Amends TCA Title 67.

ON APRIL 3, 2023, THE HOUSE ADOPTED AMENDMENTS #1, 2 AND 3, AND PASSED HOUSE BILL 323, AS AMENDED.<br /> <br /> AMENDMENT #1 rewrites this bill to make various changes to present tax law, as described below.<br /> <br /> TAX RATES UNDER THE BUSINESS TAX ACT<br /> <br /> Under present law, tax Classification 4 is for each person engaged in the business of contracting or performing a contract or engaging in any of the activities, or similar activities, listed below for a price, commission, fee, or wage:<br /> <br /> (1) Persons receiving compensation from rendering exterminating services, from installing personal property, from constructing, building, erecting, repairing, grading, excavating, drilling, exploring, testing, or adding to a building, highway, street, sidewalk, bridge, culvert, sewer, irrigation or water system, drainage, or dredging system, levee or levee system or any part thereof, railway, reservoir, dam, power plant, electrical system, air conditioning system, heating system, transmission line, pipeline, tower, dock, storage tank, wharf, excavation, grading, water well, or any other improvement or structure or any part thereof; and <br /> <br /> (2) Persons engaged in the business of selling livestock, poultry, or other farm products not exempted by other law.<br /> <br /> Present law provides that, during any taxable period, persons receiving more than $50,000 of compensation from contracts under Classification 4 in a county or incorporated municipality, or both, other than the county or incorporated municipality where domiciled or located, are deemed to have a location in the county or municipality, or both, where the work was performed and a business tax return must be filed for that location for the period in question. This amendment revises this provision to apply, instead, to a person who, during any taxable period, receives more than $100,000 of such compensation. <br /> <br /> Present law provides that an industrial loan and thrift company required by law to obtain a certificate and a license is subject to tax at the rate of three-tenths of one percent of the gross income of the business. This amendment changes that rate to one-tenth of one percent.<br /> <br /> EXEMPTIONS TO THE BUSINESS TAX ACT<br /> <br /> Present law provides that the Business Tax Act does not apply to a person primarily engaged in the manufacture of goods, wares, merchandise, or other articles of value from a location or outlet subject to ad valorem taxation. This amendment revises this provision to provide, instead, that the Business Tax Act does not apply to a person primarily engaged in the fabrication or processing of tangible personal property for resale and consumption off the premises with respect to the sales of such property made from the manufacturing location or from a storage or warehouse facility that is situated within a ten-mile radius of the manufacturing location.<br /> <br /> Present law provides that a person having less than $10,000 within a county or incorporated municipality is exempt from the tax and licensing provisions, or the tax imposed for persons with a substantial nexus in the state, for the privilege of making sales and engaging in a vocation, occupation, business, or business activity. This amendment revises these exemptions to apply, instead, to such a person having less than $100,000. <br /> <br /> DISTRIBUTIONS OF TAXES UNDER THE BUSINESS TAX ACT<br /> <br /> Present law provides that, after distributions are made to the county clerk, forty-three percent of the remaining proceeds of the tax must be earmarked and allocated specifically and exclusively to the state's general fund. This amendment lowers the forty-three percent to forty-two and sixty-two hundredths percent.<br /> <br /> NET EARNINGS UNDER THE EXCISE TAX LAW OF 1999<br /> <br /> This amendment adds to present law that for assets purchased on or after January 1, 2023, for purposes of computing "net earnings" or "net loss," § 168 of the Internal Revenue Code of 1986, relative to the accelerated cost recovery system, must be applied as it exists and applies under the federal Tax Cuts and Jobs Act of 2017.<br /> <br /> Present law provides that there are certain items added to a taxpayer's net earnings or net losses. This amendment revises the current list in the following way:<br /> <br /> (1) Revises the provision that adds any depreciation that the taxpayer deducted in computing its federal taxable income in excess of that which the taxpayer could have deducted in computing such income, if the taxpayer had computed its depreciation under § 168 of the Internal Revenue Code as it existed and applied immediately prior to the passage of the Job Creation and Worker Assistance Act of 2002 to, instead, provide that such provision applies to assets purchased on or before December 31, 2022; and<br /> <br /> (2) Adds to the current list that, for tax years ending on or after December 31, 2023, but before December 31, 2025, any amount deducted under a provision relative to any gross premiums tax being deducted in determining net earnings, but taken as a credit against the excise tax, relating to the federal employer tax credit in Section 45S of the Internal Revenue Code of 1986 and earned as a credit against the excise tax must be added.