Since 1992, Tennessee has required certain professionals – ranging from accountants to landscape architects to veterinarians – to register and pay a $400.00 (originally $200.00) Professional Privilege Tax annually to the state of Tennessee, ostensibly on the grounds that the professional being taxed has the privilege of being able to conduct business within the state. As one of only six states to have such a tax, Tennessee’s Professional Privilege Tax has repeatedly come under heavy criticism, not only that the tax violates state and federal equal protection clauses, but that it also is unnecessary given the state’s consistent budget surplus. Others have argued that some professionals now find themselves subject to double taxation – paying both the Professional Privilege Tax and also Franchise & Excise Taxes.
As has occurred many times since the Professional Privilege Tax was enacted, Tennessee legislators have once again introduced legislation to eliminate Tennessee’s Professional Privilege Tax. Four bills have been introduced so far this year that propose to phase out or eliminate the Professional Privilege Tax through various means.
On March 26, SB 253 was assigned to the General Subcommittee of the Senate Finance Ways & Means Revenue Subcommittee. As written, SB 253 phases out the Professional Privilege Tax over four years, reducing the tax by $100.00 each year with the last tax year ending May 31, 2022 and the Professional Privilege Tax owed $100.00. The Senate bill’s counterpart in the House of Representatives (HB 246) was placed behind the budget on February 20, 2019.
Similar to SB 253, SB 491, phases out the Professional Privilege Tax over five years instead of four, beginning with tax year ending May 31, 2020, and by $80.00 each year instead of $100.00. The Senate Finance Ways and Means Revenue Subcommittee referred the bill to Committee with a negative recommendation on March 6, 2019. HB 039 remains in committee.
A third bill, SB 315 reduces the Professional Privilege Tax from $400.00 to $300.00, but does not do so until tax year ending May 31, 2022, and then keeps the tax at $300.00 per year until it is eliminated for tax year ending May 31, 2025 and going forward. SB 315 was referred to the Senate Finance Ways & Means Committee with negative recommendation from the Revenue Subcommittee on March 12, 2019. Its House counterpart, HB 338 remains in committee.
The fourth bill, SB 492 completely eliminates the Professional Privilege Tax beginning with tax year ending May 31, 2020. Similar to the bills that have already come before the subcommittee, the Senate Finance Ways & Means Revenue Subcommittee has given it a negative recommendation, and it was referred to the Committee on March 6, 2019. HB 040 remains in committee.
In addition to phasing out the tax, bills have also been introduced to exempt or modify the application of the tax on certain professionals:
(1) SB 992 / HB 722 seeks to exempt judges and chancellors;
(2) SB 1290 / HB 1053 seeks to exempt individuals who are also exempt from the business tax on gross receipts; and
(3) SB 1456 / HB 1386 seeks to give members of the military or national guard additional time in which to pay the tax upon returning from combat deployment;
The Professional Privilege Tax was first introduced in 1992 to help raise revenue after the mild recession that followed the end of the Cold War and to help fund Tennessee’s (then) new Basic Education Program. Unlike an income tax or sales tax, the Professional Privilege Tax is not a progressive tax that is a percentage of income or sales. Indeed, one of the more consistent critiques of the Professional Privilege Tax is that it unfairly burdens low-income professionals. A part-time veterinarian making $25,000.00 a year pays the same tax as a senior partner in a large law firm with earning potential in the seven figures. According to a report published by the Tennessee Advisory Commission on Intergovernmental Relations in December of 2016, elimination of the tax would cost the state of Tennessee approximately $88 million in annual revenue. Historically, it has been this sizeable lost revenue that has prevented legislation eliminating or phasing out the Professional Privilege Tax from gaining traction. However, with a large number of new faces in the legislature this year following the 2018 elections (28 new House members, 4 new senators) and a new governor, it remains to be seen if this year will have different results.
For a list of professionals currently required to register and pay Tennessee’s Professional Privilege Tax, click HERE.
Kati Sanford Goodner is based in the firm’s Knoxville office. Commercial Litigation and Tax Controversy are Kati’s primary focus, although her experience and practice routinely includes Estate and Trust Litigation, Conservatorships, and advising her small business clients in a variety of matters ranging from formation issues to shareholder disputes and litigation. With an extensive background in litigation, Kati represents taxpayers before the Internal Revenue Service and the Tennessee Department of Revenue in both civil and criminal tax matters, whether in the early stages of an examination, at the collections stage, or seeking relief from IRS liens and levies through the administrative process or in Court. She is adept at handling complex litigation, has represented clients in Tennessee and across the country, and she routinely works with professionals ranging from accountants to highly-specialized physicians and engineers.
Kati is a regular speaker and author on tax-related matters, including legislative changes and practical applications of the tax code for individuals and small businesses. In addition to serving on various boards within the Knoxville, Tennessee, and American Bar Associations, she is a member of the Tennessee Bar Association’s Tax Law Section and the American Bar Association’s Section of Taxation. She also serves as a member of the City of Knoxville’s Better Building Board and enjoys working with middle school girls at Cedar Springs Presbyterian Church.