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Business Tax

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Questions Related to Licensing

1. Who will issue the business tax license and what is the fee for a new license?

The county clerks and city officials issue business licenses, and taxpayers must pay an initial fee of $15 for the license. A business must get two licenses if it is located within the limits of a Tennessee city that has enacted the business tax. One license must be from the city and the other from the county. If the taxpayer is not located within a Tennessee city's limits, or the taxpayer is located inside the limits of a city that has not enacted the business tax, the taxpayer must only get a business tax license from the county.

Starting January 1, 2014, out-of-state taxpayers with no business locations in the state must obtain a Tennessee account number from the Department of Revenue. No city license will be required except for businesses in Classification 4. Classification 4 entities will require a county and city business license in any jurisdiction in which they receive $50,000 or more in gross receipts during the tax reporting period.

Also effective January 1, 2014, businesses located in Tennessee that have between $3,000 and $10,000 in annual sales must get minimal activity business licenses from the local county clerk or a city business tax official. Taxpayers located outside Tennessee and who have no business location in the state will not need a minimal activity business license.

Out-of-state companies are not subject to the state tax unless their sales are more than $10,000 within a jurisdiction. For instance, they would only have to report sales for counties where sales exceed $10,000.

2. Will businesses receive annual license renewal mailings?

Taxpayers no longer receive annual license renewal forms in the mail. To renew existing business licenses, taxpayers must first file their annual county and/or city business tax return with the Tennessee Department of Revenue and pay the tax due.

Once the tax return and payment are processed and posted to the taxpayer's account, the Department of Revenue will notify the county or city business tax official that a renewal business license can be issued.

Qualifying taxpayers must get minimal activity business licenses each tax reporting period for $15 per license annually.

3. Who issues licenses to contractors that are doing business outside the county and/or city where they are domiciled?

The county clerks and/or city officials where the contractor is doing business are responsible for issuing business tax licenses.

Contractors living outside Tennessee with no state business location must have a state business account number to report sales in counties where sales fall between $10,000 and $50,000. They must obtain a county license in counties where they have a business location where sales exceed $50,000. They also must obtain municipal business licenses from each jurisdiction where the contractor has $50,000 or more in sales for the tax reporting period.

4. Will out-of-state contractors submit escrow funds or bonds to the county clerks or city officials when issued a license? (Tenn. Code Ann. Section 67-4-707)

Yes, businesses in Classification 4(A) (i.e., contractors) located outside Tennessee, must, when applying for a business tax license, execute a bond or establish an escrow account with the county or municipality where they are applying. The county or city may contract with the Department of Revenue to receive such bonds.

The state may collect against the surety company up to the amount of the bond to satisfy a taxpayer's business tax liability in the event of failure by the taxpayer to pay its liability.

5. Will Classification 5 taxpayers need to register with the Department of Revenue in addition to registering with the Department of Financial Institutions as an industrial loan and thrift company?

Yes, Classification 5 taxpayers must also file an application for business tax license form with the Department of Revenue in order to register. The company will then receive an account number to use when filing the annual business tax return with Department of Revenue.

6. If a business opens one to two months prior to their fiscal year end, will the business be required to file a return for those one to two months and renew its license or can the license be rolled over to the next period?

The business must get a business tax license for the short period, file a tax return with the department for the short period when it becomes due and then the local government will renew the license. There is no fee for the annual renewal of an existing license.

Questions Related to Tax Return Data

7. Will the tax rates change?

The tax rates will essentially remain the same for each classification despite some changes to the business tax under the 2013 Uniformity and Small Business Relief Act, which becomes effective January 1, 2014. One exception will be taxpayers selling gasoline and/or diesel fuel at wholesale, which will be placed into a new Classification 1E at the rate of 0.0003125.

All state taxes (formerly county taxes) in jurisdictions that had reduced rates will now be at the standard rate. Cities that had a reduced rate before the law change will still have the option to keep the reduced rate. New cities that adopt business tax must use the standard rate.

Sellers in Classifications 1 (except for 1D and 1E), 2 and 3 will be classified as either a wholesaler or a retailer based on the taxpayer's primary sales activity. All sales by a wholesaler will be subject to tax at the wholesale tax rate for the wholesaler's designated classification. All sales by a retailer will be subject to tax at the retail tax rate for the retailer's designated classification.

