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STARTING AND OPERATING A BUSINESS IN TENNESSEE Copyright © 2004, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Tennessee has a somewhat unusual tax and legal structure under which businesses must operate. Like most states, Tennessee imposes a corporate income tax (called the corporate excise tax), a franchise tax on corporations, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. However, it is one of the relatively few remaining states that does not impose a general income tax on individuals, instead having only a tax on dividends and interest income. Overall, a 1999 U.S. Census Bureau report showed that Tennessee had the fourth-lowest per capita state tax burden in the U.S., at $1,288 per capita in 1998, versus a national average of $1,762. Only New Hampshire, South Dakota, and Texas had lower total state taxes. And a recent (2004) study by the Massachusetts Taxpayers Foundation, based on 2002 tax data, showed that Tennessee ranked #1, as the lowest-tax state in the nation, in terms of state taxes collected per $1,000 of residents' income, at $84 per $1,000. Also, Tennessee is one of the few states that does not have a state minimum wage law, and is one of a minority of states that has enacted a right-to-work law. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Tennessee in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. This was particularly attractive for small businesses until recently, since, as noted above, Tennessee does not have any general income tax on the income of individuals. Thus, the business income earned as an owner of an LLC or LLP (or other unincorporated business) was generally free of income taxation by the state of Tennessee. However, major new tax legislation, in June, 1999, changed this happy situation. For tax years beginning on or after July 1, 1999, generally, all but a few agricultural and other special LLCs, LLPs, and limited partnerships are now subject to the Tennessee corporate excise (income) tax, just like corporations. However, the business income of general partnerships or sole proprietorships is not affected, and profits from those unincorporated businesses remain free of any state income tax in Tennessee. In addition, legislation adopted in 2000 now provides that limited liability entities may elect out of being subject to excise and franchise taxes, if they agree to be fully responsible (liable) for their debts, and a procedure has been established for LLPs, LLCs, and limited partnerships to make such an election. Since most such entities are set up for the purpose of obtaining limited liability, it is unlikely that the option of waiving such protection in exchange for tax savings will appeal to many companies that are operated in LLC form. At present, the state's economy is relatively robust and improving, in terms of the level of unemployment and other economic measures. For example, in September, 2004, the Tennessee unemployment rate was 5.1%, down from 6.1% a year earlier. This was below the national unemployment rate of 5.4% for the same month. In addition, Tennessee has a relatively low cost of living, compared to national averages. To view the latest federal Bureau of Labor Statistics unemployment rate data for Tennessee or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Tennessee can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. However, unlike most other states, Tennessee does not recognize S corporation tax status for income tax ("excise tax") purposes. Tennessee law provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Tennessee can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No state income tax filing is required, generally, for a sole proprietorship operating in Tennessee, since there is no general state income tax in the state, only the Hall Income Tax, which is a tax on dividends and bond interest income of individuals. Sole proprietorships owned by individuals are exempt from the Tennessee excise tax that applies to the net income of nearly all other business entities, except for general partnerships. See Section IV(c) for information on the Tennessee income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in Tennessee can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for the partnership's debts), may also be formed under Tennessee law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a Certificate of Limited Partnership with the secretary of state, together with a filing fee of $100. A copy of the limited partnership certificate must also be filed with the register of deeds in the county where the limited partnership has its principal place of business. The register of deeds can charge a fee of $5.00 plus 50 cents a page for each page in excess of five. Foreign limited partnerships must also register before being allowed to do business in Tennessee, and must pay a registration fee of $600. Unlike most other states, Tennessee imposes an income tax, the 6.5% corporation excise tax, on the income of corporations and on limited partnerships and all other unincorporated business entities, except sole proprietorships and general partnerships. However, the individual partners themselves are not subject to state tax on their share of partnership business income, since Tennessee does not have an individual income tax, except on dividends and certain bond interest. For information on limited partnership filing requirements, see the contact information for the offices of the Tennessee Secretary of State, listed in Section VI(a). Limited liability partnerships (LLPs) are a new form of partnership permitted under the laws of Tennessee. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Tennessee state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in Tennessee, you must file a registration form with and pay a filing fee of $50 per partner to the secretary of state. The minimum filing fee is $250, while the maximum fee is $2500 for an LLP. Foreign LLPs, those created under the laws of another state, must register with the secretary of state and also pay a registration fee that is the same as for a domestic LLP. Note that the Tennessee LLP law appears to give much less protection to partners in an LLP than state law grants to stockholders of a corporation. The Tennessee law shields a partner in an LLP from tort liability from claims brought against another partner in the LLP for malpractice or other such wrongdoing, but not from liability for his or her own conduct. Every domestic LLP in Tennessee must file an annual report in which they disclose any changes in the information submitted with the registration, and pay an annual fee of $50 per partner, with a minimum fee of $250 and a maximum annual fee of $2,500. Foreign LLPs registered doing business in Tennessee must renew their registration every other year, and pay the same registration fee as with the initial registration, $50 per partner, with a minimum fee of $250 and a maximum fee of $2,500. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Tennessee, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLPs. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
