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2005 Legislative Summaries

The following are brief summaries of the 2005 legislative changes to statutes administered by or affecting the Tennessee Department of Revenue. The language used is not quoted from the law and should not be used as a substitute for the formal text. For a complete copy of a particular public chapter, please visit the Secretary of State's Web site at www.state.tn.us/sos. For upcoming notices and other information regarding these changes, please visit the department's Web site at www.Tennessee.gov/revenue.

These summaries are organized by subject matter. Some public chapters cover more than one subject and, therefore, appear in more than one section of the summary. Only the portions of a public chapter that are relevant to a particular section of the summary are included in that section.

Franchise and Excise Taxes

Sales and Use Tax

Professional Privilege Tax

Individual Income Tax

Gift Tax

Litigation Tax

Unauthorized Substances Tax

Tobacco Tax

Bail Bond Tax

Tax Administration

Liquor-by-the-Drink

Beer and Bottlers Gross Receipts Tax

Miscellaneous

 

Affordable Housing Credit
Public Chapter 499 creates a new franchise and excise tax credit to promote the creation and preservation of affordable housing for low-income Tennesseans. Financial institutions will receive a credit against their franchise and excise tax liability equal to 5% of a qualified loan or qualified long-term investment made to an eligible housing entity, as defined in the statute. A qualified loan is a loan that is at least 2% below the prime rate, and a qualified long-term investment is an equity investment made for a period of at least five years. Financial institutions will receive a credit equal to 10% of a grant, contribution, or qualified low-rate loan made to an eligible housing entity. A qualified low-rate loan is a loan that is at least 4% below the prime rate.

Effective date: June 22, 2005.
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Decoupling from Federal Qualified Production Activity Income Deduction
Public Chapter 499 decouples Tennessee excise tax from Section 199 of the Internal Revenue Code, which allows a deduction from federal taxes for a specified portion of "qualified production activity income" pursuant to the 2004 American Jobs Creation Act (P.L. 108-357). Any deduction taken pursuant to 26 U.S.C. Section 199 must be added back to the taxpayer's net earnings for Tennessee excise tax purposes.

Effective date: June 22, 2005.
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Franchise Tax Proration
Public Chapter 499 amends Tenn. Code Ann. Section 67-4-2115 to allow for proration of franchise tax in two instances that were previously addressed in the department's rules: 1) if the tax year is closed within less than 12 months of incorporation, domestication or commencement of doing business in Tennessee; and 2) if the taxpayer changes its accounting period covered by the federal return (for example, the taxpayer had been reporting for federal tax purposes on a fiscal year basis and changes its accounting period to a calendar year). No other proration of franchise tax is allowed. Consistent with existing policy, Tenn. Code Ann. Section 67-4-2015 has also been amended to state that there is no proration of excise tax for a return that covers a period of less than 12 months.

Effective date: June 22, 2005.
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Obligated Member Entity Exemption
Public Chapter 499 closes a loophole concerning limited liability entities whose members or partners elect full liability. Generally, Tennessee imposes franchise and excise taxes on all entities that provide limited liability protection to their owners. However, a limited liability company, limited partnership or limited liability partnership is exempt if all of its members or partners elect to be fully liable for the debts, obligations, and liabilities of the entity and file the appropriate documentation with the secretary of state. A number of tax planning techniques have been developed that allow limited liability entities to use this exemption while still providing limited liability protection to their owners. Therefore, the exemption has been amended. Going forward, members or partners can make the same election and create an "obligated member entity." Such members or partners are referred to as "obligated members." In the event that any obligated member or any owner of an obligated member (whether such ownership is in whole, in part, direct or indirect) provides limited liability protection, the obligated member entity is liable for franchise tax and excise tax on the portion of income and equity attributable to that obligated member.

Effective date: Tax periods ending on or after July 1, 2005.
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Uniform Definition of "Affiliate"
Public Chapter 499 provides a uniform definition of an "affiliate" for franchise tax and excise tax purposes. An "affiliate" is: (1) an entity in which the taxpayer, directly or indirectly, has more than a 50% ownership interest; (2) an entity that, directly or indirectly, has more than a 50% ownership interest in the taxpayer; or (3) an entity in which an entity described in (2) directly or indirectly has more than a 50% ownership interest. A noncorporate entity is more than 50% owned if, upon liquidation, more than 50% of the assets of the noncorporate entity directly or indirectly accrue to the entity having the ownership interest.