<br /> <br /> Present law provides that there are certain items subtracted from a taxpayer's net earnings or net losses. This amendment revises the current list in the following way:<br /> <br /> (1) Revises the provision that subtracts any depreciation in excess of that which the taxpayer deducted in computing its federal taxable income that could have been deducted in computing such income if the taxpayer had computed its depreciation under § 168 of the Internal Revenue Code as it existed and applied immediately prior to the passage the Job Creation and Worker Assistance Act of 2002; to, instead, provide that such provision applies to assets purchased on or before December 31, 2022; and<br /> <br /> (2) Adds to the current list that an amount equal to the lesser of net earnings or $50,000 must be subtracted. However, this amount must not create or increase a net loss.<br /> <br /> CREDITS UNDER THE EXCISE TAX LAW OF 1999<br /> <br /> Present law provides that the tax imposed by the Excise Tax Law of 1999 is in addition to all other taxes and there is no credit allowed upon it except as provided in law. This amendment adds to the list of current exceptions that, for tax years ending on or after December 31, 2023, but before December 31, 2025, there is allowed against the sum total of the taxes imposed by the Franchise Tax Law of 1999, and by the Excise Tax Law of 1999, a credit equal to the federal employer tax credit in Section 45S of the Internal Revenue Code of 1986, as a result of compensation paid in this state during the tax period by the taxpayer. However, such credit taken on a franchise and excise tax return must not exceed fifty percent of the combined franchise and excise tax liability shown by the return before the credit is taken. Such a credit that is unused may be carried forward in a tax period until the credit is taken. However, the credit may not be carried forward for more than 15 years.<br /> <br /> APPORTIONMENT FORMULA UNDER THE EXCISE TAX LAW OF 1999<br /> <br /> Under present law, for tax years beginning prior to July 1, 2016, generally all net earnings must be apportioned to this state by multiplying the earnings by a fraction, the numerator of which must be the property factor plus the payroll factor plus twice the receipts factor, and the denominator of the fraction must be four. Additionally, for tax years beginning on or after July 1, 2016, generally all net earnings must be apportioned to this state by multiplying the earnings by a fraction, the numerator of which must be the property factor plus the payroll factor plus three times the receipts factor, and the denominator of the fraction must be five. This amendment adds the following new apportionments:<br /> <br /> (1) For tax years ending on or after December 31, 2023, but before December 31, 2024, generally net earnings must be apportioned to this state by multiplying the earnings by a fraction, the numerator of which is the property factor plus the payroll factor plus five times the receipts factor, and the denominator of the fraction is seven;<br /> <br /> (2) For tax years ending on or after December 31, 2024, but before December 31, 2025, generally net earnings must be apportioned to this state by multiplying the earnings by a fraction, the numerator of which is the property factor plus the payroll factor plus 11 times the receipts factor, and the denominator of the fraction is 13; and<br /> <br /> (3) For tax years ending on or after December 31, 2025, generally net earnings must be apportioned to this state by multiplying the earnings by the receipts factor only.<br /> <br /> This amendment provides that, if the application of (1)-(3) above to a tax year results in a lower apportionment ratio than under the current application of the apportionment method as it applied to tax years ending before December 31, 2023, then a taxpayer may annually elect to apply the current apportionment method as it applied to tax years ending before December 31, 2023. However, the election must result in a higher apportionment factor for the tax year, and the taxpayer must have net earnings, rather than a net loss, for that tax year.<br /> <br /> Under present law, a taxpayer whose principal business in Tennessee is manufacturing may elect to apportion net earnings to this state by multiplying the earnings by a fraction, the numerator of which is the total receipts of the taxpayer in Tennessee during the taxable year and the denominator of which is the total receipts of the taxpayer from any location within or outside of the state during the taxable year. A taxpayer's principal business in Tennessee is manufacturing if more than 50 percent of the revenue derived from its activities in this state, excluding passive income, is from fabricating or processing tangible personal property for resale and consumption off the premises. <br /> <br /> Present law provides that a financial asset management company may elect to apportion net earnings