There is no personal income tax in Tennessee, other than on certain dividends and interest income, so the income of a partnership is not taxed to the individual partners for state income tax purposes, unless the partnership has dividend or interest income of a kind subject to the state income tax. However, after July 1, 1999, a limited partnership or LLP (but not a general partnership that is not an LLP) is subject to the Tennessee corporation excise (income) tax, at the entity level. See the discussion of the corporation excise tax in Section IV(c). LLP's and limited partnerships may also be subject to the Tennessee franchise tax, which is a tax on net worth, as discussed in Section II(d). For details on Tennessee partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Tennessee, you must file articles of incorporation (corporate charter) with the Tennessee Secretary of State and pay a fee of $100, which includes the initial designation of registered office and agent. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Tennessee, by filing an application for a certificate of authority and paying a filing fee of $600. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Tennessee, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file an annual report and a filing fee of $20 with the secretary of state each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Tennessee must also file corporate excise (income) tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in Tennessee are also subject to a corporate franchise tax. The franchise tax is a tax on all business corporations in Tennessee, imposed for the privilege of doing business in the state. This tax is imposed annually at a rate of 25 cents per $100 valuation of a corporation's issued and outstanding stock, surplus and undivided profits, generally, with a minimum annual tax of $100. The franchise tax also may apply to certain other entities, including limited partnerships, LLPs and LLCs. The franchise tax is generally reported on the same tax form as the annual excise (income) tax. For tax forms and more information on corporate income and franchise taxes in Tennessee, see the contact information for the offices of the Tennessee Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Unlike most states, Tennessee does not treat S corporations differently from regular corporations (C corporations) for state income tax or franchise tax purposes. Thus, they are fully subject to state income and franchise taxes in Tennessee, like any other business corporation. (f) Limited Liability Companies. Tennessee, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Tennessee may also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer much of the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. However, for state tax purposes in Tennessee, LLCs are now taxed like corporations on their income, under the corporation excise (income) tax law, and are also now subject to the state franchise tax. See Section IV(c) for a discussion of the income tax treatment of LLCs under Tennessee tax laws. To form an LLC under the laws of Tennessee, one or more persons may file articles of organization with the secretary of state, which must be accompanied by filing fees of $50 per member, with a minimum fee of $300 and a maximum of $3,000. Also, if the LLC's principal office is in Tennessee, it must file a copy of the articles of organization with the register of deeds in the county where its principal office is located. The register of deeds can charge a fee of $5.00 plus 50 cents a page for each page in excess of five. Tennessee state law, until fairly recently, did not permit the formation of domestic 1-member LLCs, but legislation enacted on May 27, 1999 abolished this limitation. One-member LLCs that are "disregarded entities" for federal tax purposes are subject to income and franchise tax by Tennessee, unless the sole owner is a corporation. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Tennessee, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $300 to $3,000, computed as in the same manner as when filing articles of organization for a domestic LLC. In addition to initial filing fees, all LLCs formed in, or doing business in Tennessee must subsequently file annual reports and pay an annual report filing fee of $50 per member, with each such annual report. The minimum annual filing fee is $300 and the maximum is $3,000. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Tennessee is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Tennessee. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Tennessee, you should obtain tax releases for Tennessee state unemployment taxes, and sales and use taxes of the seller, plus, in the case of a corporation or other entity (other than a sole proprietorship or general partnership), a certificate showing that the business has paid its state franchise and excise (income) taxes. With regard to avoiding liability for the seller's unpaid state unemployment tax, you should require that the seller provide you an unemployment tax release from the Tennessee Department of Labor and Workforce Development, which will either tell you that all unemployment taxes have been paid, or the amount of such tax you must withhold from the purchase price. For information on a sales and use tax release, contact the Tennessee Department of Revenue, Taxpayer Services Division. If purchasing assets of a corporation, you can obtain a certificate from the office of the secretary of state, verifying that the seller corporation has paid its state excise (income) and franchise taxes to date. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, if you are buying substantially all of the assets of the seller, you will need to apply on a timely basis to the Department of Labor and Workforce Development, requesting that you be treated as a successor employer, filing Form LB-0483. IV. TENNESSEE TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Tennessee has a generally
favorable tax climate, with its most notable advantage being
the absence of a personal income tax, other than on certain
kinds of dividends and interest income. Until recently, this
meant that, in general, the entire business income of an
unincorporated business (except an LLC that happened to
be taxable as a corporation) was free of all state income
taxes. In addition, the corporation income tax is imposed
at a relatively low flat rate of only 6.5%, and the personal
income tax on dividends and interest income is imposed at a
flat rate of 6%.