8. How does a taxpayer determine if it is a wholesaler or a retailer?

Whether a taxpayer is a wholesaler or a retailer for business tax purposes is determined annually based on whether the taxpayer is primarily engaged in making retail sales or wholesale sales. If more than 50 percent of the taxpayer's sales for the tax year consist of wholesale sales, the taxpayer is classified as a wholesaler. If 50 percent or more of the taxpayer's sales for the tax year consist of retail sales, the taxpayer is classified as a retailer. State law (Tenn. Code Ann. Section 67-4-702 (15) & (23)) defines "retail sale" and "wholesale sale."

9. Are businesses still classified based on their dominant business activity?

Yes, businesses continue to be classified according to their dominant business activity. "Dominant business activity" is defined as "the business activity that is the major and principal source of taxable gross sales of the business."

10. Will the minimum tax change?

The minimum tax for taxpayers in Classifications 1 through 4 will be $22. The minimum tax for taxpayers in Classification 5 will be $450, and the maximum tax for taxpayers in Classification 5 will be $1,500. All entities registered to do business in Tennessee must pay at least the minimum tax.

11. How will refunds and amended returns be handled now that the Department of Revenue has taken over the administration of the tax returns?

Returns filed with the department will be amended or refunded through the department. Any prior period returns filed with local governments will be amended or refunded through local governments like they were before the law change.

12. Will Classification 4 businesses still be allowed to deduct payments made to subcontractors?

Yes, in accordance with state law (Tenn. Code Ann. Section 67-4-711), contractors can deduct amounts paid to a subcontractor provided the subcontractor has a business tax license or a contractor's license. A contractor must submit to the state, on a designated form filed with the tax return, the license number of the subcontractor and must maintain a copy of the subcontractor's license in its records. The subcontractors are also required to file business tax returns with the Department of Revenue. The change applies to all contracts issued on or after October 1, 2009.

13. Will taxpayers continue to receive the personal property tax credit? If so, how is the credit reported on the return? Are receipts for payments made required to be attached to the return?

Yes, the credit for personal property tax paid will be allowed to offset both the state and local portion of the business tax. However, the credit is limited to an amount that equals no more than 50 percent of the total business tax liability. The taxpayer will deduct personal property taxes paid to the city on the city business tax return and personal property taxes paid to the county on the county business tax return. The department will not require receipts to be attached to the returns. However, the taxpayer is responsible for keeping records of its personal property tax payments for audit purposes.

14. How will the state handle returns that are incomplete or improperly filed?

Returns will be processed and the taxpayer will be notified of any errors, including being assessed for any tax, penalty or interest that might be due as a result of the error. State law allows the department to charge penalty and interest because of late tax returns or late payment of tax due.

15. Will the state issue a refund in the event of an overpayment?

The state will issue refunds of overpaid taxes if requested by the taxpayer. Otherwise, overpayments will be applied to the amount of taxes owed next year.

Questions Related to Filing of Returns

16. How often must returns be filed?

Business tax returns must be filed annually.

Before January 1, 2014, returns were filed by classification and each classification had its own specific filing date. But, starting January 1, 2014, business tax returns will be filed by the taxpayer in conjunction with its fiscal/federal tax year, thanks to a change in state law through the 2013 Uniformity and Small Business Relief Act. The due date of the return and tax payment will be no later than the 15th day of the fourth month following the end of the taxpayer's fiscal/federal tax year.

During the transition period where taxpayers are being converted to fiscal/federal tax year filing, it is possible that a taxpayer will be required to file business tax returns for periods that are shorter or longer than one year. Taxpayers will be notified by the Department of Revenue when this is the case. The due date for the return and tax payment will remain no later than the 15th day of the fourth month following the end of the short or extended filing period.

17. How many returns must a taxpayer file per location?

A business with a location within the limits of a Tennessee city that has a business tax must file two business tax returns for that location - one return for the city and one return for the county. A business with a location outside the limits of any Tennessee city or inside the limits of a city that does not have a business tax is only required to file one business tax return for that location - one return for the county.

A business located outside Tennessee that has no business location in the state will file only a state business tax return each year. The exception for this is a Classification 4(A) business (e.g. contractor) with compensation that exceeds $50,000 in one jurisdiction. Once an out-of-state contractor's compensation from contracts performed in one county and/or one municipality exceeds $50,000, then the contractor must obtain a business license from the local business tax official(s) and file a business tax return with the Department of Revenue for the jurisdiction(s).

18. If a taxpayer has multiple locations in the same municipality, can it consolidate the locations into one return?

Yes, if a taxpayer has multiple locations in one jurisdiction, the taxpayer must make a request to the Commissioner of Revenue to file a consolidated return. Even if approval is granted to file a consolidated return, each location's gross receipts must be accounted for separately on the consolidated return, and a separate license must be obtained for each location.

