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Tennessee Tax Rankles Industry Firms
From Marketwise
By Ken Hein 
November 2008

The state of Tennessee has begun enforcing a sales- and use-tax regulation that promises to keep distributors’ and suppliers’ bookkeepers up at night. In simplest terms: If an out-of-state distributor places an order where a Tennessee supplier ships product within state lines, the supplier is required to charge the out-of-state distributor sales tax.
Typically, it is up to the end-user to pay a “use tax” for the items received, and then that is the end of the story. In Tennessee, however, suppliers are being asked to collect the tax from the distributor. (The same holds true for California.) This gives the distributor three unappealing choices:

1. Eat the tax themselves
2. Build the tax into client invoices, but not as a separate line item
3. Invoice the end-user for the tax as a separate line item.

The problem with the third scenario is the fact that the end-user will then be able to easily figure out the distributor’s cost by deducting Tennessee’s sales tax (which ranges from 7% to 9.75%, depending on the county).

“Then the whole thing unravels. How are we supposed to stay competitive if everyone knows our cost? You can’t understand the nightmares this is causing,” says Mike Calhoon, CFO of Madden Inc. (asi/259280), which first noticed the problem when it began getting billed by BIC Graphic (asi/40480) in June. BIC has a distribution center in Tennessee and the Lakeland, FL-based Madden Inc. has a client whose recipients live in Tennessee. He’s no stranger to this phenomenon, as he is already also getting billed by three vendors in California for sales taxes owed.

The problem first gained widespread attention when a number of California suppliers, including Logomark (asi/67866) and American Intercontinental Trade Group (AITG, asi/35530) were audited. Fines of up to $20,000 were levied on businesses that had failed to pay taxes on items shipped.

Under the California State Board of Equalization’s regulation, a supplier is deemed the retailer if it is working with out-of-state distributors. The supplier is therefore required to collect and remit California state sales taxes (which ranges from 7.25% to 8.75%, depending on the county) for items shipped (see www.boe.ca.gov).

While news of this now-enforced taxation law has spread throughout California, many suppliers in Tennessee have no idea that their state law even exists. “I’ve never heard of that regulation,” says Velma Bailey, bookkeeper for American Calendar Co. (asi/35400). “It’s weird. I don’t recall receiving any information on that.”

John Harvey of Tennessee’s taxpayer and vehicle services division says: “The reason is that ownership/possession never transfers outside Tennessee, making the transaction subject to Tennessee tax. The supplier must satisfy the tax requirement. Because the supplier bills the out-of-state distributor and not the Tennessee consumer, the Tennessee supplier has no option but to bill the tax to the out-of-state distributor.”(See http://state.tn.us/revenue/tntaxes/salesanduse.htm for more information and definition of the tax.)

The overarching ramifications of such regulations are disturbing to Calhoon. “Distributors are not going to get out of paying it,” he says. “One of my suppliers got nailed with an audit, and then he started charging me. Can you imagine if all 50 states charged? And believe me they are all looking for revenue now. This is a big issue for not only this industry, but any distribution industry.” – KH

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