $20 million.
Business Tax Provisions
- Personal property tax paid by a taxpayer is only allowed as a credit against business tax to the extent that such property is located at the place of business covered by the business tax return and is also taxed by the same city or county that levied the business tax.
Hall Income Tax Provisions
- Corporations having stockholders in Tennessee are no longer required to furnish the Commissioner of Revenue with a list of stockholders to whom dividends are paid, their last known address, and the amount of dividends paid.
Flood Relief Provisions
- Pursuant to Senate Bill 231, passed in addition to the Technical Corrections Bill, persons receiving disaster assistance through the Federal Emergency Management Agency (FEMA) as a result of a disaster occurring between May 1, 2010 and May 8, 2010, are permitted, until Nov. 30, 2010, to apply for a sales tax refund of up to $2,500 for the sales tax paid on purchases of major appliances, residential furniture, or residential building supplies between May 1, 2010, and Sept. 30, 2010. Appliances and residential furnishings must be purchased for use in the claimant's primary residence to replace items that were damaged or destroyed in the disaster occurring between May 1, 2010, and May 8, 2010, and the sales price per item may not exceed $3,200. Residential building supplies, including cleaning supplies, must be used in the claimant's primary residence for purposes of restoration, repair, replacement, or rebuilding due to the disaster, and the sales price per item may not exceed $500. Persons applying for a refund under this provision will be required to submit proof establishing that they received Federal disaster assistance, made eligible purchases, and paid Tennessee sales tax on such purchases.
- Counties or municipalities may, by a two thirds (2/3) vote of the governing body, allow taxpayers with commercial and industrial tangible personal property that was destroyed, demolished, or substantially damaged as a result of a disaster certified by FEMA, to have the annual assessment of property taxes prorated for the actual time the qualifying personal property is not replaced or restored, provided that the time such personal property is not replaced or restored exceeds 30 days. Taxpayers must apply for this relief by Sept. 1, 2010.
- Taxpayers engaging in qualified disaster restoration projects involving a minimum investment of at least $50 million to restore real or tangible personal property located in a federally declared disaster area that suffered damages as a result of such disaster may apply for a credit of all state sales or use tax paid, except tax at the rate of .5%, on the purchase or lease of qualified tangible personal property used to restore or replace such damaged property.
- Quantities of beer equal to 50 barrels or more that were rendered unsalable and subsequently destroyed as a result of flooding occurring from May 1, 2010 through May 8, 2010, are exempt from the barrel tax set forth in Tenn. Code Ann. § 57-5-201.
Pollution Control Provisions
- The pollution control sales and use tax credit is extended to machinery and equipment used to produce electricity in a certified green production facility. For franchise and excise tax purposes, such machinery and equipment is not deemed to be property actually utilized by the taxpayer in the conduct of its principal business. For property tax purposes, such machinery and equipment will be valued at salvage value (i.e., no more than .5% of acquisition cost).
Economic Development Provisions and Incentives
- The Commissioners of Revenue, Economic and Community Development, and Finance and Administration are authorized, with the approval of the Comptroller of the Treasury, to jointly establish a program whereby buildings or other infrastructure may be developed utilizing a state funding mechanism and pursuant to which the value of tax credits earned by a taxpayer, but which remain unutilized, may be applied in lieu of payments toward the purchase or lease of such property pursuant to a contractual agreement between the taxpayer and the program.
- Tenants leasing a significant portion of a qualified medical trade center who are essential to the initial establishment and viability of the trade center are entitled to a credit against franchise and excise tax equal to any qualified medical trade center relocation expenses not exceeding $10 for each square foot of space leased and occupied by such tenant.
- Taxpayers incurring qualified advertising expenses for the purpose of co-promoting a qualified medical trade center and the State of Tennessee or the City of Nashville may, subject to the approval of the Commissioner of Revenue and the Commissioner of Economic and Community Development, qualify for a franchise and excise tax credit equal to 15% of such expenses.
- The Commissioner of Revenue may lower the wage and investment criteria for the job tax credit additional annual credit and headquarters relocation credit if the investment is made, or jobs are created, within a central business district or an economic recovery zone and the Commissioner determines it is in the best interest of the State. Certain insurance companies meeting the criteria for the headquarters exemption, but which are exempt from franchise and excise tax, are now entitled to claim the refundable headquarters tax credit.
- Airline companies with international, national or regional headquarters in Tennessee that have qualified for a headquarters facility sales tax credit may, subject to the approval of the Commissioner of Revenue and the Commissioner of Economic and Community Development, elect to convert any available and unused franchise and excise job tax credit and additional annual credit into a refundable credit, which will be discounted to present value using the Tennessee interest rate in effect on the date of such election.
- Taxpayers purchasing Brownfield property in Tennessee for the purpose of a qualified development project shall, if approved by the Commissioner of Revenue and the Commissioner of Economic and Community Development, be entitled to a franchise and excise tax credit equal to 50% or 75% of the purchase price of such Brownfield property, depending upon the level of investment.
- The refund provision whereby qualified production companies with headquarters facilities in Tennessee that incur at least $1 million in qualified expenses may receive refunds equal to 15% of qualified expenses is modified to now constitute a refundable credit and is extended beyond July 1, 2012.
The attorneys of Waller Lansden are available to answer any questions that you may have regarding this Bill. For additional information, please contact Charlie Trost, Mike Yopp, Leigh Griffith, Chris Wilson, or any member of the Waller Lansden Tax practice at 800-487-6380.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.