Tennessee Clarifies Franchise, Excise Tax; Could Affect Georgia Business

On April 29, 2019, the Tennessee Department of Revenue issued Frequently Asked Questions – Franchise and Excise Tax (“FAQs”) which clarify that a business need not have a physical presence in the state to have substantial nexus subjecting it to franchise and excise taxes. This affects all taxpayers who have sales to Tennessee customers, including those selling tangible personal property. Tennessee originally enacted the substantial nexus provisions under the Revenue Modernization Act (L. 2015, H644) for tax years beginning after January 1, 2016.

The FAQs emphasize that a business without a physical presence in Tennessee may have substantial nexus if it meets one of the following bright-line tests:

  • At least $500,000 of receipts in Tennessee, or
  • At least $50,000 of property or payroll in Tennessee, or
  • At least 25% of its total receipts, property, or payroll in Tennessee,
  • However, a business without a physical presence and not meeting a bright-line test may still have substantial nexus if it has economic nexus due to engaging in “systematic and continuous business activity in the state that has produced receipts attributable to Tennessee customers.” The FAQs make clear that a business selling tangible personal property and qualifying for protection under P.L. 86.272 is subject only to franchise tax and not to income tax.

Substantial nexus is one component of a four-part test under the Commerce Clause of the U.S. Constitution for determining whether a state may impose a tax. Prior to the U.S. Supreme Court’s June 21, 2018, decision in South Dakota v. Wayfair (U.S., No. 17-494), a business’s physical presence in a state was necessary for having substantial nexus for sales and use tax collection purposes. Pre-Wayfair, many states also looked at physical presence as necessary for franchise and income tax purposes. The Wayfair decision has resulted in states replacing physical presence requirements with economic nexus for sales and use tax purposes.

Commentary

Tennessee’s FAQs signify the extension of Wayfair’s economic nexus principles to taxes other than sales and use. The FAQs indicate that Tennessee will pursue businesses not qualified for protection under P.L. 86-272, such as those selling services or licensing intangibles, for payment of excise taxes, thereby enlarging the state’s tax base. All taxpayers who have sales to Tennessee customers including sellers of tangible personal property should be aware that they may be subject to the excise tax or, at a minimum, the franchise tax.

Now that many states have enacted economic nexus statutes and regulations related to sales and use tax, we expect that many more states will look to add income economic nexus provisions or bright-line tests for taxpayers who do not sell tangible personal property and are not currently protected from income tax under P.L. 86-272. We would also expect similar franchise economic nexus provisions that may impose franchise tax on sellers of tangible property in addition to sellers of services and intangible property. This is will result in an increase in the overall filing requirements for taxpayers with customers outside of their state of domicile as well and an overall increase in their franchise and income tax liabilities.

For more information, please contact:

Tim Clancy
State and Local Tax Practice Leader
Windham Brannon, P.C.
678 510 2804
tclancy@windhambrannon.com