2009 Technical Corrections Bill: Important Tax Changes

The Tennessee General Assembly has passed the Administration’s tax legislation package for this year, commonly referred to as the “Technical Corrections Bill." Governor Bredesen signed the bill into law on June 25. There are a number of significant changes including the following:

Economic Incentives

• Increase in the amount of the standard job tax credit from $2,000 to $4,500 per new job regardless of the county in which the job is created.
• Business plans limited to 12 months from the effective date of the plan in which to make the required capital investment and create at least 25 qualified jobs.
• The amount of job tax credit which may be taken on any return is limited to 50 percent of the combined franchise and excise tax liability shown on the return regardless of the level of Tennessee employment.
• Such changes apply to all business plans filed on or after July 1, 2009.

Franchise & Excise Tax

• Removes “rent” from the definition of passive investment income for purposes of the FONCE exemption and substitutes “rents from residential and farm property,” which eliminates “ents from industrial and commercial property from the definition. “Residential property” will specifically include property with four or fewer residential units and “farm property” will not include acreage used for recreational purposes.
• Provides for a window until October 1, 2009 in which to file the appropriate documentation with the Secretary of State to become an obligated member entity.
• Requires the add-back of the amount in excess of “reasonable rent” to the excise tax base if the rent is from industrial and commercial property owned by an affiliate. “Reasonable rent” is defined as 2% per month of the appraised value of property for property tax purposes.
• Imposes a negligence penalty equal to the greater of $10,000 or 50% of any required adjustment to the return for failure to disclose transactions involving an intangible expense deduction or a captive REIT dividend received deduction.
• Requires the filing of an annual exemption application to claim a statutory exemption from the tax and authorizes a penalty of $1,000 for failure to file.
• All changes, except for the negligence penalty, are effective July 1, 2009. The negligence penalty provision applies to any tax period beginning on or after January 1, 2009.

Sales Tax

• Delays the effective date of the remaining Streamlined Sales Tax legislation from July 1, 2009 until July 1, 2011.
• Provides for the application of sales tax to any computer software maintenance contract which covers software installed on computers in this state.
• Provides that the sales tax exemption for computer software created “in-house” only applies to software created internally by employees and specifically does not apply if created by employees of another company functioning as agents. This legislation specifically addresses and overturns the recent decision of the Tennessee Court of Appeals in Teksystems v. Farr (May 11, 2009).
• Clarifies that sales tax applies to final artwork and advertising materials and does not apply to preliminary artwork used by the advertising agency solely for the purpose of conveying concepts or ideas.
• Provides for an exemption from sales or use tax for (1) computer software developed and fabricated by an affiliated company and (2) computer software repair services and other taxable services performed by an affiliated company. The previous exemption for services rendered between parent corporations and subsidiaries was repealed in its entirety.
• Such changes, except for the exemption for work done by affiliated companies, are effective July 1, 2009. The sales tax exemption for software and services provided by an affiliated company is effective for transactions occurring on or after January 1, 2009.

Business Tax

• Authorizes the Commissioner of Revenue, instead of the county clerks, to collect and administer the local business tax.
• Classifies each business as either a retailer or a wholesaler based on its dominant business activity defined as at least 50% of taxable gross sales.
• Adds a new definition for “resale.”
• Requires contractors to provide the name, address and business license number or contractor’s license number of the subcontractor in order to take the deduction for amounts paid to subcontractors from the tax base.
• Adds a new provision for the deduction of bad debts from the tax base.
• Revises the manner in which personal property taxes are used as a credit against the tax and limits the use of such taxes as a credit to 50% of the tax liability.
• Requires the electronic filing of tax returns and the electronic remittance of the tax if the business is required to file its sales and use tax returns electronically.
• Such changes are effective July 1, 2009.

Other Tax Provisions

• Imposes the professional privilege tax on National Basketball Association and National Hockey League players who are on the roster for games played in this state; the tax is assessed at $2,500 per game with a three-game annual cap; effective July 1, 2009.
• Lowers the threshold for the required electronic payment of sales and use taxes from $2,500 to $1,000; clarifies that estimated payments for franchise, excise tax purposes are required to be remitted electronically if the payment is $2,500 or more; effective June 25, 2009.
• Provides an automatic extension of 12 months in which to file an inheritance tax return; allows a copy of the federal extension to be filed with the state return in lieu of filing for an extension by the statutory due date of the return; effective June 25, 2009.