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UID:http://www.sitemason.com/element/d4rutj0/id/10579
SUMMARY:Tennessee General Assembly Amends Tennessee Tax Statutes
DESCRIPTION:   As part of the Tennessee Department of Revenue’s (TDOR) annual  “Technical Corrections Bill\,” the General Assembly has enacted provisions  amending several areas of Tennessee’s tax law.  A summary of the relevant  changes is set forth below.\n  * FONCE No Longer Includes Industrial and Commercial Rent\n  * Codifies F&E Exemption Filing Requirement\n  * Revises Intangible Holding Company/Captive REIT Penalty  Provisions\n  * Modifies Job Tax Credit\n  * Delays Effective Date of Remaining Streamlined Sales Tax Changes\n  * Taxes Computer Software Warranty and Maintenance Contracts\n  * Overturns TEKsystems\n  * Exempts Preliminary Artwork and Advertising Services From Sales  Tax\n  * Centralizes Administration and Expands Scope of Local Business  Tax\n The Technical Corrections Bill passed the Senate on Friday\, June  12\, 2009\, by a vote of 26-5\, and passed the House with minor changes on Tuesday\,  June 16\, 2009\, by a vote of 53-43.  The Bill will be sent to Governor Bredesen  for his signature.\n FONCE No Longer Includes Industrial and Commercial  Rent\n The FONCE exemption no longer applies to entities receiving rental  income from industrial/commercial property and certain farm property.  Entities  receiving rental income from residential rental property will continue to  qualify for the exemption\, provided the residential rental property only  includes property with four or fewer residential units.  The effective date of  the change is Oct. 1\, 2009\, but entities currently qualifying as a FONCE can  elect unlimited liability and continue to be exempt as an obligated member  entity\, provided that the election is made prior to Oct. 1\, 2009.\n A related change establishes a phase-out of the rent that can be  deducted by an affiliated lessee. Under the change\, an affiliated lessee will be  allowed to deduct monthly rent only up to 2 percent of the appraised property  tax value of the property.  As a result\, for property with a value of $500\,000  for property tax purposes\, the lessee can deduct up to $10\,000/month ($500\,000 x  2 percent) for rent.  Rent paid in excess of this cap is added back to the net  earnings of the lessee. Notably\, rent is not defined in the statute\, making it  unclear how the payment of maintenance expenses and insurance will be treated  for purposes of the 2 percent rule.  A plain reading of the statute would seem  to suggest that those expenses can be deducted in addition to the rent  threshold.\n Codified F&E Exemption Filing  Requirement\n The franchise and excise tax exemptions are further amended to  require both an application for exemption and an annual information  return. The statute makes the applicable exemptions contingent upon filing these  returns and further imposes a $1\,000 penalty for the failure to either properly  register or file the annual information return. Entities required to file the  information returns include\: family-owned non-corporate entities\,  farming/personal residence\, affordable housing\, venture capital funds\,  diversified investing funds\, obligated member entities\, asset-backed  securitization entities (REMIC/FASIT)\, or other entities exempt as securing  third-party indebtedness.\n Revised Intangible Holding Company/Captive REIT Penalty  Provisions\n The penalty for failing to report intangible holding companies and  captive REITs is amended to set a minimum penalty of $10\,000. The alternative  calculation is 50 percent of any required adjustments to the initial return  filed. Under the prior law\, the exemption was based on underpayments of tax and  often resulted in a $0 penalty. The commissioner may waive the penalty for good  and reasonable cause.\n Job Tax Credit Modifications\n The standard job tax credit is increased from $2\,000 to $4\,500.   Under prior law the standard credit was $4\,500 only for jobs created in  economically distressed counties.  Additionally\, the legislation clarifies that  the required capital investment includes investments in computer software.  Also  clarified in the Bill is that the required capital investment and creation of  jobs must take place within 12 months of the effective date of the business plan  which details the investment to be made and the jobs to be created.\n Effective Date of Streamlined Sales Tax Changes  Delayed\n The Bill further extends the effective date of changes made as  part of the Streamlined Sales Tax Project. The effective date of these changes  is extended from July 1\, 2009\, to July 1\, 2011.\n Computer Software Warranty and Maintenance Contracts  Taxable\n The Bill extends the sales and use tax to computer software  warranty and maintenance contracts. Thus\, contracts to provide customers with  future computer software updates or upgrades\, or to provide support services\,  are subject to sales and use tax.  