This favorable tax treatment no longer applies to limited
liability entities, including LLCs, LLPs, and limited
liability partnerships. All such entities are now taxed
like corporations under the Tennessee corporation excise
tax, on and after July 1, 1999. However, the business
income of sole proprietorships and general partnerships
continues to escape any state income taxation by Tennessee.
Members of an LLC or partners in a limited partnership
or LLP may execute a document that, in effect, waives their
personal liability protection, in order to become exempt from
the excise tax, but it is unlikely that many businesses will
take advantage of this provision, which would place the
owners in the same position as partners in a general
partnership, with regard to liability to creditors.
In addition, Tennessee imposes a franchise tax on
corporations and all other business entities except for
sole proprietorships and general partnerships, in addition
to the excise (income) tax, and counties and municipalities
are authorized by state law to impose local business and
occupations taxes on various businesses, professions, and
occupations at specified rates, or at lower rates, if the
local governments so choose. Also, Tennessee is one of the
few states that still imposes an intangible property tax,
although this tax now applies only to a few types of stocks
of financial companies, where the dividends from such
investments are not subject to the Hall Income Tax (the
state's individual income tax on dividends and interest
income).
Besides a generally favorable tax climate, Tennessee is
also attractive to employers, as it has a right-to-work
law, and it does not have its own separate state minimum
wage law. (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. Also, local governments in Tennessee are allowed to impose business and occupations taxes at maximum rates specified by state law, on a wide range of businesses and occupations, under the Business Tax Act. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Tennessee has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. The state of Tennessee imposes a $400 annual professional privilege tax, due by June 1 each year, on most major types of professional license holders, including physicians, dentists and other medical practitioners, accountants, lawyers, engineers, architects, and various other licensed professionals ranging from lobbyists to stockbrokers. For information on state licensing and business registration requirements in Tennessee, see the contact information for the offices of the Division of Regulatory Boards, Tennessee Department of Commerce and Insurance, listed in Section VI(a). (c) Income and Franchise Taxes. Tennessee is one of the few states that does not have a general individual income tax. However, it does have a 6.5% corporation income tax ("excise tax"), which applies to regular corporations and S corporations, as well as to most LLCs, LLPs, and limited partnerships after June 30, 1999. It also generally imposes a franchise tax on such business entities. The state imposes a 6% income tax on certain dividends and interest income received by individuals, but not on their business income or other types of income. This tax, called the Hall Income Tax, also exempts numerous types of dividend income, including dividends from state and national banks, Tennessee savings and loan associations, credit unions, insurance companies licensed in the state, insurance policies, and other specified dividends. Interest income from federal or state of Tennessee obligations, various types of bank savings accounts and certificates of deposit, commercial paper, insurance policies, and from credit unions is also exempted from the Hall Income Tax. Individuals who receive interest and dividends that are subject to this tax in the amount of $1,250 or more ($2,500 if filing jointly) must file a Tennessee income tax return and pay the 6% tax on such income by the 15th of April each year, for the preceding year's taxable dividend and interest income. Partnerships are pass-through entities for Tennessee income tax purposes, and general partnerships are not subject to tax themselves, as separate taxable entities. Since there is no general individual state income tax in Tennessee, the income earned by a general partnership is taxable only to any partners that are corporations, unless the partnership has income or dividend income that is taxable to individual partners under the Hall Income Tax described above. However, on and after July 1, 1999, LLPs and limited partnerships are taxable like corporations, at the entity level, under the Tennessee corporation excise tax, as well as being subject to franchise tax on their capital employed in Tennessee. The Tennessee corporate excise (income) tax rate, on all business corporations, including S corporations, is imposed at a flat rate of 6.5%. The state corporation income tax return is Form FAE 170, which must be filed annually with the Tennessee Department of Revenue, by the first day of the fourth month following the end of the taxable year, or by April 1 in the case of a corporation whose taxable year is the calendar year. Effective July 1, 1999, the corporate income tax is also imposed on the income of LLCs, LLPs, and limited partnerships doing business in Tennessee. The minimum annual tax was also increased after that date from $10 to $100. Additional legislation in 2000 specified that an LLC that has a single member which is a not a corporation and is disregarded under federal tax laws is nevertheless subject to Tennessee excise (income) and franchise taxes. The state franchise tax, which is described in Section II(d), can be reported on the same tax return as the corporate excise (income) tax. State law requires that any business subject to the excise and franchise taxes must submit an Application for Franchise, Excise Tax Registration within 15 days after becoming subject to tax. Corporations and other entities are required to make estimated tax payments of their excise and franchise tax in advance, if their combined excise and franchise tax liability for the year exceeds $5,000. