Tennessee legislation (SB 603 and HB 644) would make some dramatic changes to the income and sales tax nexus definitions used for Tennessee tax purposes. Tennessee, like most states, is finding it more challenging to collect the revenue it needs to fund the state programs. Without a state personal income tax, Tennessee relies on a 9 to 10 percent sales tax and its corporate income tax to generate the needed revenue. Neighboring states, like Georgia, get 50% of their state revenue from individual income tax.
SB 603 and HB 644, outline the “bright-line presence test” as the new method for determining both income tax and sales tax nexus in Tennessee. Any company meeting any one of the three parts of this “bright-line” test is deemed to have nexus in the state. Parts “ii” of this test states that a company with average property in Tennessee of $50,000 will have nexus and part “iii” of the test says that a company with $50,000 of compensation will have nexus in Tennessee. There is nothing new here. The presence of property and payroll in Tennessee has always created nexus so I’m not sure why this needed to be added. However, Part “i” of the bright-line test deems nexus to be created if the company has the lesser of $500,000 in revenue or 25% of its revenue sourced to Tennessee. My guess is that a company that has 25% of its revenue in Tennessee or has $500,000 of sales in Tennessee may already have nexus in the state, so I’m not really sure why this specific provision is necessary for income tax purposes.
In addition, Tennessee is also adopting language that mirrors the “Amazon nexus” language in New York and in other states. Under this language if a remote seller located outside of the state of Tennessee had commissioned sales arrangements with agents inside of Tennessee and the remote seller has $10,000 or more of sales in Tennessee the previous year, then the remote seller is deemed to have nexus in Tennessee for sales tax purposes. This is also called “click through” nexus. If passed, Tennessee would joint about 20 other states that have similar provisions. The effectiveness of these statutes is questionable since many remote sellers just cancel their agreements with the instate sellers so that they can avoid the requirement. Also, Amazon is already registered in Tennessee for sales tax.
Lots of states are passing bills similar to what Tennessee is doing. Even thought they may pass and be signed into law, they must still pass Constitutional muster.
Ned Lenhart CPA
Interstate Tax Strategies, P.C.
