TENNESSEE DEPARTMENT OF REVENUE Business Tax Update TODAYS

TENNESSEE DEPARTMENT OF REVENUE Business Tax Update

TODAY’S OBJECTIVES • Review the basics of business tax • Understand new legislation

BUSINESS TAX OVERVIEW

General • Tax on the privilege of doing business in Tennessee • Statutes: Tenn. Code Ann. §§ 67 -4 -701 – 730 • Rules: TENN. COMP. R. & REGS. 1320 -4 -5 -. 01 –. 61 • Tennessee Department of Revenue administers both the state tax and the municipality tax • On gross taxable sales of tangible personal property and services • Tax paid on a per location basis

Other Key Information • Two taxes: State and City tax • Not imposed for cities unless locally adopted • Department of Revenue distributes tax back to local governments – about 60 cents of every dollar collected goes to cities and counties

Public Chapter 313, 2014 • Changed county tax to uniform state tax • State tax money still distributed to counties • State tax imposed on everyone doing business in Tennessee (with exceptions) • Still not imposed in municipalities, unless locally adopted

NATURE OF BUSINESS TAX

Two Different Taxes • State Tax • Municipality Tax

Taxes vs. Licenses Taxes are collected at the state level Licenses are issued at the local level Unless your business is exempt, you must always have a current business license!

State Tax • Tenn. Code Ann. § 67 -4 -704 • All persons located and doing business in the state are subject to the state tax – Person is: individual, firm, partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit – Person is not: United States, the State of Tennessee, or any political subdivision of the two; electric membership co-ops; or utility districts

State Tax for Out-of-State Persons • Out-of-state person subject to state tax if they have nexus in Tennessee: – Receipts: > $500, 000 or 25% of total receipts from sales in TN – Property: >$50, 000 or 25% of total property by value in TN – Payroll: >$50, 000 or 25% of compensation paid in TN • Contractors have special considerations

Municipality Tax • Tenn. Code Ann. § 67 -4 -705 • Must elect to impose • Does not apply to any out-of-state taxpayers (except out-of-state contractors with a deemed location)

Who is Subject to State Business Tax? • State Tax: – Tennessee Retailers • With $10, 000+ sales per county – Out-of-State Retailers • Performing activity under Tenn. Code Ann. § 67 -4 -717(a) • With $10, 000+ sales per county – Tennessee Contractors • With $10, 000+ sales sourced to county domicile or >$50, 000 sales in any other county – Out-of-State Contractors • With $10, 000+ sales in any county

Who is Subject to City Business Tax? • Municipality Tax: – Tennessee Retailers • With $10, 000+ sales per municipality – Tennessee Contractors • With $10, 000+ sales sourced to municipality domicile or >$50, 000 sales in any other municipality – Out-of-State Contractors • With >$50, 000 sales in any municipality

TAXPAYER RESPONSIBILITIES

Registration • Every taxpayer must register • Every location must be registered • In-state taxpayer can register with local official or Department of Revenue • Out-of-state taxpayer must register with Department of Revenue – exception for contractors having >$50, 000 in receipts in any county or city

Licensing • Every business location in Tennessee with taxable sales of $10, 000 or more must get a standard business license from their county clerk – also with city recorder if city has passed business tax ordinance • One-time $15 fee • Expires on the 15 th day of the 5 th month following the business’ fiscal year • Automatic renewal upon payment of tax • Must be displayed and cannot be transferred

Minimal Activity Licenses • If taxable sales of more than $3, 000 but less than $10, 000, a business can get a minimal activity license • On a per-location basis • $15 per year for minimal licenses – must renew each year • If taxable sales equal $3, 000 or less, a business may get a minimal activity or even a standard license, but is not required to do so

Out-of-State Contractor’s Bond • An out-of-state contractor must file a bond with the county and/or city at the same time he applies for a license • It should be for an amount to cover his anticipated tax liability

Filing Return & Paying Tax • Required to file electronically – submit information for all locations in one electronic filing • May receive one 30 -day extension to file for good cause – must apply with Revenue for this • A final return must be filed within 15 days after quitting business – Also must file final return and get a new license if the taxpayer changes locations more than once each year

