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Sellers of Prescription Drugs Could be Subject to Tax in Tennessee

Health & Life Sciences Alert Dawn R. Gabel and David Brunori

Just because sales of prescription drugs are exempt from the state of Tennessee’s sales tax does not mean that sellers of prescription drugs are not subject to tax there. Tennessee adopted economic nexus legislation for sales and use tax, franchise and excise tax and the business tax, effective January 1, 2016. Tennessee now asserts that nexus exists with Tennessee for companies that meet one of these standards: being organized or domiciled in Tennessee; the use of capital in the state; systematic and continuous business activity in the state that produces gross receipts attributable to customers there; the licensing of intangible property in the state; or receipts of more than $500,000 or 25% of total receipts from sales in the state, property in the state worth more than $50,000 or payroll in the state of more than $50,000. ;The application of the economic nexus standard for sales and use taxes is on hold right now pending legislative review of the Wayfair v. South Dakota Supreme Court decision, but for the other three taxes, franchise, excise and business tax, economic nexus is being implemented.; Those three taxes are measured differently and as a result, all three may be imposed on a company having nexus with Tennessee at once. The franchise tax is a net worth tax, the business tax is a gross receipts tax and the excise tax is an income tax, so it is the only one of the three for which Public Law 86-272 can provide a safe harbor.

Because of the new economic nexus standards, companies that have no contact with Tennessee at all other than that they sell products or services to residents of Tennessee, need to analyze whether they could be in Tennessee’s crosshairs for audit, including those selling products that are exempt from sales tax. For example, prescription drugs are exempt from Tennessee's sales and use taxes, but under the Business Tax scheme, the business of selling prescription drugs and patient medicines is taxable.; One rate is applied to the gross receipts from retail sales of prescription drugs and patient medicines, currently .0025 and another, lower rate of .000375 is applied to the gross receipts from the wholesale sales of prescription drugs or patient medicines. Thus even the sale of otherwise exempt products can be considered by Tennessee to be “doing business” there and subject a company to the Business Tax, Franchise Tax and/or Excise Tax. If you believe that your business activities may meet one of Tennessee’s broad nexus standards, you should speak with a knowledgeable state and local tax advisor.

For additional information, please call your local Quarles & Brady attorney or contact: