“Caveat Lender” - The Tennessee Indebtedness Tax (Part 1)

While not as well-known as the Florida documentary stamp tax, the Tennessee indebtedness tax (T.C.A. 67-4-409) crops up in secured transactions and increases transaction costs associated with lending transactions. In this three-part series, Waller attorneys Robert Harris and Lindsay O’Tousa will unpack the Tennessee indebtedness tax, detail the process of calculating and paying it, and explore statutory methodologies to minimize it. A must-read for banks, finance companies and private equity firms doing lending transactions with a Tennessee nexus.

With the influx of out-of-state lenders and corporate relocations to Tennessee, lenders in multi-state transactions with a Tennessee nexus need to be aware of the Tennessee indebtedness tax.

The Tennessee indebtedness tax statute provides that upon filing a financing statement or other instrument evidencing indebtedness with the Tennessee Secretary of State or local recordation office, a recordation tax based on the amount of indebtedness being secured and the type and location of collateral must be paid.

The total “indebtedness” is the principal debt or other obligation which is reasonably considered by the parties to be included within the terms of the agreement.

Thus, indebtedness should be equal to the sum of:

(i) the full amounts of revolver commitments;

(ii) the full amounts of funded term loans; and

(iii) the full amounts of non-conditional delayed draw term loans.

The total indebtedness typically does not, however, include interest and collection expenses such as attorney’s fees, or any other costs associated with the financing other than the principal debt or obligation for which a debtor becomes liable. If such an amount or cost is added to the principal debt or obligation, and is used to calculate additional interest pursuant to a refinancing transaction, amendment or similar transaction, such cost could become part of the maximum principal indebtedness, and thus subject to the tax.

It is the lender’s or indebtedness holder’s duty to collect and remit the recording tax. The Tennessee indebtedness tax is due at the time of filing and is paid at a rate of eleven and one half cents (11.5¢) for each one hundred dollars ($100) of debt (or one thousand one hundred and fifty dollars ($1,150) per one million dollars ($1,000,000) of debt). However, there is an exemption for the first two thousand dollars ($2,000) of debt, applicable to the first filing only, such that the tax is paid only on the amount over and above the two thousand dollar threshold, and any subsequent increases in indebtedness thereafter.

Thus, the recording tax is computed by excluding the first two thousand dollars ($2,000) of the maximum principal indebtedness reported on a financing statement and multiplying the remaining indebtedness by .00115 (11.5¢ per each $100 of indebtedness). Every UCC-1 financing statement filed with the Tennessee Secretary of State or local recordation office must state the amount of the maximum principal indebtedness on the face of the instrument, or an attached sworn statement, including each amendment that increases the maximum principal indebtedness.

Parties filing financing statements in Tennessee should include the phrase, the “Maximum Principal Indebtedness for Tennessee Recording Tax Purposes is $_______________________” on each financing statement. It is best practice to include the legend in all UCC filings even though some lenders will require a sworn statement to be filed with the UCC filing (although this is becoming more and more infrequent and is not statutorily required).

Failure to pay the tax does not impact the effectiveness, validity, priority, or enforceability of the security interest. However, nonpayment, or underpayment, of the tax could cause significant problems for the holder of indebtedness both during and after nonpayment. For example, the holder of the indebtedness can be held liable for a penalty equal to the greater of two hundred and fifty dollars ($250) or double the unpaid tax due, in addition to the tax. Moreover, nonpayment can give rise to a super-priority tax lien, for both the tax amount and penalties, in favor of the Department of Revenue and against the collateral and any proceeds thereof.

The Tennessee indebtedness tax statute is a complex statute, and lenders new to Tennessee would be well-advised to consult with counsel experienced in navigating the statute and ensuring compliance.

To read the full series:

“Caveat Lender” - The Tennessee Indebtedness Tax (Part 1)

The Tennessee Indebtedness Tax in Practice (Part 2)

Saving clients money: statutory methodologies to minimize tax (Part 3)