by multiplying such earnings by a fraction, the numerator of which is the total receipts of the taxpayer in Tennessee during the taxable year as determined under this section and the denominator of which is the total receipts of the taxpayer everywhere during the taxable year. <br /> <br /> To elect either method of apportionment, the taxpayer must notify the department of the election, in writing, on its return for the taxable year to which the election applies. Once a taxpayer elects the method of apportionment, such election must remain in effect for a minimum of five tax years and thereafter until revoked. The taxpayer may revoke the election after the minimum period by notifying the department of the revocation, in writing, on its return for the first taxable year to which the revocation applies. A taxpayer that revokes the election must not be permitted to newly elect the method of apportionment for a period of five tax years, beginning with the tax year in which the taxpayer revoked the previous election.<br /> <br /> This amendment repeals the above methods of apportionment for tax years ending on or after December 31, 2025 for both the Excise Tax Law and Franchise Tax Law apportionments. <br /> <br /> CERITFIED DISTRIBUTIONS<br /> <br /> Present law provides that a taxpayer that makes an election for application based on meeting certain gross sales and receipts factor thresholds must, so long as such election is in effect, apportion net earnings and net worth in the manner prescribed elsewhere in the Excise Tax Law and Franchise Tax Law. The gross sales threshold must exceed one billion dollars of sales of tangible personal property made in this state during the tax period. This amendment adds that the gross sales threshold can also be met if the taxpayer has sales of alcoholic beverages made in this state to an affiliate that continues the manufacturing process that exceeds one billion dollars.<br /> <br /> However, the total amount derived from certified distribution sales must be excluded from the numerator of the receipts factor. A taxpayer that has made such an election, so long as such election is in effect, pay to the commissioner, annually, an excise tax on the total amount of certified distribution sales excluded from the numerator of the taxpayer's receipts factor. "Certified distribution sales" is defined as sales of tangible personal property made in this state by the taxpayer to any distributor, whether or not affiliated with the taxpayer, that is resold for ultimate use or consumption outside the state; provided, that the distributor has certified that such property has been resold for ultimate use or consumption outside this state.<br /> <br /> This amendment adds that "certified distribution sales" also includes sales of alcoholic beverages when such sales are made in this state by the taxpayer to an affiliate that continues the manufacturing process, prior to the manufactured beverage being sold for ultimate use or consumption outside this state, as long as the affiliate has certified that such property has been sold for ultimate use or consumption outside this state.<br /> <br /> FRANCHISE TAX LAW OF 1999<br /> <br /> Under present law, the measure of the tax levied by the Franchise Tax Law of 1999 must in no case be less than the actual value of the real or tangible property owned or used in Tennessee, excluding exempt inventory and exempt required capital investments. However, this amendment provides that for tax years ending on or after December 31, 2023, the measure of the tax levied applies to the actual value of the taxpayer's aggregate real or tangible property in excess of $500,000. This amendment extends this provision out to tax years ending on or after December 31, 2024.<br /> <br /> Under present law, for tax years beginning prior to July 1, 2016, generally the net worth of a taxpayer doing business both in and outside this state must be apportioned to this state by multiplying such values by a fraction, the numerator of which must be the property factor plus the payroll factor plus twice the receipts factor, and the denominator of the fraction must be four. Additionally, for tax years beginning on or after July 1, 2016, generally the net worth of a taxpayer doing business both in and outside this state must be apportioned to this state by multiplying such values by a fraction, the numerator of which must be the property factor plus the payroll factor plus three times the receipts factor, and the denominator of the fraction must be five. This amendment adds the following new apportionments: <br /> <br /> (1) For tax years ending on or after December 31, 2023, but before December 31, 2024, generally the net worth of a taxpayer doing business both inside and outside this state must be apportioned to this state by multiplying such values by a fraction, the numerator of which is the property factor plus the payroll factor plus five times the receipts factor, and the denominator of the fraction is seven;<br /> <br /> (2) For tax years ending on or after December 31, 2024, but before December 31, 2025, generally the net worth of a taxpayer doing business both inside and outside this state must be apportioned to this state by multiplying such values by a fraction, the numerator of which is the property factor plus the payroll factor plus 11 times the receipts factor, and the denominator of the fraction is 13; and<br /> <br /> (3) For tax years ending on or after December 31, 2025, generally the net worth of a taxpayer doing business both inside and outside this state must be apportioned to this state by multiplying such values by the receipts factor only.