F&E Apportionment-1 - Criteria for Determining When to Apportion

A Tennessee taxpayer may apportion its business income subject to excise tax and its non-consolidated net worth subject to franchise tax if it also has business activities in another state, and the business activities performed in the other state are substantial enough to give the taxpayer nexus in the other state (under Tennessee’s definition of substantial nexus).

For example, XYZ, Inc. has $1,000,000 in total gross receipts from the sale of tangible personal property.  Of that amount, sales to Tennessee customers totaled $990,000, and sales to Kentucky customers totaled $10,000 (which was the taxpayer’s only contact with Kentucky). Under Tennessee’s definition of substantial nexus, an entity’s activities can create nexus in the state in numerous ways.  However, in this example, the only element of the definition that would apply is the gross receipts factor, which requires at least $500,000 of the entity’s gross receipts (or 25% of total gross receipts) to come from sales of property or services delivered or shipped to a purchaser in the state in order to create substantial nexus.  Because only $10,000 of XYZ, Inc.’s total gross receipts were sourced to Kentucky, it would not have substantial nexus in Kentucky under Tennessee’s definition.  Therefore, XYZ, Inc. does not have the right to apportion.  It should report 100% on Tennessee return lines that ask for an apportionment ratio.

Reference: Tenn. Code Ann. §§ 67-4-2010; 67-4-2110.

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