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 7th, and 10th months of the taxable year, and on the 15th day of the first month of the following year. The total estimated tax that must be paid in is usually equal to 100% (formerly 80% until 2003) of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if that is less. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. No estimated tax payments are required for the state franchise tax. S corporations receive no special tax treatment for purposes of the Tennessee corporation excise (income) and franchise tax laws; that is, they are fully taxable to the same extent as a C corporation for state income and franchise tax purposes. In Tennessee, a limited liability company (LLC), even if treated as a partnership for federal income tax purposes, is subject to the Tennessee corporate excise (income) for tax years beginning on or after July 1, 1999. However, since individuals are not taxed by the state of Tennessee on their business income, there is no state income tax imposed directly on the business owners, so that no double taxation results. Whether or not an LLC is taxable as a corporation for federal tax purposes, it will be treated like a corporation by Tennessee, so that it will be subject to both the state corporate excise (income) tax and the state franchise tax. Note that under IRS "check-the-box" regulations, effective since 1997, an LLC is able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal tax purposes. Tennessee law was recently amended, in May, 1999, to permit the formation of one-owner LLCs. While a one-member LLC will now generally be disregarded (treated as a sole proprietorship) for federal tax purposes, it is subject to Tennessee franchise and corporate excise (income) tax, unless it its sole owner is a corporation. (d) Sales and Use Tax. Tennessee imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 7% (6% on food and food ingredients). In addition, local governments are allowed to adopt local sales taxes, at combined local tax rates of up to 2.75%, so that the combined state and local sales tax rate can be as high as 9.75% in some parts of the state. Sellers are required to obtain a seller's permit and to collect and pay over the state and local sales and use taxes to the Tennessee Department of Revenue. Sales and use tax returns are usually due monthly, but you may be allowed to file quarterly or annual returns, depending on the amount of the average monthly tax liability, under the sales tax regulations. Note that if you file and pay over sales and use tax on a timely basis, you are allowed to retain a portion of the tax collected as compensation for the administrative burdens of collecting the tax and filing sales tax returns. The amount allowed to a seller as such a credit is 2% of the first $2,500 of taxes collected per month, and 1.15% of the excess over $2,500, but is limited to $25 per report filed, except for certain out-of-state vendors that are not required to file sales or use tax returns but who voluntarily do so. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Tennessee. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Tennessee has one of the most aggressive use tax laws in the country, with regard to mail order sellers. Under the Tennessee law, the mere shipment of catalogs into the state by mail or otherwise is considered to be a taxable "use" of the catalogs, based on their value, so that a mail order company with no other contacts with Tennessee may be taxable on the value of catalogs it ships into the state. The use tax would apply even if no sales resulted from the shipment of such catalogs to prospective customers in Tennessee. Tennessee, until recently, took the position that Internet access charges were communications services, subject to sales tax. However, the Tennessee Court of Appeals decision in 2003 (upheld by the state supreme court) in Prodigy Services Corporation, Inc. v. Johnson, has held that such services are not "communications services" and are thus not subject to tax under Tennessee law. Before making any taxable sales, you will need to register with the Tennessee Department of Revenue on Form RV F1300501, Application for Registration. For more details on Tennessee sales and use tax registration and compliance, see contact information for the offices of the Department of Revenue in Section VI(a). (e) Real and Personal Property Taxes. In Tennessee, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Tennessee also allows localities to impose personal property taxes on most kinds of tangible personal property. However, certain business personal property, such as business inventories, are exempt from personal property tax in Tennessee, if the owner of such property is subject to local business and occupation tax. Also exempted are other items such as certain amounts of personal belongings, household goods and farm personal property. Tennessee also imposes a personal property tax on certain types of intangible personal property, but only in limited instances, on property such as stock of financial companies on which the dividends are tax-exempt under the state's income tax on dividends and interest (the Hall Income Tax). Such tax is actually listed and paid by the issuing financial institution, generally. Other stocks, if held by a corporation, may be treated as tangible property and taxed at the same rates as tangible personal property. Money in a bank account is exempted from the intangibles tax. (f) Other Business