*HB7039 by *Chumney. (SB7044 by *Dixon.)
Taxes - Enacts "Tax Reform and Revision Act of 1999." - Amends TCA Title 9; Title 45; Title 48; Title 56; Title 57; Title 61; Title 62; Title 67 and Title 68.
Fiscal Summary for *HB7039 / SB7044
Increase State Revenues - Net Impact:
$362,200,000 FY00
$437,200,000 FY01
Increase State Expenditures - Dept. of Revenue:
Exceeds $3,000,000 Recurring
Exceeds $2,000,000 One-Time
Bill Summary for *HB7039 / SB7044
EXCISE TAX
Tax Imposed:
Present law provides for a 6 percent excise tax on the net earnings of all corporations, cooperatives, joint stock associations and business trusts, organized for profit and doing business in this state, including state chartered or national banks doing business in Tennessee, and including state chartered or federally chartered savings and loan associations doing business in Tennessee.
This bill would extend the 6 percent excise tax to the net earnings of all limited liability companies and limited liability partnerships doing business in Tennessee, except for those exempt from taxation pursuant to section 401(a), 501(c) or 501(d) of the Internal Revenue Code.
This bill specifies in regard to "business earnings," that a taxpayer would not be considered to have business earnings if such taxpayer is engaged exclusively in the buying, selling or holding of securities on its own behalf and not as a broker, and its gains or losses from the sale or exchange of such securities are treated as gains or losses from the sale or exchange of capital assets. This bill would also redefine "compensation" to specifically include compensation arrangements pursuant to a staff leasing arrangement.
Net Earnings and Net Losses:
This bill provides definitions for "net earnings" and "net losses" that correspond to the type of business at issue as follows:
(1) For corporations, limited liability companies treated as corporations and other persons required to file a federal tax return on a federal form 1120 (other than S corporations and unitary businesses): federal taxable income or loss before the operating loss deduction and special deductions, and as adjusted as discussed below.
(2) For S corporations: ordinary income determined under the applicable provisions of the Internal Revenue Code, increased or decreased by items of income or expense specifically allocated to shareholders under the Internal Revenue Code, and as adjusted as discussed below.
(3) For unitary businesses: the combined net earnings or net loss (as determined using the corporation method) for all members of the unitary group with all dividends, receipts and expenses resulting from transactions between members of the unitary group excluded when computing combined net earnings, and subject to the adjustments as discussed below on a combined basis.
(4) For persons required to file a federal partnership return: an amount equal to: (a) the amount of ordinary income or loss determined under the applicable provisions of the Internal Revenue Code, increased or decreased by items of income or expense specifically allocated to partners under the provisions of the Internal Revenue Code; LESS (b) the amount subject to self-employment taxes paid to each partner or member, but not in excess of $72,000 for any one partner or member; and (c) as adjusted as discussed below.
(5) For a trust, estate or any other person doing business in Tennessee and not covered by (1) -- (4): taxable income or loss determined under applicable provision of the Internal Revenue Code, excluding any net operating loss deduction or special deductions similar to those provided in sections 241 -- 247 and 249 of the Internal Revenue Code, as adjusted as discussed below.
Adjustments:
The present excise tax on corporations provides for adjustments to the federal taxable income by way of adding or subtracting certain items therefrom. Similarly, under this bill, the following would be added to a taxpayer's net earnings or net losses:
(1) Except in the case of financial institutions and insurance companies, an amount equal to the sum of compensation paid to employees which exceeds, for any one employee, $72,000 per tax year;
(2) Excise tax imposed by this state to the extent deducted in determining federal taxable income (like present law);
(3) Interest income from obligations defined in section 103 of the Internal Revenue Code, as reduced by allowable amortization (like present law);
(4) Any deduction made pursuant to sections 611 -- 617 of the Internal Revenue Code to the extent the deduction when added with similar deductions in prior years exceeds the cost of the property (like present law);
(5) Any capital loss carrybacks or carryovers, arising in the course of a trade or business and deducted pursuant to section 1212(a) of the Internal Revenue Code (like present law); and
(6) Any expense or depreciation, permitted as deducted in computing federal taxable income solely as a result of lease characterizations permitted under section 168 of the Economic Recovery Tax Act of 1981, which would not have been permitted in the absence of such act (like present law).
