The Tennessee General Assembly passed legislation on June 16, 2009 that will centralize the administration of Tennessee’s business tax which, under current law, is imposed and administered by most cities and counties in Tennessee. Budget estimates indicate that approximately $40 million in new state and local revenue will be generated by the centralized administration of this tax, most of which will come from taxpayers that the Tennessee Department of Revenue (TDOR) believes are currently not in compliance with the business tax. For taxpayers currently filing and paying business tax, there are very few substantive changes. The tax continues to apply to the same privileges, and the rates, tax years, and return due dates also remain unchanged. For taxpayers not currently paying business tax, care should be taken to review the law and determine whether any exposure exists.
Changes in the Calculation of Tax
Although the substantive law remains relatively unchanged, there are a few new provisions. First, the applicable credits, including the personal property tax credit, are now capped at 50 percent of the taxpayer’s tax liability. Under current law, the credit is limited to the amount of the city and county portion of the tax. This change could have significance to businesses with significant amounts of equipment or to entities in their first or last year of operation.
The Bill also requires general contractors to obtain the business license of subcontractors to qualify for the deduction for amounts paid to subcontractors. Under current law general contractors get a deduction for amounts paid to subcontractors without any confirmation, and there was concern that subcontractors were not paying their share of the tax.
The new provisions will also require taxpayers to be classified according to their predominant activity as either a retailer or wholesaler and be subject to tax on all sales at either the retail or wholesale rate. Under current law, a taxpayer could be both a retailer and a wholesaler and pay tax at different rates depending on the nature of the sale.
The credit for the prior year’s minimum tax ($15) is also deleted.
Compliance issues
Businesses will continue to obtain licenses from the city and county in which they are doing business, and will now also have to register with TDOR. Rather than sending annual returns to the local tax collectors, however, returns will now be sent to TDOR. Nothing in the Bill indicates that a consolidated return will be allowed for all the business locations of a taxpayer, so taxpayers will continue to file separate returns for every jurisdiction in which they have a place of business. Accordingly, the cost of complying with the business tax will only marginally improve. Taxpayers required to file sales and use tax returns electronically will also be required to file business tax returns electronically.
Procedural Changes
The business tax amendments also include procedural changes such that taxpayers will no longer be required to pay disputed taxes under protest. Instead, taxpayers will be able to file claims for refund, without paying under protest, using TDOR’s standard refund procedures. Based on the effective date of the Bill, however, it is anticipated that the pay under protest procedures will remain in effect for the current tax periods.
What Businesses Should Do …
Review current compliance with the business tax! It is anticipated 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, the business should consider a Voluntary Disclosure Agreement (VDA), which would 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.
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.
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.
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