Record Keeping & Retention • Records must be kept for at least 3 years from December 31 of the year the return is filed • Electronic records should be provided in a standard record format

CLASSIFICATIONS

General • Classified by dominant business activity • Classified on a per location basis • There are five different classifications plus a separate category for antique malls, flea markets, and the like

Classification 1 • A: – Sales of food and beer for home preparation (except delicatessens and candy at retail) – food brokerage services • B: – Sales of lumber, building materials, tools, builders’ hardware, paint and glass, electrical supplies, roofing materials, farm equipment, plumbing, heating and air conditioning equipment, and other basic lines of hardware

• C: – Sales of hay, grain, feed, fertilizer, seeds, bulbs, nursery stock, and other farm, lawn, and garden supplies and tools (except products produced by farmers sold directly from the farm) • D: – Sales of gasoline, diesel fuel, and motor oils at retail • E: – Sales of gasoline and diesel fuel at wholesale

Classification 2 Motor vehicles Clothing (excluding made-to-order items) Home furnishings Prescription drugs Prepared food Coal, wood, ice, fuel oil, and liquefied petroleum gas • Cut flowers • Advertising specialties • Any tangible personal property not classified elsewhere • • •

Classification 3 • Candy • Made-to-order clothing • Antiques • Artwork • Books and magazines • Sporting equipment • Jewelry • Tobacco products • Toys • • • Cameras Fireworks Hearing aids Luggage Non-prescription eyeware Pet food Pets Swimming pools Services

Classification 4 • Persons improving real property (construction contractors) • Persons installing tangible property • Persons providing exterminating services • Persons receiving commissions from the sale of farm products belonging to others

Classification 5 • A: – Industrial loan and thrift companies certified and licensed under title 45, chapter 5 • B: – Natural gas marketers

Antique Malls, Flea Markets, etc. • Antique malls, flea markets, craft shows, antique shows, gun shows, and auto shows • Excludes business that sells antiques at least five days a week from a permanent location (these would be Classification 3) • Administered locally • Review Business Tax Guide at www. TN. gov/revenue for more information

EXEMPTIONS/EXCLUSIONS

Exempt Services • • Tenn. Code Ann. § 67 -4 -708(3)(C)(i)-(xvi) Use SIC Index to find description of service 16 specific types of services listed Exemptions Include: – Medical, legal, educational, services by nonprofits, accounting, public utilities, insurance, veterinary, engineering, etc. • Still must pay tax on sales of tangible personal property and taxable services

Manufacturers • Exempt under Tenn. Code Ann. § 67 -4 -712(b)(2) • To qualify for the exemption: – Must be engaged in one of the activities described under Division D of the SIC Code – Over 50% of the business’s gross receipts must be derived from manufacturing – Sales of the manufactured products must be made from the manufacturing location • Must qualify for the exemption on a perlocation basis

• If a manufacturer qualifies for the exemption, then all sales from that location are exempt • Installation of the manufactured product by the manufacturer as part of the sale of the manufactured good is considered a manufacturing activity • Publishers and printers of newspapers and other periodicals are manufacturers

Other § 67 -4 -712 Exemptions • Blind vendors • Disabled members and former members of the armed forces • Employees of a business • Newspaper route carriers • Religious and charitable institutions on donated items • Sales at state or county fairs • Farm products direct from the farm and sold by the farmer • Receipts from admissions to amusement or recreational activities conducted entirely by a non-profit

Other Exemptions/Exceptions • Providers of direct-to-home satellite television programming services • Movie theaters • Radio and TV stations • School bus operators transporting students • Individual property owners who use property management companies to manage vacation lodging for overnight rentals, but only on those receipts

DEDUCTIONS

Deductions Include: – Trade-in allowances – Amounts paid to subcontractors – Sales of services delivered to customers located out-of-state – Sales of tangible personal property in interstate commerce – Bad debts – Certain taxes Listed in Tenn. Code Ann. § 67 -4 -711

CREDITS

Personal Property Tax Credits • Credit can’t exceed 50% of amount owed • Property must be at the location for the return • This is not real estate property tax!