Under this bill, the following would be subtracted from net earnings and losses:
(1) Dividends earned by a parent corporation from a subsidiary corporation where such parent owns 80 percent or more of the stock of the subsidiary (like present law);
(2) Any amount included in federal taxable income but not taxable under the laws of this state (like present law);
(3)(A) In the case of entities subject to the excise tax as it presently applies, any net operating loss incurred for fiscal years ending on or after January 15, 1984 (like present law), and in the case of all other taxpayers, any net operating loss incurred for fiscal years ending on or after July 1, 1999. This bill provides for a carryover of net operating loss for up to seven years for a member of a unitary group and up to 15 years for all other persons subject to excise tax; and
(B) There would be added to the net loss as determined for excise tax purposes, all nonbusiness earnings, all interest, dividends excluded from net earnings pursuant to these adjustments and any other income excluded from net earnings pursuant to this provision (like present law);
(4) A portion of the gain or loss of the sale or other disposition of property having a higher basis for Tennessee excise tax purposes than federal income tax purposes measured by the difference in the Tennessee basis and the federal basis (like present law);
(5) Any capital losses incurred during the fiscal year and not deductible under 1211(a) of the Internal Revenue Code (like present law);
(6) Any expense, other than income taxes, not deducted in determining federal taxable income for which a credit against the federal income tax is allowable (like present law);
(7) Any amount included in federal taxable income solely as a result of lease characterizations permitted under section 168 of the Economic Recovery Tax Act of 1981, which would not have been permitted in the absence of such act (like present law);
(8) Any amount of depreciation or other expense which the taxpayer could have deducted in computing federal taxable income had it not made the election to enter into a lease transaction permitted under the Economic Recovery Tax Act of 1981, section 168, which would not have been permitted in the absence of such act (like present law); and
(9) An amount equal to the difference, if any, between the reserve for bad debts allowed under sections 585 and 593 of the Internal Revenue Code, as such sections existed on December 31, 1986, and such reserve as it may have been modified subsequently (like present law).
Apportionment Formula:
Under present law, except as may otherwise be provided, all business earnings are apportioned to this state by multiplying the earnings by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three; provided, that for tax years beginning on or after December 15, 1997, the numerator of such fraction is the property factor plus the payroll factor plus 1.50 times times the sales factor and the denominator of such fraction shall be 3.50 times; and for tax years beginning on or after December 15, 1998, the numerator of such fraction is the property factor plus the payroll factor plus twice the sales factor and the denominator of such fraction is be 4.
Under this bill, unless otherwise provided, all net earnings would be apportioned to this state by multiplying the earnings by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor and the denominator of which is 4. Nonbusiness sales would not be used in the denominator or numerator in any apportionment formula.
FRANCHISE TAX
Tax Imposed:
Present law imposes a franchise tax of 25 cents per $100, or major fraction thereof, of the issued and outstanding stock, surplus and undivided profits of each corporation. The minimum tax payable is $10.00.
Under this bill, the franchise tax, in the same amount as present law, would apply to the net worth of any person doing business in Tennessee (subject to the adjustment discussed below). This tax would not apply to taxpayers who have tax exempt status pursuant to section 401(a), 501(c) or 501(d) of the Internal Revenue Code. This bill would delete present law's minimum tax provision.
Net Worth:
"Net worth" is defined as the difference between the value of a taxpayer's total assets less the taxpayer's total liabilities as such assets and liabilities are shown on the taxpayer's balance sheet. Proper reductions of asset and liability accounts used to determine net worth would be allowed if in accordance with generally accepted accounting principles. Treasury stock would not be considered a part of the net worth of a corporation.