Effective date: Tax periods beginning on or after January 1, 2005.
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Computation of Net Worth on a Consolidated Basis
Public Chapter 499 makes technical corrections to legislation enacted in 2004 that allows members of an affiliated group to compute their net worth for franchise tax purposes on a consolidated basis if all members of the group make the election. (Forms, instructions, and other information about this election are available on the department's Web site at www.Tennessee.gov/revenue). Public Chapter 499 also provides that the election is not allowed unless each member of the affiliated group closes its taxable year on the same date, except that the election is allowed when a member exits the group during the taxable year due to a change in ownership, merger, or liquidation of the member, in which case the member exiting the group will be excluded from the group and will compute its net worth on a separate entity basis.

Effective date: June 22, 2005.
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Qualified Headquarters Facility Relocation Expense Credit
Public Chapter 499 creates a franchise and excise tax credit equal to the amount of qualified relocation expenses incurred by a taxpayer in connection with the establishment of a qualified headquarters facility. The credit is available if the taxpayer is both eligible for the sales and use tax headquarters facility credit and qualifies for the franchise and excise tax job tax credit in connection with a required capital investment in excess of $1 billion. The total relocation expense credit allowed to a taxpayer cannot exceed $50,000 multiplied by the number of headquarters staff employee positions relocated by the taxpayer to the qualified facility during the investment period. To the extent the amount of the credit exceeds the taxpayer's combined franchise tax and excise tax liability, the amount of such excess will be considered an overpayment of tax for which the taxpayer can receive a refund if requested within the applicable period of time. If the facility is not utilized as a headquarters facility for at least ten years, the taxpayer is subject to assessment of the total amount of the credit or refund taken, plus interest. If a headquarters staff employee position does not remain filled for at least five years, the taxpayer is subject to assessment of the credit or refund taken in connection with the relocation of that position, plus interest.

Effective date: June 22, 2005.
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Jobs Tax Credit
Public Chapter 499 extends the sunset provision applicable to the jobs tax credit found in Tenn. Code Ann. Section 67-4-2109(c) from January 1, 2008, to January 1, 2011.

Public Chapter 499 also expands the jobs tax credit to new high-skill, high-wage jobs in high-technology areas, emerging occupations, or skilled manufacturing even if total net employment is not increased, if the taxpayer failed to meet the net increase requirement due to worker layoffs or reductions where such workers are certified by the U.S. Department of Labor's Division of Trade Adjustment Assistance as having been adversely affected by foreign trade so as to be eligible for assistance under the U.S. Trade Adjustment Assistance Reform Act of 2002.

Public Chapter 499 also allows taxpayers who qualify for the increased jobs tax credit in connection with an investment of $500 million to receive the credit on an annual basis for each tax year, up to a maximum of 10 years, in which the jobs remain filled at wages equal to or greater than 150% of the state's average industrial wage.

Effective date: June 22, 2005.
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Franchise Tax Base
Public Chapter 499 limits the franchise tax base of any manufacturer to the first $2 billion of apportioned net worth or real and tangible personal property owned or used in Tennessee. A manufacturer is one whose principal business is fabricating or processing tangible personal property for resale and ultimate use or consumption off the premises.

Effective date: Tax periods ending after December 31, 2005.
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Financial Institutions
Public Chapter 499 clarifies the language in several statutes that apply franchise tax and excise tax to financial institutions.

Effective date: June 22, 2005.
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Deduction for Qualified Charitable Donations
Public Chapter 98 enacts a new deduction from net earnings for excise tax purposes equal to 75% of the amount donated to nonprofit organizations that are exempt from federal income taxation under Section 501(c)(3)(4)(5) or (6) of the Internal Revenue Code. Donations must be monetary, and the organization must certify to the taxpayer making the donation that it was spent to purchase goods or services subject to sales and use tax and that sales and use tax was actually paid.

