State to take over business tax collection

Effective in 2010, the State of Tennessee is taking the collection of business taxes and the renewal of business licenses away from the local city and county governments, which had been performing that function.

Entrepreneurs will still go to the appropriate city or county office to obtain a new business license, but from that point forward the state will handle license renewals and collection of the business tax. Businesses which file their sales tax reports electronically will now be required to file their business tax returns electronically as well.

The state claims that the changes will make tax collections more efficient and that, by cross-referencing business tax records with sales tax records, they will be able to ensure that businesses pay their fair share.

"This undertaking is a true partnership between state and the local governments," said Tennessee Department of Revenue Commissioner Reagan Farr in a news release. "While increasing revenue through improved tax compliance, we also plan on simplifying the tax process for business owners including developing a new, simplified tax return and initiating major education programs."

Bedford County Clerk Kathy Prater said the state has promised that local governments will still receive the same revenue from business tax collections as in the past.

Any business which grosses over $3,000 is required to obtain a license and pay business tax. The tax is based on a percentage of gross income. The exact percentage varies by category of business, with 1/10 of one percent being one typical rate.

Another change in the law will affect the construction industry. Contractors have always been able to deduct the amount paid to subcontractors from their gross revenue when computing their business tax. They will still be able to do so, according to Prater, but now they must be able to document that the subcontractor is licensed and is paying business tax themselves.

Renewal licenses will still be mailed out by local governments once they have been processed and issued by the state.

Last month, Shelbyville's treasurer Gary Cantrell said that the biggest contributor to the city's recent revenue shortfall is business taxes, which are off 45 percent -- $51,458 out of the $114,579 budgeted.

Cantrell said that Shelbyville had no notice of this move prior to adopting this year's budget, and had set up their budget expecting to collect the business tax with the bulk of the money going back to the state.

"For our cash flow, the collection of business taxes was pretty important," Cantrell explained in November.

"At some point, they'll send us back a portion of it, but they've hit us twice -- first, in the revenue we used to get, and second, they hurt our cash flow," Cantrell said.

Cantrell also explained that the city has no idea how much of the business tax the state collected, or how much Shelbyville would have collected.

Prater said the work of renewing business licenses and collecting the tax has accounted for the equivalent of one full-time staff position in her office. She said she plans to reduce her staffing by one as a result of normal attrition.

The new rules take effect Jan. 1, 2010, but the first filing deadline under the new rules will be Feb. 28. Returns due on that date will be filed with Tennessee Department of Revenue rather than with city or county governments.

The Department of Revenue is "working closely with local municipalities and counties to make this transition a smooth process," according to a state news release. The department is collecting lists of licensed businesses from counties and cities so that it can mail out tax forms by the end of this year.

More information is available at www.TN.gov/revenue.