Under present law and this bill, in the case of taxpayers doing business in Tennessee and elsewhere, the measure of the tax is apportioned to Tennessee for the purpose of taxation in the manner set forth herein. This bill would add that for purposes of allocation and apportionment of net worth under this part, a taxpayer would be considered taxable in another state if:
(1) In that state it is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or
(2) The state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.
Standard Apportionment Formula:
Under present law, except as may otherwise be provided, the capital stock, surplus and undivided profits are apportioned to this state by multiplying such values by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3; provided, that for tax years beginning on or after December 15, 1997, the numerator of such fraction is the property factor plus the payroll factor plus 1.50 times the sales factor and the denominator of such fraction is 3.50; and for tax years beginning on or after December 15, 1998, the numerator of such fraction is the property factor plus the payroll factor plus twice the sales factor and the denominator of such fraction shall be 4.
Under this bill, the net worth of a taxpayer doing business within and without this state would be apportioned to this state by multiplying such values by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor and denominator of which is 4. Nonbusiness sales would not be used in the denominator or numerator in any apportionment formula.
This bill would require a taxpayer to pay quarterly payments if such taxpayer has a franchise tax liability of $5,000 or more for the prior tax year or for the current tax year.
Extensions:
Under present law, the commissioner of revenue may grant an extension of time for a taxpayer to file a franchise or excise tax return. For franchise taxes, the appropriate payment for tax, equal to prior year's franchise tax measure times the tax rate in effect for the fiscal year for which the report is filed, must be paid at the time the application for extension is made. If the formula used for determining the formula is not a true indication of the present franchise tax liability or if there was no liability for the previous year, then the appropriate payment is an amount equal to 90 percent of the final tax liability for the year for which the report is filed.
Under this bill, the six-month extension for franchise tax may be granted; provided that on or before the original due date of the return, the taxpayer has paid franchise or excise tax (as appropriate) equal to 100 percent of the liability for the tax year for which the extension is being requested. Where the taxes paid on or before the original due date do not equal 100 percent of the liability for the tax year for which the extension is requested, or if the return is not filed by the extended due date, penalty and interest would attach as though no extension had been granted.
PROVISIONS APPLYING TO BOTH EXCISE AND FRANCHISE TAX
For purposes of the property, payroll and sales factor, property, compensation and total sales, respectively, would not include a taxpayer's share of any specific property, compensation or sales, respectively, of any limited liability company in which such taxpayer has a membership interest.
Under this bill, any person doing business in Tennessee, who licenses the use of patents, trademarks, trade names, copyrights, or other intellectual property to another person in this state, and who is paid royalties or other income based on the sale of products or other activity in Tennessee by the licensee, would source such income to Tennessee for purposes of its apportionment formula.
This bill would authorize the dissolution/revocation of taxpayers that fail to pay excise or franchise tax. Under present law, a corporation's charter may be revoked for failure to pay franchise taxes.
The excise and franchise tax portions of this bill would only apply to accounting periods ending on or after July 1, 1999, but before June 30, 2000. A return for the taxes imposed by this bill would not be required for accounting periods ending on or before June 30, 1999.
A taxpayer not subject to prior excise or franchise tax law, that has an accounting period ending on or after July 1, 1999, would file its first return for the excise or franchise tax based on such period. In the event the accounting period begins before July 1, 1999, and ends on or after July 1, 1999, the taxes computed on the return would be prorated by a ratio, the denominator of which is the number of days in the accounting period and the numerator of which is the number of days from and including July 1, 1999, until the close of the accounting period.
For a taxpayer subject to prior excise or franchise tax law, in the event the accounting period begins before July 1, 1999, and ends on or after July 1, 1999, the tax due for this accounting period would be the sum of:
(1) The franchise or excise tax computed under prior excise or franchise law, multiplied by a fraction, the denominator of which is the number of days in the accounting period and the numerator of which is the number of days from the beginning of the accounting period until and including June 30, 1999; PLUS
(2) The franchise or excise tax computed under this bill, multiplied by a fraction, the denominator of which is the number of days in the accounting period and the numerator of which is the number of days from and including July 1, 1999, until the close of the accounting period.