Effective date: Tax periods beginning on or after July 1, 2005.
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Credit for Providing Jobs to Persons with Disabilities
Public Chapter 490 enacts a new franchise and excise tax credit for the employment of persons with disabilities who are receiving state services directly related to those disabilities. The credit is $5,000 for each qualifying net new full-time job and $2,000 for each qualifying net new part-time job. A full-time job must be permanent, provide at least 37 ½ hours of work per week for at least 12 consecutive months, and include minimal health care benefits. A part-time job must provide at least 10 hours of work per week for at least 12 consecutive months. The credit is available only to taxpayers who participate in an existing employment incentive program pursuant to which persons with disabilities are being served by certain state agencies listed in the act. To qualify for the credit, the taxpayer must file a plan with the Department of Revenue on or before the last day of the fiscal year in which the employment begins and the Department of Finance and Administration must certify the taxpayer's eligibility for the credit under the act.

Effective date: Tax periods ending on or after July 1, 2006.
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Streamlined Sales and Use Tax
Public Chapter 311 delays the effective date of Tennessee 's legislation to conform to the provisions of the Streamlined Sales and Use Tax Agreement (SSUTA) until July 1, 2007. It also designates a group to study the effects of streamlined sales tax legislation on local governments and small businesses and requires the group to report its findings to the Senate and House Finance, Ways and Means Committees by December 31, 2006.

Effective date: June 6, 2005.

Public Chapter 499 makes technical corrections to previously enacted streamlined sales tax legislation that will become effective on July 1, 2007.

Effective date: July 1, 2007.
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Sales Tax Holiday
Public Chapter 398 establishes an annual sales tax holiday beginning in August 2006. The holiday starts each year at 12:01 a.m. on the first Friday in August and ends at 11:59 p.m. on the following Sunday. During the holiday, the following items are exempt from sales and use tax: 1) clothing with a price of $100 or less per item; 2) school supplies with a price of $100 or less per item; and 3) computers with a price of $1,500 or less per item.

Exempt clothing is defined as human wearing apparel for general use. It excludes accessories such as jewelry or bags, as well as sports and recreational equipment such as baseball gloves. An exempt school supply is defined as an item used by a student in a course of study. The definition contains an all-inclusive list of school supplies. Examples include binders, book bags, calculators, lunch boxes, markers, pens, paper, etc. The following types of items are specifically excluded from the exemption: computer software, clothing accessories, protective equipment, sports and recreational equipment, school art supplies, school instructional material, school computer supplies. The exemption does not apply to items used in a trade or business or to items that are rented.

The bill provides several provisions needed to administer the holiday. For example, it provides that layaway sales qualify for the exemption if final payment is made and the property is given to the purchaser during the holiday or if the layaway order is made during the holiday even if delivery is made after the holiday ends.

The state will reimburse local governments for the loss of local option sales tax on exempt holiday sales.

Effective date: July 1, 2006.
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Electronic Filing
Public Chapter 131 lowers the threshold for mandatory electronic filing of sales tax returns and electronic payment of the tax due. Tenn. Code Ann. Section 67-1-703(b) requires taxpayers whose average monthly liability is $10,000 or more to make payments in readily available funds. In 2002, it became mandatory to file sales and use tax returns electronically if a taxpayer was required to pay its sales and use tax in readily available funds. Electronic filing of these returns has reduced errors and lowered processing costs. Under this public chapter, the requirement to file sales and use tax returns electronically and pay in readily available funds applies to any taxpayer whose average monthly tax liability is $5,000 or more. It also gives the Commissioner authority to waive these electronic payment and filing requirements in extenuating circumstances.

Effective date: The department will provide public notice when the lower threshold becomes effective.
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Food Service Establishments
Public Chapter 499 amends the definitions of "manufacturer" and "industrial machinery" to make it clear that restaurants and other establishments preparing food for immediate retail sale do not qualify for the sales and use tax exemptions provided to manufacturers.

