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Advertising materials that are printed outside Tennessee then subsequently shipped to Tennessee for temporary storage at a taxpayer’s distribution center before being distributed outside the state are not subject to Tennessee use tax.  If the materials are shipped from the distribution center in Tennessee to locations within Tennessee, the use tax is imposed. The use tax liability for printed advertising materials remaining in Tennessee is determined based upon the “entire cost” of designing and printing the materials.This includes costs paid to design and develop the advertising materials, printing costs, transportation costs, and any other expense paid by the taxpayer to produce the materials, regardless of where the expenses were incurred.If the state where the advertising materials are printed imposes use tax on the advertising materials and the taxpayer pays the use tax, the amount of tax paid to that state can be credited against Tennessee use tax due.  (Revenue Ruling No. 12-31, Tennessee Department of Revenue, November 29, 2012)

(06/03/2013)

Freezer racks used at a food production facility qualify as industrial machinery and are therefore exempt from Tennessee sales and use tax.  The freezer racks qualify as equipment necessary to the taxpayer’s processing operation because they allow the taxpayer to freeze products in an efficient manner. The freezing of food products that the taxpayer produces, along with keeping the products in a frozen condition, constitutes processing for purposes of the industrial machinery sales and use tax exemption. The maintenance of the products in a frozen state, and therefore the manufacturing process, continues until the products are removed from the racks. The freezer racks don’t qualify as storage because at least 90% of their use occurs during the manufacturing process. (Letter Ruling No. 13-02, Tennessee Department of Revenue, January 9, 2013)

(06/03/2013)

In April 2013, the Consumer Financial Protection Bureau (CFPB) ruled that unclaimed property laws in Maine and Tennessee that deem gift cards as abandoned property if not used within a certain period are preempted by federal law. Under the Electronic Fund Transfer Act and the CFPB’s Regulation E, the CFPB is permitted to “make a preemption determination” as to whether the rules conflict with state laws pertaining to the “expiration dates of gift certificates, store gift cards or general-use prepaid cards.” Federal law prohibits the sale of a gift card that expires sooner than five years after the date when the card was loaded. However, unclaimed property laws in Maine and Tennessee consider some gift cards to be abandoned property as early as two years from the date of purchase. “Commenters unanimously agreed that a state law that would force consumers to retrieve their unused gift cards’ value from the state, rather than from the issuers, would be less protective than federal law,” the CFPB said.  (Bureau of Consumer Financial Protection, Docket No. CFPB-2012-0036)

(05/23/2013)

The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013.  If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes.  Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.

 

Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.

 

States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.

 

To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.

 

-       A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

-       A single audit of a remote seller for all state and local taxing jurisdictions within that state

-       A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

-       Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.

-       Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.

-       Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.

-       Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.

-       Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.

-       Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.

-       Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.

 

For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.

 

On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.

 

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.

 

UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet.  The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights.  For more details on the principles, click here to see the House Judiciary Committee’s press release.

 

We are continuing to track the activities of these bills.  We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage.  Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates. 

 

The text of the bill passed by the Senate can be viewed here.

 

For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.

 

(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)

(09/20/2013)

The Tennessee Department of Revenue ruled that reusable specialty containers used to transport parts that are component parts of the item being manufactured from a storage facility to an assembly line are exempt from sales and use tax as industrial machinery.  The taxpayer is a manufacturer fabricating products for resale, and the containers are only used to transport component parts from the storage facility to the assembly line.  Tennessee’s definition of "industrial machinery" includes equipment used to transport raw materials from storage to the manufacturing process.  The taxpayer does not use the containers to store raw materials or move parts around the storage facility. (Letter Ruling No. 12-16, Tennessee Department of Revenue, August 2, 2012)

(10/23/2012)

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