Tennessee Department of Revenue Circulates Draft of

"Technical Corrections" Bill

 

April 2008 

 

Each year, late in the Tennessee legislative session, the Administration and the Tennessee Department of Revenue (TDOR) release what they call the Technical Corrections Bill.  The Bill typically contains multiple targeted changes to state tax law, some small and some not so small, depending on whether you are in the cross-hairs of the bill.  The Bill is scheduled to be released later this week (or next).  A preliminary draft includes proposed changes with significant potential impact on businesses in Tennessee.  Please note that the draft is touted as  "VERY preliminary" and states that "many sections will need to be revised and/or added before the amendment is finalized."

 

Digital Products/iPOD Tax.  The Bill contains sweeping legislation that would subject downloaded sales of digital media, including music videos, motion pictures, news and entertainment programs, music, ringtones, electronic books, etc. to the retail sales tax.  Under current law digitally delivered goods are not taxable unless delivered in a tangible form.

 

Sales Taxes Paid by Lodging Industry.  Under this provision of the Bill, "hotels, motels, inns, and other dealers that offer lodging accommodations" would have to pay sales taxes on items they provide to guests that currently are folded into room rates (linens, bathroom supplies, breakfast bar items, manager's receptions' drinks, in-room coffee, etc.).  Under the Bill, lodging providers with restaurants could avoid paying sales tax on food purchases by offering guests coupons to restaurants that sell and serve the same food to non-guests.  This portion of the Bill would reverse a 2000 decision by the Tennessee Court of Appeals exempting hotels from paying sales tax on such items.

 

Diversified Investing Funds.  The Bill imposes a new requirement on a fund to qualify for the exemption from franchise and excise tax ("F&E Tax") as a diversified investing fund.  No portion of the fund's assets, income, interest, dividends, or gains consist of or are derived from a Family-Owned Non-Corporate Entity (FONCE).

 

REITS Still Target of Department.  As in years past, REITs continue to be a TDOR target. The proposed change would provide for new reporting requirements for financial institutions receiving dividends from over 90 percent-owned (Captive) REITs.  Failure to report will result in the loss of the institution's dividend received deduction and 50 percent penalties.     

 

Transferability of Bad Debt Deductions.  Under the Bill, the transferability of bad debt deductions would generally be restricted to the taxpayer generating the deduction or an affiliate.  Taxpayers would be eligible to deduct bad debts generated by an affiliate only when such bad debts are charged back to the taxpayer by the affiliate.

Regulations on Contractor's Use Tax.  The Bill would specifically authorize the TDOR Commissioner to issue rules and regulations regarding when the installation of specific types of tangible personal property would be deemed to be an improvement to realty.  Parties subject to the contractor's use tax should take notice of this provision, which indicates that TDOR is likely preparing to make regulatory changes in the near future.

 
Biodiesel. The Bill subjects sales of biodiesel fuel to the 17-cent-per-gallon diesel fuel tax.

Exemptions/Credits Lost.  The Bill tightens the definition of a "qualified farmer or nurseryman" able to claim the Code's myriad agricultural sales tax exemptions and does away with F&E Tax credits for investments in federal low income housing programs.  The Bill would do away with a 1999 law that created a process providing for legislative oversight of tax exemptions, including requirements that TDOR report statistics on larger tax exemptions and the Joint Business Tax Study Committee hold regular public hearings on the cost of tax exemptions.

 

Job Creation Tax Credit Oversight.   The Bill tightens oversight of F&E Tax exemptions for businesses creating jobs in economically disadvantage areas or creating new jobs by relocating corporate headquarters to Tennessee.  

 

Business Software.  The Bill proposes to tax, at the retail sales tax rate, the leasing, installation, modification, support or repair of computer software.  This amendment will reinstate the imposition of tax on the foregoing services after the tax was apparently inadvertently omitted from prior amendments taking effect Jan. 1, 2008.  

 

Modifications to Economic Development Incentives.  The Bill continues the efforts of the administration to (i) expand and target incentives and (ii) provide more flexibility for combined activity of the Commissioners of Economic Development and Revenue to extend periods for business to qualify for certain incentives and credits.  

Sale of Property Owned by an Affiliate of an Entity Subject to the Excise Tax.  The Bill would impose the excise tax on any entity or individual not otherwise subject such tax on the gain from the sale of any asset if "[t]he asset was owned, during the twelve-month period immediately prior to the sale, by an affiliate subject  to [excise] tax."

Gift Tax Change.  The Bill also ends the distinction between Class A and Class B donees for Tennessee gift tax purposes.  Gifts to Class B donees will now be treated the same as Class A donees thus allowing for higher gift tax exemptions and lower gift tax rates for gifts to former Class B donees and eliminating a trap for the unwary and simplifying the law.  

Limits on FONCE Exemption.  The Bill would eliminate the current FONCE F&E Tax exemption of those LLCs and LPs with rental real estate, other than single family rental residences, if such rents and other disqualified income exceed one-third of the income of the entity.  Rents from duplexes and other multi-unit residential property, commercial property, and industrial property will no longer generate qualifying income.  Parties with rental real estate currently utilizing the FONCE exemption should take notice of these provisions.  For more information, see the Waller Lansden bulletin at this link.

Expansion of Permitted Owners of a FONCE.  The Bill would permit trusts created during the lifetime of the settler to qualify as a member of a FONCE if all of the beneficiaries were qualified family members.  As drafted, contingent non-family beneficiaries, such as a charity, could disqualify the FONCE.

It is still possible to make suggested improvements or note areas of concern before the Bill is finalized and presented to the General Assembly for consideration or for changes to be made in the Legislative process. The attorneys of Waller Lansden are available to answer any questions that you may have and will continue to monitor this Bill.  For additional information, please contact Leigh Griffith,

Brett Carter or any member of the Waller Lansden Tax practice at 800-487-6380.

 

 

 

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

 

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WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.