Tennessee issues guidance regarding nexus and apportionment

Tennessee's 2015 franchise and excise tax guide provides additional information that companies operating inside and outside Tennessee should review and plan accordingly in advance of 2016.

1. Economic nexus standard - expanding criteria under which an out-of-state vendor may incur nexus
2. Apportionment formula - changed apportionment formula by triple-weighting the sales factor
3. Market-based sourcing - additional information and clarification regarding application of market-based sourcing for sales other than tangible personal property
4. Distribution apportionment incentive - special elective apportionment rule for taxpayers who sell very large volumes of product to regional distribution

Economic Nexus Standard

For tax years beginning on or after January 1, 2016, out-of-state businesses not already subject to Tennessee taxes will be subject to franchise and excise taxes to the fullest extent allowed by the Constitution. Such nexus includes, but is not limited to, any of the following:

• The taxpayer is organized or commercially domiciled in Tennessee;
• The taxpayer owns or uses its capital in Tennessee;
• The taxpayer has a systematic and continuous business activity in Tennessee that has produced gross receipts attributable to customers in Tennessee; or
• The taxpayer has a bright-line presence in the state. A person has a bright-line presence in this state for a tax period if any of the following applies:
  • 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% 

Triple-Weighting of Sales Factor

For tax years beginning on or after July 1, 2016. the apportionment formula consists of the property factor, plus the payroll factor, plus three times the receipts factor, and the denominator is five (5).

Market-Based Sourcing

For tax years beginning prior to July 1, 2016, sales of other than tangible personal property are allocable to Tennessee if a greater proportion of the earnings-producing activities are performed in Tennessee. Effective for all tax years beginning on or after July 1, 2016, sales, other than sales of tangible personal property, are in Tennessee if the taxpayer’s market for the sale is in Tennessee. (see page 52 of the guide for details on when the taxpayer's market is in Tennessee)

Distribution Incentive

Effective January 1, 2016, a taxpayer that meets the gross sales threshold and the receipts factor threshold (one billion dollars or the taxpayer's receipts factor exceeds 10%) during the tax period qualifies for the application of a new distribution incentive and may elect the incentive by filing an election form with the Department on or before the due date of the tax return for the period for which such election is to take effect. The election remains in effect until revoked by the taxpayer or until the taxpayer no longer qualifies for the election.

"Certified distribution sales" means sales of tangible personal property made in Tennessee 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 Tennessee. (see page 53 of guide for details on when the incentive applies)