Effective date: June 22, 2005.
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Telecommunications
Public Chapter 499 makes technical corrections to the definition of telecommunication services that was enacted in 2004 for sales tax purposes. It also sets out the circumstances in which a bundled transaction involving telecommunication services, ancillary services, Internet access services, or audio or video programming services such as cable, wireless cable, and direct-to-home satellite television programming services can be unbundled.

Effective date: June 22, 2005.
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Qualified Headquarters Facility Credit
Public Chapter 499 removes the provision under which the sales and use tax credit for establishing a qualified headquarters facility in Tennessee would have expired on December 31, 2006.

Effective date: June 22, 2005.
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Qualified Emerging Industry Facility Credit
Public Chapter 499 makes a sales and use tax credit available to taxpayers that establish a qualified facility to support an emerging industry in Tennessee. The credit is equal to the amount of sales and use tax paid to Tennessee on the sale or use of building materials, machinery, and equipment used exclusively in the qualified facility (except for tax at the rate of 0.5% that is earmarked for education). An emerging industry is one that promotes high-skill, high-wage jobs in high-technology areas or emerging occupations as determined by the commissioner of revenue and the commissioner of economic and community development. Emerging industry does not include manufacturing, warehousing and distribution, call centers, or convention or trade show facilities. To be eligible for the credit, the taxpayer must be subject to franchise and excise tax, make a minimum investment of $100 million in the facility, and create at least 50 high-wage, full-time jobs at the facility with at least minimum health care. A high-wage is equal to or greater than 175% of the average wage in the county or metropolitan statistical area where the facility is located. If the taxpayer does not maintain at least 50 qualifying jobs or the facility is not used to support an emerging industry for at least 10 years, the taxpayer will be subject to assessment of sales or use tax, penalty, and interest that would have otherwise been due and for which credit was taken, but the amount of the assessment will be prorated based on the period of time that the requirements for the credit were met.

Effective date: June 22, 2005.
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Preservation of Historic Properties
Public Chapter 499 rewords the existing franchise tax, excise tax, and sales tax exemptions for companies temporarily holding historic properties (that otherwise are held by nonprofit entities) solely for the purpose of obtaining federal funding for historic preservation. It also creates a new exemption that allows the company to sell tickets to an amusement, such as a theater performance, without collecting sales tax when the same tickets would be exempt if sold by the nonprofit entity.

Effective date: Corrections to existing exemptions effective June 3, 2004. New amusement tax exemption effective June 22, 2005.
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School Book Exemption
Public Chapter 499 creates definitions of "textbook" and "workbook" and exempts them from sales and use tax. This exemption replaces the more limited exemption for "school books."

Effective date: June 22, 2005.
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Animal Bathing
Public Chapter 499 removes the partial sales tax exemption for bathing animals. Animal bathing is subject to sales tax based on 100% of the amount charged for the service. Bathing of animals by veterinarians for medical purposes remains exempt from sales tax.

Effective date: June 22, 2005.
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Transaction Accommodation Fees
Public Chapter 499 creates an immediate credit equal to the amount of sales tax otherwise due on transaction accommodation fees, defined as charges made by a franchised motor vehicle dealer to a qualified motor vehicle manufacturer in consideration for selling or leasing a motor vehicle produced by the manufacturer to one of the manufacturer's full-time employees. In order for the credit to apply, the motor vehicle manufacturer must qualify for the franchise and excise tax credit provided in Tenn. Code Ann. Section 67-4-2109(c)(2)(H) and the transaction accommodation fee must be separately stated on the face of the invoice from the dealer to the customer.

Effective date: Effective date applies to transactions and assessments occurring on or after June 22, 2005.
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Insurance Companies
Public Chapter 499 clarifies that insurance companies are not exempt from paying sales and use tax on their purchases of tangible personal property or taxable services unless a specific exemption applies.

Effective date: June 22, 2005.
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Record Retention
Public Chapter 499 addresses the requirement that all dealers preserve suitable records of all sales and purchases and maintain adequate records to determine the amount of sales and use tax due. This public chapter makes it clear that the three-year period for keeping such records runs from December 31 of the year in which the associated sales and use tax return was filed, which is consistent with the time period in which the Department may audit those records.

