Tennessee Revenue Ruling 24-06 posted by the Department on September 3, 2024, addresses the sourcing of sales for franchise and excise tax purposes in the context of “look-through” sourcing; meaning, can you or should you source your sale to the location of your customer’s customer?
In this ruling, the Department said no. It appears the taxpayer was looking for a “yes” so they could reduce their Tennessee apportionment factor.
Details of Tennessee Revenue Ruling 24-06
The taxpayer manufactured property outside Tennessee, then shipped it into Tennessee and stored it at a third-party warehouse. While at the warehouse, the taxpayer maintained title to the property.
The taxpayer would ship the property to wholesale distributors’ distribution centers (some in-state and others outside Tennessee). The title to the property would transfer to the wholesale distributor at the time of receipt by the distributor.
The distributor would hold the property on average 14 to 25 days, and then ship it to customers across the US. The distributor did not mark-up the property. The distributor was paid for “distribution services” by the taxpayer.
The taxpayer would provide support to the ultimate customer after the distributor’s sale to the customer.
Like most states, Tennessee uses the ‘destination rule’ for sourcing sales for franchise and excise tax (income tax) purposes. Tennessee regulations provide a specific example that seems to directly apply to the taxpayer’s facts resulting in the conclusion that the taxpayer’s sale to the distributor should be a Tennessee sale.
Another key fact mentioned in the ruling is that the location of the ultimate customer (i.e., buyer from distributor) is not known when the taxpayer makes its sale to the distributor.
Takeaway from Ruling 24-06
The question of sales sourcing when companies sell to a middleman of some kind creates challenges. There isn’t one blanket answer as the answer could turn on the company’s facts and the state involved.
“Look-through” sales sourcing is sometimes sought to be used by a state or a taxpayer depending on who it would benefit. Thus, sometimes states want the answer to be a ‘yes’ and sometimes they want the answer to be ‘no,’ just like taxpayers. Consequently, it is important to analyze the facts and state guidance in each instance instead of making a blanket conclusion or assumption.
Navigating the complexities of state tax sourcing rules can be challenging. If you need assistance understanding how these rulings impact your business or require guidance on compliance, reach out to your Frazier & Deeter tax advisor, or Brian Strahle, Partner and National Practice Leader of State and Local Tax, at brian.strahle@frazierdeeter.com.