By Tom Humphrey,
June 4, 2012

Two bills on business taxation that were part of Gov. Bill Haslam’s legislative package this year provide an interesting contrast both in presentation and outcome.

The most interesting was a proposed rewrite of the state’s business tax code that appeared relatively late in the session, then was dropped like a proverbial hot potato after complaints arose.

The idea, according to some folks involved, was to try to address some legal concerns about inequities in the business tax, a local government levy that requires businesses to be licensed and taxes paid. Businesses obtain licenses through their county clerks, but since 2009 have been required to send their taxes to the Department of Revenue instead of the clerks.

Three of the state’s 95 counties – Clay, Claiborne and Morgan – do not have a business tax, according to the department’s website. Three other counties have reduced tax rates, according to Barbara Sampson, deputy commissioner of the Tennesse Department of Revenue.

Most cities have a business tax. A few don’t.

Thus, since the tax is not uniform statewide, the possibility of lawsuits exists.

Enter Senate Bill 3104, originally filed as a “caption bill,” meaning it was basically a placeholder to be transformed later via amendment. The amendment was scheduled for an April 4 meeting of the Senate Tax Subcommittee and draft copies were provided to various interests several days in advance.

The draft amendment ran some 50 pages. The gist was to apply the tax statewide with funds distributed back to county governments by the state.

Sampson says the changes were proposed “with the purpose of providing greater uniformity and leveling the playing field between in-state and out-of-state businesses while also relieving an estimated 30,000 small businesses from filing business tax returns.”

The relief would have come through raising the exemption level, now at $3,000, to $5,000.

Sampson says there was also a provision “clarifying the payment of tax by businesses that maintain a location outside the state but compete directly with businesses that maintain a location in the state.”

Wayne Scharber, a vice president of the Tennessee Chamber of Commerce and Industry, thought Revenue Commissioner Richard Roberts’ proposal was worthy legislation bringing uniformity and fairness statewide.

“If we have a fair and consistent application of existing taxes, that lessens any need for other taxes to be increased,” he said.

Franchise and excise taxes are of more concern to companies than the relatively modest business tax. If uniform application of existing taxes brings in another $50 million, Scharber said, “that’s $50 million that won’t be needed from franchise and excise.”

Others, however, reacted with some alarm to a major overhaul of business taxes being produced as the Legislature was winding down. Feeling blindsided, they were reminded of the Department of Revenue annually producing a “technical corrections bill” — typically late in the session and with multiple and complex provisions — during former Gov. Phil Bredesen’s tenure.

Among those reminding colleagues was Senate Minority Leader Jim Kyle, D-Memphis, who sponsored those “technical corrections” bills and listened to Republican complaints.

The bill’s sponsor, Senate Majority Leader Mark Norris, R-Collierville, more or less agreed.

“I would say it was a bridge too far,” Norris said. “It was too late, it had too many potential problems, or permutations, and no one had talked to me about it (from the administration).”

So Norris decided not to present it to the subcommittee. The bill is likely to return next year – perhaps in modified form and presented much earlier in the session.

“The department decided not to pursue the legislation during this session, but is still examining ways in which the tax can be made easier to administer for both taxpayers and the department,” said spokesman Billy Trout in an email.

A contrasting department success story was SB2233, a Department of Revenue-produced measure aimed at getting more businesses to file their franchise and excise taxes electronically. The bill was drafted, filed and shopped around among interested parties early in the legislative process.

The bill calls for charging businesses that don’t file electronically a $25 “handling fee” and provides a $500 penalty to those required to file electronically that fail to do so.

Commissioner Roberts testified before the committee, and agreed to a four-year implementation of the plan, as well as several amendments offered by lawmakers. The additions assure the department won’t be penalizing what one lawmaker called “mom and pops” who have difficulties filing online; has the discretion to waive the requirement; and that businesses with locations in more than one jurisdiction won’t be subject to multiplied penalties.

Jim Brown, who lobbies for the National Federation of Independent Business, said the initial version provided a “carrot and stick” approach, but “the stick could have been a club to a number of small operators.”

NFIB backed the electronic filing bill with the changes, and now is “grateful to have the time to review” an anticipated rewrite of the business tax law.

The Legislature’s Fiscal Review Committee staff estimated the positive financial impact of the electronic filing bill to the state at about $3.5 million, mostly in savings.

The staff has not estimated the fiscal impact of the business tax bill, though Sampson says the changes in revenue would not be significant.

Norris said the department made an “innocent commission” in handling the business tax bill – he didn’t want to use the word “mistake” – but such things are to be expected.

“They live and learn, like the rest of us,” he said.

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