Tennessee Seeks to Adopt Triple Weighted Sales Factor for Apportionment Purposes


Two companion bills introduced in the Tennessee legislature on February 2, 2015—Senate Bill 324 and House Bill 213 filed by Tennessee Senate Majority Leader Mark Norris and Tennessee House Majority Leader Gerald McCormick respectively—seek to change Tennessee’s method of apportioning income and net worth of multi-state businesses (including corporations and limited liability companies) operating in Tennessee. The legislation would significantly benefit businesses headquartered in Tennessee by adopting a triple weighted sales factor effective for tax years beginning on or after July 1, 2016. This legislation would likely also make Tennessee a more attractive location for companies considering the relocation of larger corporate headquarters and manufacturing facilities.

Tennessee currently apportions income using a formula, the numerator of which includes the percentage of in-state to out-of-state property, payroll, and sales of multi-state entities, with the sales factor of the formula being double weighted, and the denominator of which is four (4). This new legislation seeks to triple weight the sales factor in the numerator and change the denominator to five (5). The bills would continue to provide for the inclusion of net earnings of captive real estate investment trust affiliated groups in the formula, including factors of members not otherwise taxable in Tennessee.

The adoption of a triple weighted sales factor for apportionment purposes would place greater emphasis on an entity’s market share inside and outside of Tennessee, with less emphasis being placed upon such an entity’s investments in property or jobs within a particular state. Such a shift in focus, in effect, places Tennessee-based businesses (particularly manufacturers and large corporate headquarters) on a more level field with out-of-state businesses without property or payroll within Tennessee, but which maintain a sales market within the state. This increased weighting on sales is also consistent with trends across the country placing greater emphasis on market-based taxation. For service entities, this augers more disputes with taxing authorities, including Tennessee. For an example of a very large dollar dispute involving cellular services and the issue where services are performed through the use of a Tennessee Department of Revenue variance, see Vodafone Americas Holdings Inc. v. Roberts, a case presently before the Tennessee Supreme Court in which Waller filed an amicus brief for the Committee on State Taxation (COST).

Waller will monitor the progress of SB324 and HB213 in the Tennessee legislature. For additional information, please contact Chris Wilson, Leigh Griffith or Mike Yopp in Waller’s State and Local Tax practice or James Weaver or Jeffery Parrish in Waller’s Government Relations practice at 615.244.6380 or 800.487.6380.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.