Taxes. Tennessee imposes various other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Tennessee law only requires certain types of business organizations to register a fictitious or assumed business name. A corporation is required to register such a name with the secretary of state before it may transact business in the state, as is an LLC, limited partnership, or LLP. There are no such requirements for sole proprietors, general partnerships, or miscellaneous other entities, such as business trusts. Also, if your business uses a trade name, trademark or a service mark in Tennessee, and you wish to protect its exclusivity, you should register the name with the secretary of state's office and pay the applicable $20 filing fee. The registration is good for five years, and can be renewed before it expires. File registration applications or renewals on Secretary of State's Form SS-4264. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will have to withhold federal income tax and FICA taxes from their wages. Since Tennessee has no general state income tax on wages, you will not need to be concerned with any obligation to withhold Tennessee state income tax. However, if you pay more than a minimal amount of wages, you will most likely be required to pay state unemployment tax, and will have to register with the state as an employer for unemployment tax purposes, as described in Section V(b). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Tennessee unemployment tax are required to register with the Employment Security Division of the Tennessee Department of Labor and Workforce Development on Form LB-0441, Report to Determine Status, Application for Employer Number, to obtain an employer identification number for state unemployment tax purposes. New employers are generally required to pay tax at a rate of 2.7% in 2004 on the first $7,000 of wages paid to each employee. (Higher rates apply to construction and mining employers, and to some manufacturing industries.) After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Tennessee law, cannot be charged to your employees or withheld from their wages. Employers are required to obtain an Unemployment Insurance for Employees poster from the Employment Security Division and display it in the workplace. For more information on your Tennessee unemployment tax obligations as an employer, see the contact information for the offices of the Employment Security Division of the Department of Labor and Workforce Development, listed in Section VI(a). (c) Workers' Compensation. In Tennessee, virtually all businesses with five or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Construction firms and employers in coal mining and production are required to have coverage if they have one or more employees. General contractors are almost always required to have workers' compensation coverage, because of their liability for uninsured subcontractors. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Employees, for the purposes of the workers' compensation law, include corporate officers and employee-stockholders of a corporation, but a corporate officer may elect not to be covered under workers' compensation. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a workers' compensation notice poster from the Tennessee Department of Labor and Workforce Development, which gives notice to your employees that they you are required to obtain workers' compensation coverage on their behalf. Numerous changes to the workers' compensation laws go into effect on January 1, 2005, including a provision that prohibits filing a workers' compensation case in court until a Benefit Review Conference has been held between the parties, conducted by the Division of Workers' Compensation. For more detailed information regarding your obligations as an employer under the Tennessee workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Division of Workers' Compensation, Tennessee Department of Labor and Workforce Development, listed in Section VI(a). (d) State Wage and Hour Laws. Unlike most states, Tennessee does not have a minimum wage law governing the hourly wage that you must pay to your employees. However, in most cases, your business will be subject to the federal minimum wage and overtime laws, and thus required to pay at least $5.15 an hour and time-and-a-half for overtime hours, for any non-exempt employee who works more than 40 hours in a week. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Tennessee. Under Tennessee child labor laws, employment of minors under the age of 14 is generally not permitted. Children age 14 or 15 may be employed, but under very restricted circumstances, particularly during periods when school is in session, at which times they may not work:
When school is not in session, 14- and 15-year-olds may not work more than 8 hours per day and 40 hours per week or after 9:00 p.m. or before 6:00 a.m. Children age 16 or 17 can generally be hired for any gainful occupation which does not interfere with their health or well-being and there are no legal limitations on the number of hours which a 16- or 17-year-old may work. However, 16- and 17-year olds who are enrolled in school cannot be employed during hours when they are required to attend classes. In addition, 16- and 17-year-olds may not work past 10:00 p.m. on a night preceding a school day, unless a parent signs a Parental Consent Form that allows the child to work until 12:00 midnight a maximum of three nights per week. There are also many specific jobs in which minors under the age of 18 may not be employed, in various kinds of hazardous occupations or in situations involving heavy equipment or machinery, as listed in the Tennessee Child Labor Act. Minors must be given a thirty (30) minute unpaid break or meal period if scheduled to work six (6) hours consecutively. Such breaks may not be scheduled during or before the first hour of scheduled work activity. A similar rule applies in the case of adult employees, except in workplace environments that by their nature provide for ample opportunity to rest or take an appropriate break. For more information on state child labor laws, see the contact information for the Tennessee Department of Labor and Workforce Development, listed in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Tennessee is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Tennessee job safety requirements, you may wish to contact the Division of Occupational Safety and Health (TOSHA), part of the Tennessee Department of Labor and Workforce Development, and request a free on-site safety consultation by the TOSHA Consultative Services Division. