The Tennessee Business Tax is an excise tax imposed on gross receipts from sales to Tennessee customers. In addition, Tennessee has a bright-line economic nexus threshold.1 Thus, any taxpayer that satisfies the bright-line economic nexus threshold—which includes making sales into Tennessee in excess of $500,000—owes Tennessee Business Tax on those Tennessee sales unless otherwise exempt.2
And one exemption is important to many of our clients. That is the exemption for the sale of self-manufactured goods. Under the statute, the exemption purports to be limited to Tennessee manufacturers.3 Stated another way, sales of goods manufactured in Tennessee are exempt from the Business Tax, but sales of goods manufactured outside Tennessee are not exempt. If applied in this way, the exemption for sales of self-manufactured goods would discriminate in favor of in-state manufacturing in violation of the Commerce Clause.4 Thus, to comply with the Commerce Clause, if a taxpayer sells products into Tennessee that they manufacture outside the state, we believe the receipts from those sales must be exempt, just as they would be as if the products had been manufactured in Tennessee. A number of our clients have been taking this position on their Tennessee Business Tax returns.
In recent litigation, a taxpayer raised this issue, claiming that Tennessee’s Business Tax manufacturing exemption was unconstitutional under the Commerce Clause.5 On November 2, 2021, the Chancery Court found in favor of the taxpayer, however, the court decided the case on statutory grounds and declined to address the constitutional issue.6 Thus, the issue is still unsettled and will likely end up in future litigation.
If you paid Tennessee Business Tax for the 2017 tax year on receipts from goods you manufactured outside of Tennessee, this issue is relevant to you and you should file a protective refund claim by December 31, 2021. Download our quick and easy way to file a protective claim based on this issue. Instructions for filing are available on the Tennessee Department of Revenue's website and in the Tennessee Code. If you have any questions or would like assistance, please contact one of the authors of this Alert, or another member of Reed Smith's State Tax Group.