<br /> <br /> This amendment provides that, if the application of (1)-(3) above to a tax year results in a lower apportionment ratio than under the application of the current apportionment method as it applied to tax years ending before December 31, 2023, then a taxpayer may annually elect to apply the current apportionment method as it applied to tax years ending before December 31, 2023. However, the election must result in a higher apportionment factor for the tax year, and the taxpayer must have net earnings, rather than a net loss, for that tax year.<br /> <br /> SALE AND USE TAXES, GENERALLY<br /> <br /> This amendment levies a tax at the rate of the tax levied on the sale of personal tangible property at retail on the repairing of tangible personal property or computer software, the laundering or dry cleaning of tangible personal property, the installing of tangible personal property that remains tangible personal property after installation, and the installing of computer software, when such repair, cleaning, or installation occurs at a place of business outside this state and the serviced tangible personal property or computer software is delivered by the seller to the purchaser or the purchaser's designee within the physical limits of this state or to a carrier for delivery to a place inside the physical limits of this state for use or consumption in this state.<br /> <br /> Under present law, the sale at retail, the use, the consumption, and the distribution and storage for use or consumption in the state of magazines and books that are distributed and sold to consumers by United States mail or common carrier, where the only activities of the seller or distributor in this state are those activities having to do with the printing, storage, labeling and/or delivery to the United States mail or common carrier of the magazines or books, or the maintenance of raw materials with respect to those activities, notwithstanding that the seller or distributor maintains employees in the state solely in connection with the production and quality control of the printing, storage, labeling and/or delivery, or in connection with news gathering and reporting is exempt from the sales and use taxes. Additionally, sales and use taxes do not apply to the sale or use of direct mail advertising materials that are distributed in Tennessee from outside the state by a person engaged solely and exclusively in the business of providing cooperative direct mail advertising. This amendment deletes these exemptions. <br /> <br /> This amendment establishes a sales tax holiday, exempting the retail sale of food and food ingredients, if sold between 12:01 a.m. on August 1, 2023 and 11:59 p.m. on October 2023 from the sales and use taxes. However, this provision does not exempt sales for an unattended food establishment or vending machine or device.<br /> <br /> TRANSACTIONS SUBJECT TO THE SALES AND USE TAXES<br /> <br /> This amendment expands on the present law regarding transactions subject to the sales and use taxes. This amendment clarifies that these provisions apply in determining whether a transaction is sourced to this state, apply regardless of the characterization of a product as tangible personal property, a digital good, a service, or other taxable product and applies only to determine a seller's obligation to pay or collect and remit a sale and use tax with respect to the seller's retail sale of a product. However, these provisions do not impose tax on a transaction if that tax is prohibited by the United States Constitution or Constitution of Tennessee. <br /> <br /> The retail sale of a product from out of state into this state is sourced as follows: <br /> <br /> (1) When the product is received by the purchaser at a business location of the seller, the sale is sourced to that business location;<br /> <br /> (2) When the product is not received by the purchaser at a business location of the seller, the sale is sourced to the location where receipt by the purchaser or the purchaser's donee as designated by the purchaser occurs, including the location indicated by instructions for delivery to the purchaser or the purchaser's donee, known to the seller; <br /> <br /> (3) When subdivisions (1) and (2) do not apply, the sale is sourced to the location indicated by an address for the purchaser that is available from the business records of the seller that are maintained in the ordinary course of the seller's business when use of <br /> <br /> that address does not constitute bad faith;<br /> <br /> (4) When subdivisions (1)-(3) do not apply, the sale is sourced to the location indicated by an address for the purchaser obtained during the consummation of the sale, including the address of a purchaser's payment instrument, if no other address is available, when use of that address does not constitute bad faith; and<br /> <br /> (5) When subdivisions (1)-(4) do not apply, or in the circumstance in which the seller is without sufficient information to determine which sourcing requirement applies, then the location is determined by the address from which tangible personal property was shipped, from which the digital good or the computer software delivered electronically was first available for transmission by the seller, or from which the service was provided.