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Nashville offices of the state Division of Occupational Safety and Health, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Tennessee labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Employers are required by state law to pay wages at least twice monthly, and an employee who quits or is terminated must receive his or her final wages not later than the date of the employer's next regular payday or 21 days after employment terminates, whichever is later. A written notice, informing employees of which days are paydays, must be prominently displayed in at least two places in the workplace. Under state law, employers are required to furnish a separation notice, in a specified format, to each employee who is terminated or furloughed for seven days or more, within 24 hours of the time of separation, on Form LB-0480. If 25 or more workers are separated simultaneously from the same establishment solely due to "lack of work", you may file a "mass separation notice," instead of the individual separation notices. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Tennessee has a right-to-work law. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Tennessee if you have eight or more employees. The state law prohibits employment discrimination on account of an individual's race, creed, color, religion, sex, age, or national origin. You must display a poster informing employees of their rights, which you can obtain from the Tennessee Human Rights Commission, at the address listed in Section VI(a). (4) Reporting new hires. Under new federal welfare reform laws, employers in all states now must report any newly-hired (or rehired) employees to a designated state new hire agency within 20 days after the date of hire. You can contact the Tennessee New Hire Reporting agency in Nashville at the phone number listed in Section VI(a), or mail in new hire reports to the address listed there (which is to the National New Hire Registry in Nebraska). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Tennessee, as many states have done in recent years, has set up a "one-stop" center to provide information or referrals to your new or existing business, to help you obtain all necessary state licenses and permits. To obtain business information on starting or relocating your business in Tennessee, contact:
SECRETARY OF STATE. Contact the office of the secretary of state for information on:
EMPLOYER WITHHOLDING. Since there is no state income tax on wages in Tennessee, employers are not required to withhold Tennessee state income tax from employees' wages. STATE UNEMPLOYMENT TAX. Contact the Employment Security Division of the Tennessee Department of Labor and Workforce Development, at the address listed above for that agency, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Workers' Compensation Division of the Tennessee Department of Labor and Workforce Development, at the address listed above for that agency. STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Tennessee, contact the Division of Occupational Safety and Health, part of the Tennessee Department of Labor and Workforce Development, at the following address:
STATE NEW HIRE REPORTING. Tennessee employers must report all newly hired or rehired employees to the Tennessee New Hire Reporting Directory. Such reporting was previously to the Tennessee Department of Human Services in Nashville. However, beginning November 1, 2004, such reports are to be mailed to the following address in Nebraska (no, the Nebraska address is not a misprint):
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Tennessee to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Tennessee. Since new sites are appearing constantly, you might also want to search for other Tennessee government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Tennessee government information, you may want to begin with the following Internet sites: List of Tennessee government agency Web sites: Tennessee Department of Revenue: Tennessee Secretary of State, Division of Business Services (incorporation, LLC filings): Tennessee Department of Labor and Workforce Development (labor laws, workers' compensation, and TOSHA Consultative Services): Tennessee Department of Labor and Workforce Development (state unemployment tax):(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration (SBA) office in Tennessee. Also, the SBA, certain Tennessee banks, and the Chambers of Commerce in Nashville, Memphis, and Chattanooga have started a small business loan program called ACCE$$, which provides loans of $5,000 or more to small businesses. This program allows a small business person to submit his or her business plan to a group of bank officers, orally. Contact your Chamber of Commerce in those cities for details. The address of the main SBA Office in Tennessee is:
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Copyright © 2004 Michael D. Jenkins
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