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Tennessee DOR Releases Related Member Addback and Intangible Property Nexus Rulings

The Tennessee Department of Revenue released two taxpayer-favorable rulings related to the intangible expense addback statute and economic nexus on January 8, 2013. In Letter Ruling No. 12-3

The Tennessee Department of Revenue released two taxpayer-favorable rulings related to the intangible expense addback statute and economic nexus on January 8, 2013. In Letter Ruling No. 12-32 (Dec. 19, 2012), the Department ruled that the discount incurred in the course of factoring trade receivables using an affiliated factoring company did not constitute an “intangible expense” subject to Tennessee’s related member addback statute. The ruling confirms that Tennessee’s addback statute is properly interpreted to generally exclude expenses unrelated to intangible property, such as factoring discounts and interest expenses on debt unrelated to intangible property.

In Letter Ruling 12-27 (Nov. 14, 2012), the Department ruled that an intangible holding company did not have nexus in the state where it licensed patents to an affiliated company that used the patents to manufacture products outside of Tennessee and then distribute and sell the products to customers located in Tennessee. The ruling found that the intangible holding company’s contacts with Tennessee under the facts were “too remote and indirect so as to be characterized as an activity ‘purposefully engaged in’ within the state with the object of gain, benefit, or advantage.” Citing a 2009 New Jersey Supreme Court case, Praxair Tech., Inc. v. Dir., Div. of Taxation, 988 A.2d 92, however, the ruling notes that the holding company “could be” subject to tax in Tennessee if the affiliate to which the patents were licensed used the patents to manufacture products within Tennessee.

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