Effective date: June 22, 2005.
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Contractor's Use Tax
Public Chapter 371 creates an exemption from contractor's use tax for any tangible personal property that is provided to a contractor or subcontractor on a temporary basis to be tested. The exemption only applies if tests are conducted at a facility owned by the United States or an agency thereof, and does not apply to equipment or other property used to conduct the test. For purposes of this exemption, the word "testing" is limited to diagnostic, analytical or scientific testing for the purpose of providing information and findings supportive of the aerodynamic, hypersonic, aero propulsion, space, missile, aircraft and aerospace technologies or industries.

Effective date: June 7, 2005.
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Sales Tax Distribution
Public Chapter 212 allows certain counties and cities bordering, crossed by, or near the Tennessee River to elect to be a " Tennessee River resort district" and receive a distribution of the state sales and use tax based on actual collections in lieu of the present distribution of a portion of the state sales and use tax.

Effective date: January 1, 2006.

Public Chapter 505 allocates to Campbell County the sales tax collected within a specifically-described development.

Effective date: July 1, 2005.

Public Chapter 441 allocates to a municipality that has a sports authority the sales tax revenues derived from a minor-league (ECHL or CHA) hockey team.

Effective date: July 1, 2005.

Public Chapter 499 allocates sales tax revenue derived from concessions at a qualifying baseball and softball complex for retirement of the debt on the facility.

Effective date: June 22, 2005.

Public Chapter 448 creates the Courthouse Square Revitalization Pilot Project Act of 2005, under which one municipality (with a population of less than 120,000) in each grand division of the state will be chosen to receive an allocation of sales and use tax for revitalization of its public square. The allocation will consist of the sales and use tax collected within a defined courthouse square revitalization zone.

Effective date: July 1, 2005. Repealed on June 30, 2015.
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Persons in the Armed Forces
Public Chapter 494 creates an exemption from the professional privilege tax for persons who are in the armed forces of the United States, or who are called into active military service of the United States from the reserves or National Guard, for more than 180 days during the fiscal year.

Effective date: June 22, 2005.
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Automatic Extension
Public Chapter 499 creates an automatic six-month extension of time in which to file an individual income tax return. The automatic extension will apply if the taxpayer attaches a written request to his or her tax return filed on or before the extended due date of the return. Taxpayers do not need to file a request for extension separate from the tax return. Taxpayers may use either an extension form from the Department of Revenue or the taxpayer's federal request for extension filed for the corresponding tax period. Interest will accrue on the unpaid amount from the original due date of the return until the tax is paid. Penalty will not apply if the return is filed and the amount due is paid on or before the extended due date and the return includes the request for extension.

Effective date: Tax periods ending on or after December 31, 2004.
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College Savings Plan Exemption
Public Chapter 499 exempts contributions to college savings plans from gift tax regardless of whether the contribution is made to a Tennessee BEST plan or an out-of-state plan.

Effective date: Applies to plans in existence on June 22, 2005, and to plans established after that date.
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Court Fees and Litigation Tax Bill
Public Chapter 429 enacts legislation regarding uniformity and simplification of court fees and litigation privilege taxes. The principal changes made by the bill are to: 1) establish standardized statewide flat fees for court costs for civil and criminal cases; 2) standardize clerk's commissions, including a hold harmless provision to prevent the loss of local government revenues on such commissions; 3) codify the allocation of various taxes among 17 different funds benefiting from those taxes into one code section, with a hold harmless provision for any loss of funding by any fund or program, except the general fund, for any fiscal year; and 4) change distribution of privilege taxes to the various special funds by converting existing distribution into percentages.

Effective date: January 1, 2006.
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Tax Distribution
Public Chapter 499 clarifies that voluntarily paid unauthorized substances tax is allocated to the general fund.

Effective date: June 22, 2005.
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Delivery Sales
Public Chapter 388 amends the current tobacco tax law to impose restrictions on delivery sales. Delivery sales are sales of cigarettes to consumers in this state when either: 1) the purchaser submits the order by telephone or other voice transmission, by mail or other method of delivery, or by the Internet or other online service; or 2) the cigarettes are delivered to the purchaser by mail or other delivery service. The public chapter adds a new reporting requirement for persons making delivery sales to Tennessee consumers and adds provisions applicable to delivery companies that transport cigarettes sold by delivery sale.