The change is in response to certain  taxpayers who where taking the position that software warranty contracts  executed outside the state were not subject to Tennessee sales tax. Under the  amendment\, the sales tax will apply if (1) the maintenance contract is sold as  part of the sale of computer software that is subject to the tax\, (2) the  contract applies to computer software installed on computers located in  Tennessee\, or (3) the location of the computer software is not known but the  purchaser’s address is in Tennessee. Additional charges made for actual repairs\,  modifications\, updates or upgrades under the contract are also subject to the  sales tax.\n Legislature Overturns Teksystems\n The Legislature also amended the exemption for software developed  by a taxpayer for its own use. This is in response to a recent Tennessee Court  of Appeals ruling – TEKsystems v. Chumley  [http\://www.wallerlaw.com/articles/2009/06/16/possible-refund-opportunity-for-tennessee-taxpayers-tennessee-court-of-appeals-holds-that-in-house-software-exemption-applies-to-software-created-by-contract-workers-from-staff-augmentation-service.10541]– in which the Court concluded  that software developed by temporary\, information technology professionals  qualified for the “in-house” exemption because the professionals functioned as  agents and not as independent contractors.  The amendment limits the application  of the exemption for future periods to software developed by a direct employee  that receives a federal W-2 from the company for which the software is being  developed. \n Preliminary Artwork and Advertising Services  Exempt\n The Legislature also enacted provisions attempting to clarify the  taxation of advertising agencies. Under the amendment\, advertising services and  preliminary artwork created by the advertising agency appear to be exempt from  sales and use tax. Sales tax only applies to the sales price of the final  artwork which is based on charges that are directly allocable to the production  of the final artwork.\n Under the amendment\, “advertising materials” are also taxable.  This includes tangible items or the digital equivalent produced to advertise a  product\, service\, or idea\, including brochures and catalogs. Notably\,  “advertising materials” specifically excludes sound recordings or video  recordings produced by recording or television studios.\n Centralized Administration of Local Business  Tax\n The Technical Corrections Bill also centralizes the administration  of Tennessee’s local business tax\, which will be transitioned to the State over  the next year.  The tax continues to apply to the same privileges\, and the  rates\, tax years\, and return due dates also remain unchanged. Substantive  changes include a 50 percent cap on tangible personal property tax credits and a  requirement that general contractors obtain the business license of a  subcontractor to qualify for the deduction for amounts paid to subcontractors.   The Bill also changes the distinction between wholesalers and retailers such  that businesses will now be classified as a wholesaler or retailer based on  their predominant business activity.\n Taxpayers must continue filing separate returns for each place of  business\, but the returns must now be sent to TDOR instead of the local  jurisdiction. Also\, taxpayers required to file sales and use tax returns  electronically must also file business tax returns electronically.  For a more  detailed summary of the business tax changes\, please see “Tennessee – Summary of Local Business Tax Changes.” [http\://www.wallerlaw.com/quotes/2009/06/17/tennessee-summary-of-local-business-tax-changes.10566]\n Taxpayers should review their compliance with the business tax.  The revenue estimates indicated that TDOR anticipates raising over $40 million  from this change. The thinking is that TDOR will be able to match business tax  records against sales tax records and IRS records better than city and county  clerks\, so taxpayers will likely see increased scrutiny on business tax filings.  If a business has not paid or has underpaid business tax since Jan. 1\, 2006\,  they should consider a Voluntary Disclosure Agreement (VDA)\, which should allow  the taxpayer to anonymously offer to pay the tax and interest due and avoid the  penalty.  VDAs also limit the period of liability to three years.\nFor  more information\, please contact Charles A. Trost [http\://www.wallerlaw.com/attorneys/2007/06/11/trost-charles-a.4811]\, G. Michael Yopp [http\://www.wallerlaw.com/attorneys/2007/06/11/yopp-g-michael.4728]\, J. Leigh Griffith [http\://www.wallerlaw.com/attorneys/2007/06/11/griffith-j-leigh.4828]\, Brett R. Carter [http\://www.wallerlaw.com/attorneys/2007/06/11/carter-brett-r.4851]\, Chris A. Wilson [http\://www.wallerlaw.com/attorneys/2007/09/11/wilson-christopher-a.4664] or any member of the Waller Lansden Tax [http\://www.wallerlaw.com/services/salt] practice at 800-487-6380.\nWE 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.\nThe 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.\n
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CATEGORIES:state-and-local-tax,tax
CLASS:PUBLIC
SEQUENCE:4
DTSTAMP:20120208T093921
CREATED;TZID=US-Central:20090618T075619
LAST-MODIFIED;TZID=US-Central:20090618T080759
DTSTART;VALUE=DATE:20090617
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