TAX RATES

Minimum Tax • Class 1 -4 and 5 B taxpayers must pay at least a minimum tax of $22 • On a per-location basis • Out-of-state taxpayers must pay at least a minimum tax of $22 for all of its activity in the state • Class 5 A taxpayers must pay at least a minimum tax of $450 per year (but have a maximum tax of $1, 500 per year)

Wholesaler vs. Retailer Rate • Separate wholesaler and retailer rates for Classes 1 -3 • If taxpayer’s taxable gross sales are more than 50% wholesales – pay wholesale rate on all of its taxable sales • If taxpayer’s taxable gross sales are at least 50% retail sales – pay retail rate on all of its taxable sales

Tax Rates Classification Retailer Rate Wholesaler Rate General Rate Class 1 A 1/10 of 1% 1/40 of 1% Class 1 B & 1 C 1/10 of 1% 3/80 of 1% Class 1 D 1/20 of 1% NA Class 1 E NA 1/32 of 1% Class 2 3/20 of 1% 3/80 of 1% Class 3 3/16 of 1% 3/80 of 1% Class 4 NA NA 1/10 of 1% Class 5 A NA NA 3/10 of 1% Class 5 B NA NA 1/50 of 1%

Municipality Rate • If municipality levied the business tax before 1/1/14, then it may continue levying at the same rate – some have reduced rates • If municipality elects to enact business tax after 1/1/14, must levy at the rates listed in table

FILING PERIODS

File on Time To Avoid Penalty! • Due date is always based on fiscal year (IRS year) • Returns due 15 th day of 4 th month following the end of the taxpayer’s fiscal year (not the same as the expiration date on the license) • Must file electronically, unless a waiver is obtained from Revenue

SOURCING & DISTRIBUTION

In-State Taxpayers Having Mobile Businesses • For Classes 1 -3 • In-state taxpayer taxable receipts are sourced to municipality and/or county in which the taxpayer has a location • If a business has taxable receipts in another jurisdiction without establishing a location, those receipts are reported back to the municipality and/or county of their home location

Out-of-State Taxpayers • For Classes 1 -3 • All out-of-state taxpayer taxable receipts earned in any county will be sourced to the state general fund • Out-of-state taxpayers are exempt from municipality tax (exception for contractors having >$50, 000 of receipts within a city)

MISCELLANEOUS ISSUES

Invoicing Business Tax • Business tax can be separately itemized and passed on to the customer • Must be included in tax base for business tax and sales & use tax

Warehouses • Sales from a warehouse are subject to the business tax from that location • Storage at a warehouse for later sale elsewhere is not subject to the business tax • The sale of storage services is subject to the business tax under Class 3 • The lease of warehouse space without providing any services is not subject to the business tax

Contractors • If receipts of more than $50, 000 in a jurisdiction – those receipts sourced to that county and/or city – Applies to both in-state and out-of-state contractors • If in-state contractor has receipts of $50, 000 or less in a jurisdiction – those receipts sourced to county and/or city of contractor’s domicile • If out-of-state contractor has receipts of $10, 000$50, 000 in a county – those receipts sourced to the State general fund (those receipts exempt from municipality business tax)

• Speculative builders: – Not a contractor – if build houses for sale on builder’s own property from own plans – Contractor – if builder agrees to sell the property and alters the plans to suit the purchaser • Contractor can take a deduction for actual payments made to a licensed subcontractor • Sales to contractors of items used by contractor to fulfill contract are retail sales

Deemed location: • If a contractor earns more than $50, 000 in a city and/or county in which he does not have a location (e. g. , office, home, etc. ) • The law treats the situation as though he does have a location in that city and/or county • Therefore, the contractor is required to get a standard business license and pay the business tax for that location • Rule applies to out-of-state & in-state contractors

If contractor earns ≤$50, 000 in city/county: • In-state contractor: – Register for and pay business tax on total earnings in city/county of domicile – Get standard business tax license in domicile if total earnings are at least $10, 000 – Get minimal activity license in domicile if total earnings are less than $10, 000 (but more than $3, 000) • Out-of-state contractor: – Register for and pay state business tax on total earnings (only add up earnings from each county where the county total is $10, 000 -$50, 000) – Does not get a business tax license

THANKS FOR YOUR ATTENTION!