<br /> <br /> The lease or rental of tangible personal property imported into this state is sourced as follows: <br /> <br /> (1) For a lease or rental that does not require recurring periodic payments, the payment is sourced the same as a retail sale described above; <br /> <br /> (2)(A) For a lease or rental that requires recurring periodic payments, generally the first periodic payment is sourced the same as a retail sale in accordance with the provisions for the sale of a product from out of sate into this state. Periodic payments made subsequent to the first payment are sourced to the primary property location for each period covered by the payment; <br /> <br /> (B) The primary property location is as indicated by an address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of that address does not constitute bad faith; and <br /> <br /> (C) The property location must not be altered by intermittent use at different locations, such as use of business property that accompanies employees on business trips and services calls; <br /> <br /> (3) For the lease or rental of motor vehicles, trailers, semi-trailers, or aircraft that do not qualify as transportation equipment and watercraft with a displacement of under 50 tons, that requires recurring periodic payments, the first and each subsequent periodic payment is sourced to the primary property location. The primary property location is determined in accordance with (2); and <br /> <br /> (4) Notwithstanding the primary property location covered by a recurring periodic payment, the lease or rental of transportation equipment is sourced the same as a retail sale in accordance with the provisions described above for the sale from out of this state into this state. <br /> <br /> This amendment provides that the sale, including the lease or rental, or a product made from a place of business within the physical limits of this state where delivery is made by the seller or lessor to a purchaser or a lessee within the physical limits of this state or to a carrier or United States postal service location for delivery to a place within the physical limits of this state, is sourced to the seller's or lessor's place of business in this state. The location of where the purchaser may take or use the product is not determinative of where the sale is sourced. <br /> <br /> For the sale of a product made from a place of business within the physical limits of this state that is delivered by the seller to the purchaser or the purchaser's designee outside the physical limits of this state or to a carrier for delivery to a place outside the physical limits of this state, the sale is not sourced to this state. For a lease or rental of property, excluding transportation equipment, delivered to the lessee or renter in this state that requires recurring periodic payments, the periodic payments made subsequent to the first payment that cover periods where the primary property location is no longer within the physical limits of this state are not sourced to this state. The lessor is not liable for sales and use taxes on the periodic payments that cover periods where the primary property location is no longer in this state. The primary property location is determined in accordance with the rules governing the lease or rental of tangible personal property imported into this state. <br /> <br /> For the sale of repairing of tangible personal property or computer software; laundering or dry cleaning of tangible personal property; and installing of tangible personal property that remains tangible personal property after installation; and installing of computer software, made from a place of business within the physical limits of this state where the serviced tangible personal property or computer software is delivered by the seller to the purchaser or the purchaser's designee outside the physical limits of this state or to a carrier for delivery to a place outside the physical limits of this state, the sale is not sourced to this state.