Effective date: July 1, 2005.
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Bail Bonds
Public Chapter 378 amends the statute on the duration of criminal bail bonds and recognizances to clarify the operation of original bonds and new bonds that may be required by a trial judge after a finding of guilt or other disposition of the case by such judge. The amendment has no impact on the department's administration of and collections from the bail bond tax because Tenn. Code Ann. Section 67-4-804 still requires that a new bail bond tax be paid on an appeal of a prior conviction even if the bond is a continuation of a previous bond.

Effective date: June 9, 2005.
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Refund Claims
Public Chapter 499 provides that a claim for refund must set forth each ground upon which a refund is claimed, the amount of such refund, the tax period, the tax type, and information reasonably necessary to apprise the Department of Revenue of the general basis for the claim. It makes clear that a refund requested on a franchise and excise tax return, or amended return, properly filed with the Department is a valid refund claim. It also makes it clear that interest on a refund claim accrues beginning 45 days from the date the Department receives proper proof to verify that the refund is due and payable.

Effective date: June 22, 2005.
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Special Investigations
Public Chapter 499 makes it clear that special agents of the Department of Revenue who investigate tax fraud have full police power.

Effective date: June 22, 2005.
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Revenue Enforcement
Public Chapter 499 gives the Department of Revenue authority to sell property by Internet auction, in addition to its current authority to sell property by traditional auction or by public sale under sealed bids.

Effective date: June 22, 2005.
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Liquor-by-the-Drink Licensees
Public Chapter 253 allows a retirement center in Williamson County that meets certain specific requirements to sell liquor for on-premises consumption.

Effective date: July 1, 2005.


Public Chapter 262 allows any municipality within Blount County to sell liquor for on-premises consumption pursuant to a referendum.

Effective date: May 28, 2005.

Public Chapter 422 allows several specifically described recreational and tourist facilities to sell liquor for on-premises consumption.

Effective date: August 1, 2005.

Public Chapter 212 allows businesses within a Tennessee River resort district to sell liquor for on-premises consumption.

Effective date: January 1, 2006.
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Wholesale Beer Price Lists
Public Chapter 499 amends the wholesale beer tax price list provisions to accommodate new types of beer receptacles within the price list structure now established by law.

Effective date: June 22, 2005.
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Definition of "Beer"
Public Chapter 298 amends the definition of beer to include beverages containing alcohol obtained from flavors or other non-beverage ingredients. However, no more than 49% of the overall alcoholic content of such beverage may be derived from the addition of flavors and other non-beverage ingredients containing alcohol.

Effective date: January 1, 2006.
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Extensions of Taxes Earmarked for Litter
Public Chapter 86 extends the date on which certain taxes earmarked for litter control will sunset. Current beer and bottlers gross receipts taxes (Tenn. Code Ann. Sections 57-5-201(a)(2) and 67-4-402(b)(1)) contain temporary taxes on barrels of beer (extra 50 cents per barrel) and bottles of soft drinks (extra 0.4% gross receipts tax rate), respectively, with both taxes earmarked for the highway fund to fund programs for the prevention and collection of litter. Public Chapter 86 extends these taxes for an additional 5 years, until June 30, 2010, or until June 30 of any year following the enactment of any state or federal law which imposes mandatory deposits by consumers on beverage containers sold in Tennessee.

Effective date: June 1, 2005.
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State-shared Taxes
Public Chapter 500 restores to local governments one half of the state-shared taxes that were allocated to the general fund pursuant to Chapter 355 of the Public Acts of 2003.

Effective date: August 1, 2005.
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Probate and Miscellaneous Property Transfer and Ownership Laws Amendment
Public Chapter 99 refines various statutes pertaining to probate, wills, trusts, custodial accounts, guardianship, conservatorship, taxes and healthcare powers of attorney, including amendatory language that broadens the exemption from recordation tax on certain transfers of real estate involving the creation or dissolution of a tenancy by the entirety.

Effective date: April 22, 2005.
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