19. If a contractor must file an additional return for a location outside of its resident city and/or county, how will the Department of Revenue distinguish between the multiple returns?

If a contractor located in Tennessee receives more than $50,000 of compensation from contracts in a different county or city than his home city or county, then the contractor must register for a business license in that location and file a business tax return for that location. The contractor will be required to identify the business location when making application for the business license. The contractor's account will be registered with the Department of Revenue based on that location. There will be a "jurisdiction" field on the business tax return that will be preprinted with the location so the contractor and the department will know which location the contractor is filing for.

If a contractor is located outside the state and has no physical business location in Tennessee, the contractor will need to register with the Tennessee Department of Revenue for a state Classification 4 account number. Once an out-of-state contractor's compensation from contracts performed in one county and/or one municipality exceeds $50,000, then the contractor must obtain a business license from the local business tax official(s) and file a business tax return with the Department of Revenue for the jurisdiction(s).

20. Will taxpayers continue to receive their return in the mail before the filing due date or must taxpayers file business tax returns electronically?

All business must file their business tax returns and make tax payments electronically. Paper business tax returns will no longer be mailed to taxpayers prior to the due date of the return.

21. Are taxpayers required to pay any taxes due directly to the state?

Yes, taxpayers will pay the amount due together with the return directly to the Department of Revenue. Payments must be made electronically.

22. If a taxpayer is going out of business or ceasing to exist, must it file a final return with the Department of Revenue?

Yes, a final return is required of any taxpayer going out of business. There will be a "final return" box to check on the return. Business tax law requires that the final return from an entity that is going out of business or ceasing to exist must be filed no later than 15 days after the date of selling or shutting down the business.

Questions related to transient vendors, antique malls, flea markets, craft shows, antique shows, gun shows and auto shows.

23. Who is responsible for collecting transient vendors, antique malls, flea markets, etc., taxes and fees?

County clerks and city officials collect taxes and fees from these entities.

Questions related to compliance efforts by the Department of Revenue

24. How will the state know if a business has paid their local personal property tax?

The Department of Revenue will be responsible for auditing the tax returns and verifying all deductions and credits. The department will be performing office and field audits, including matching tax return data with data from other state and local agencies.

25. Will the state be the party to generate tax notices/assessments for all the businesses?

Yes; the state will issue notices of assessment to businesses for underpayment of taxes and/or failure to file a tax return.

26. Can taxpayers enter into a voluntary disclosure agreement for business taxes?

Taxpayers not yet registered and filing business tax returns are strongly encouraged to request a voluntary disclosure agreement from the department.

27. What is the procedure to enter into a voluntary disclosure agreement?

Before being contacted by the department or any local jurisdiction regarding business tax, the taxpayer, or its representative, must notify the department in writing of the taxpayer's desire to enter into a voluntary disclosure agreement. Once the letter is received, the department will draft an agreement and send it to the taxpayer or its representative for approval. The signed agreement will be sent to the taxpayer or its representative within 15 days from receipt of the original letter.

28. How does a taxpayer enter into an agreement?

To enter into the voluntary disclosure program, a letter must be written to:

Tennessee Department of Revenue
Discovery Unit - Business Tax
P.O. Box 190644
Nashville, TN 37219

29. What should be put in the letter?

The letter should state what activities the company does in the state and if the company is registered to pay for any taxes in Tennessee. The letter should identify the taxpayer's dominant taxable business activity, have a basic description of that activity and note the business tax classification the taxpayer believes applies. Every request must state that neither the state, nor the county clerk nor the municipal official has contacted the company.

30. What is the look-back period?

For business taxes, it will depend on the business' classification and reporting year. The look-back period is based on when the return is due. The department is currently allowing businesses to provide a spreadsheet for the reporting periods that should have been filed within the last three years from December 31 plus the most currently completed reporting period, if applicable.

The look-back period may be extended to at least six years for those businesses that do not voluntarily come forward to register and file for business tax purposes. In addition, a mandatory penalty of up to 25 percent will be assessed on any tax due.

31. Does the department waive penalty and interest?

For voluntary disclosure purposes, in most instances, the department will agree to waive the penalty associated with the non-filing. However, interest must be paid.

32. Does the taxpayer have to file returns?

For voluntary disclosure purposes, the department prefers a spreadsheet that includes gross sales from all sources, net sales subject to business tax, allowable deductions and/or personal property tax credits broken down by each filing period. The taxpayer will also need to provide a breakdown of the amount of both wholesale and retail sales. A standard schedule is available on the department's web site.

33. Who do I contact for further questions regarding voluntary disclosure agreements?

Please call the Discovery Unit at (615) 741-8319.