Under present law, if the allocation and apportionment provisions of excise tax, or the apportionment provisions of franchise tax, do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the commissioner may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more of the factors (property, payroll, and sales) from the formula used to determine the excise tax;
(3) The inclusion of one or more additional apportionment factors that will fairly represent the taxpayer's business activity in this state; or
(4) The employment of any other method to effectuate an equitable allocation and/or apportionment of the taxpayer's earnings.
This bill would expand present law by authorizing the commissioner to modify the excise formula if the taxpayer's net earnings are not fairly represented or the franchise tax formula if the taxpayer's net worth is not fairly represented. This bill would also revise the provision described above in (4) to specify that the petitioner could petition for the use of any other method that would effectuate an equitable allocation and apportionment of the taxpayer's net earnings or losses (for excise tax) or net worth as adjusted (for franchise tax) that fairly represents the extent of the taxpayer's activities in Tennessee.
Also, present law authorizes the commissioner to allocate tax attributes among, and require combined reports from, affiliated groups of corporations. This bill would expand present law by authorizing the commissioner to allocate tax attributes among, and require combined reports from, any two or more persons, organizations, trades, or businesses owned or controlled by the same interests. The commissioner would be authorized to disregard any entity created or transaction made that has no business purpose or was created or made to evade taxes.
Under present law, a modification of the excise tax formula remains in effect until the circumstances that necessitated such modification are changed. Under this bill, such modification would remain in effect until changed or discontinued by the department of revenue.
OTHER PROVISIONS
Under present law a hospital company is a corporation which owns or manages ten or more hospitals or provides health care services at ten or more hospitals. This requirement is met if hospitals are owned (or services are provided by) partnerships or LLCs subject to franchise and excise taxes. This bill would remove that requirement and would apply this provision to all partnerships and LLCs regardless of whether they are subject to such taxes.
This bill would also delete the following special privilege tax rates:
(1) The reduced rate of 1.9 percent on the gross receipts of persons bottling and manufacturing soft drinks, a person who pays this tax is not liable for tax on gross receipts from the sale of such soft drinks outside this state;
(2) The reduced rate of 3 percent on persons who furnish or distribute gas, water, or electric current;
(3) The 1.5 percent reduced rate on persons who manufacture gas or distribute manufactured or natural gas;
(4) The reduced rate of 3 percent on public utilities;
(5) The rate of 37 cents per $100 on the transfer of realty;
(6) The rate of 11.5 cents per $100 on financing statements and liens under the UCC;
(7) The rate of 15 percent on persons selling mixed drinks or setups for mixed drinks; and
(8) The $15.00 tax for family violence shelters on marriage licenses.
This bill would also levy a tax of 6 percent on the gross charge for the following business services: legal, engineering, architectural, surveying, accounting, auditing and bookkeeping, advertising, credit report and collection, mail, reproduction art and stenographic, building services, personnel supply, computer and data processing, management consulting and public relations, detective and protective services, cable television services, research and testing, motion picture production, veterinary, real estate brokerage and agents, landscape services, and advertising in newspapers.
This bill also directs that commissioner of finance and administration to establish a tax rebate program to reimburse low-income residents of the state for the average amount of tax on food, legal services, and real estate brokerage and agent services. This reimbursement would be available to residents who have income of equal to or less that 150 percent of the federal poverty level.
This bill would not result in any tax liability to taxpayers who reorganize their form of business to become an entity which is not subject to the franchise and excise taxes prior to the effective date of these tax revisions.
EFFECTIVE DATE
This bill would take effect upon becoming a law for the purpose of the promulgation of rules and forms. All changes in the franchise and excise taxes would take effect January 1, 2000, and all other provisions would take effect July 1, 1999.
NOTE: In Section 9 of this bill there is a reference to "subdivisions 1-5 above". There are only four subdivisions above and the 5 should be changed to a 4 to reflect this.