<br /> <br /> This amendment provides that the sale of direct mail is sourced as follows: <br /> <br /> (1) For the sale of advertising and promotional direct mail and other direct mail made from a place of business in this state to a purchaser where delivery is made by the seller to a carrier or United States postal service location for distribution or delivery to direct mail recipients within the physical limits of this state, the sale is sourced to the seller's place of business; <br /> <br /> (2) To the extent the seller knows based on information provided by the purchaser showing the jurisdictions to which the direct mail will be delivered to recipients in another state, the portion of the sales price that equals the percentage of direct mail delivered to recipients in another state is not sourced to this state; <br /> <br /> (3) In lieu of providing the delivery information, a purchaser may provide the streamlined certificate of exemption to claim the direct mail exemption for the portion of the sales price that equals the percentage of direct mail delivered to recipients in another state; and <br /> <br /> (4) In the absence of bad faith, where the seller sourced the sale according to the delivery information provided by the purchaser in accordance with this section, the seller is not liable for tax if it is determined the purchaser provided incorrect delivery information.<br /> <br /> A sale of a prepaid calling service, or a sale of a prepaid wireless calling service, is sourced in accordance with the following: <br /> <br /> (1) The sale of a product made from a place of business within the state and delivered to a purchaser within the state, when sold from a place of business within the physical limits of this state; and <br /> <br /> (2) The retail sale of a product from out of this state into this state, when sold from out of state into this state. However, in the case of a sale of prepaid wireless calling service, the rule provided when a seller is without sufficient information to determine which sourcing requirement applies includes as an option the location associated with the mobile telephone number.<br /> <br /> AMENDMENT #2 makes the following changes:<br /> <br /> (1) Provides that there must be allocated and distributed to the counties and municipalities an amount substantially equal to the amount that would have been allocated to the counties and municipalities but for the temporary exemption from sales tax applicable to the retail sale of food and food ingredients between 12:01 a.m. on August 1, 2023, and 11:59 p.m. on October 31, 2023. This allocation must be based on the reporting of exempt sales of food and food ingredients during the exemption period and any other data or information the commissioner deems relevant; and<br /> <br /> (2) Changes the effective date for Sections 26, 27, 28, 30, 31, and 32 of this bill to July 1, 2024.<br /> <br /> AMENDMENT #3 clarifies that in addition to a taxpayer that meets certain gross sales threshold and receipts factor threshold being authorized to make an election concerning the apportionment of net earnings and net worth, and tax liability associated with certain certified distribution sales, under the Excise Tax Law of 1999, a taxpayer that is an affiliate of such taxpayer may also make such election. Currently, a taxpayer meets the receipts factor threshold if the taxpayer's receipts factor exceeds 10 percent. This amendment revises that provision to provide, instead, that a taxpayer meets the receipts factor threshold if the taxpayer's receipts factor exceeds 7.5 percent and more than 50 percent of the taxpayer's sales in this state are certified distribution sales. Under present law, a taxpayer making an election must annually pay the commissioner of revenue an excise tax on the total amount of certified distribution sales excluded from the numerator of the taxpayer's receipts factor. This amendment changes that to a gross receipts tax.<br /> <br /> NOTE: This amendment adds four new undesignated Sections to this bill. This amendment assigns one undesignated Section an effective date of January 1, 2025, and one or more other undesignated Sections an effective date of January 1, 2024.<br /> <br /> ON APRIL 19, 2023, THE SENATE SUBSTITUTED HOUSE BILL 323 FOR SENATE BILL 275, ADOPTED AMENDMENT #4, AND PASSED HOUSE BILL 323, AS AMENDED.<br /> <br /> AMENDMENT #4 makes the following changes to this bill:<br /> <br /> (1) Clarifies that unused credits given pursuant to the Excise Tax Law of 1999 and the Franchise Tax Law of 1999, which are earned in tax years ending on or after December 31, 2008, may be carried forward for 25 years;<br /> <br /> (2) Clarifies that when determining the apportionment formula under the Excise Tax Law of 1999, for tax years ending on or after December 31, 2023, net earnings for a qualified member of a qualified group must be apportioned to this state by multiplying the earnings by a fraction, the numerator of which is the property factor plus the payroll factor plus three times the receipts factor, and the denominator of the fraction is five; and<br /> <br /> (3) Clarifies that when determining the apportionment of net worth under the Franchise Tax Law of 1999, for tax years ending on or after December 31, 2023, the net worth for a qualified member of a qualified group must be apportioned to this state by multiplying such values by a fraction, the numerator of which is the property factor plus the payroll factor plus three times the receipts factor, and the denominator of the fraction is five.<br />